Chapter 5 Flashcards
What is international financing?
involves financing of business projects from funds that are not of purely national origin
Why are there uncertainties in global financial markets?
due to global financial interdependence, highly sensitive global financial system, unpredictability (e.g. local imbalances can quickly trigger a global destruction 2007 financial crisis)
What does IMF mean?
International Monetary Fund
What is the IMF?
headquartered in Washington D.C
-founded to provide loans under certain conditions to countries in financial straits.
-conditions include austerity programs, economic reforms to increase exports
-tasks: stabilize global economy and financial architecture, promotion of free trade and capital movements, introduction of flexible exchange rates, abandonment of Bretton Woods Agreement
-before concerned with containing risks of inflation within economic weak countries
What are the forms of international financing transactions?
-financing of commercial transactions:
payment transactions, letters of credit,
documentary collection, guarantee payments,
forfaiting, factoring and leasing.
-international investments: purchases of
shares, equity funds, bonds or direct
investments
-clearing: settlement of accounts to balance
transactions (between banks)
-credit transactions: taking out and repaying
loans by states, companies & organizations
-arbitrage transactions: taking advantage of
local price differences
-speculative transactions: options, futures,
forward transactions
-exchange rate hedging: forward exchange
transactions, options futures
What is Bretton Woods Agreement?
enforced in the 1970s
ensured a fixed exchange rate against US dollar for all currencies
What is the World Bank?
founded end of WW2 in US
-doesn’t finance short term, currency-related bridging of economic imbalances
-concentrates on long term projects in the real economy and the promotion of development esp. in developing countries
-borrowers can be government organizations, private companies and organizations
-prerequisite for loan guarantee from respective state
What are clearing transactions?
-sometimes concluded as bilateral agreements between governments to offset the value of surpluses in cross-border trade (e.g. export surpluses)
What are forward exchange transactions?
forward transactions involving currencies that specify the exchange amount in the future, regardless of current exchange rate (e.g. currency futures)
-provides protection against future rising exchange rates, which would make transaction more expensive (predictable)
risk: opposite could happen
What are arbitrage transactions?
exists in high frequency trading on stock exchange to take advantage of minimal price fluctuations of a share in difference stock exchanges
exists in export business through different pricing in different target markets (e.g. automotive trade)
-strategies to prevent arbitrage transactions: reducing comparability of products through different guarantee agreements or standardized pricing within fixed price corridors
What is forfaiting?
resale of medium to long-term receivables from foreign transaction to a buyer (forfaiter)
-exporter can resell receivable after transaction has taken place if they have longer payment term then refinance themselves quickly
What are prerequisites for forfaiting?
-service or delivery has to be fully rendered
-no objections or complaints that endanger claim for payment
-claim isn’t burdened with claims from third parties (pledging)
-monetary claim is in principle assignable
When is it difficult to find forfaiter to buy receivable?
-during uncertain legal or political situation in country, as claim is enforceable
What are risks of international financing?
delay due to language and mentality barriers, customs regulations, import & export regulations
-legal risks e.g. legal frameworks, questionable enforceability of claims, high legal costs, regulations and prohibitions on purchase of real estate
-currency and interest rate e.g. exchange rate fluctuations, additional costs due to currency swaps
-country risks and risks of non payment, political instability
What are currency swaps?
intended to compensate for currency and interest rate fluctuations by means of exchange
