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8/12/2019 Stiles 1627 Asbdc Conference 9-5
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International Trade
Payment Methods
ASBDC ConferenceSeptember 8, 2011
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Understanding International
Financial Risk
Commercial
Sovereign or Political
Foreign Exchange
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Movement of Funds
SWIFTSociety for Worldwide Interbank Financial
Telecommunication Drafts
Bank
Sight
Usance
Checks
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Foreign Exchange
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Who uses Foreign Exchange
Tourists
Importers / Exporters
Investors
Speculators
Central Banks
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Which Currencies are Traded
Local CurrencyPayment
Western Europe Japan, Hong Kong,
Singapore, Australiaand New Zealand
Canada, Mexico South Africa
Thailand, Indonesia
US$ Payment
South America
Eastern Europe China, Taiwan
Africa
Malaysia
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Instruments most commonly
used to offset risk
Spot
Forwards (up to 1 year typically)
Futures
Swaps Options
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Determinants of Spot Rate
Balance of Payments/Trade
Real rates of return
Current growth and growth prospects ofthe economy
Economic and political stability
Exchange restrictions, if any
Central Bank intervention
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Forward Contracts Purchase or sale of one currency for
another with delivery taking place on a
specific future date or within a specificwindow of time
Unlike futures traded over-the-counter
Any convertible currencyAny maturity (typically less than a year)
Any amount (typically with a $50,000 min)
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Forward Contracts Price is based on:
Current spot rate plus or minus a discount or premiumfor interest rate differentials
Determinants of Forward Rates
A currency is at a PREMIUM against another currencyin the forward market when that other currencys
interest rate is higher
A currency is at a DISCOUNT against another currencyin the forward market when that other currencys
interest rate is lower
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Options
The right but not the obligation to convert onecurrency for another on a specific future date.
Price is based on: current spot price strike price volatility factor
Example:
The right to buy Japanese Yen at a specific rate oneyear out in the future. If the Yen weakens aconversion will be made in the open market.
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Options vs Forward Contract
Forward Contract
Eliminates up anddownside potential
Good tool whencompany has firmcommitments in thefuture
Mark-to-market offsetagainst A/R or A/P
No initial cost
10% risk assessment
Option
Eliminates downside
but leaves upside
Good tool forcompany involved inprojects withuncertainty
Naked hedge for
commitments not yetrecognized on thebalance sheet
1-5% premium up
front a tough sale
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Futures Contracts
Contracts for specific quantities of a givencurrency
Chicago Mercantile ExchangeExchange rate fixed at time contract is
entered into
Mark to Market Daily settlement with profits or losses paid every
day
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Futures versus Forwards
Advantages
Smaller size
Freedom to liquidate acontract anytime
Disadvantages
Limited number of
currencies Limited delivery dates
Rigid contractualamounts
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Foreign Exchange Objectives
Maximize consolidated net after-tax cashflows without undue risk
Preserve US dollar value of cash flow
Minimize volatility in reported earnings
Maximize profitability
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Payment Methods
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International Payment Methods
Cash in Advance
Open Account
Documentary Collections
Letters of Credit
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Risk vs. Method of Payment
Low
High
High
Low
Buyer Risk Seller Risk
Open Account
DocumentaryCollection
Letter of Credit
Cash in Advance
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Cash In Advance Time of Payment
Before Shipment
Goods Available to Buyer
After Payment
Risks to Seller
None
When Appropriate
Seller has negotiating strength to demandcash in advance
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Open Account
Time of PaymentAs agreed; i.e. 30 days
Goods Available to BuyerBefore Payment
Risks to Seller
Buyer defaults on payment obligationDelays in availability of foreign exchange and
transferring of funds from buyers country
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Open Account
When AppropriateSeller has absolute trust that buyer will accept
shipment and pay at agreed timeSeller is confident that importing country will
not impose regulations deferring or blockingtransfer of payment
Seller has sufficient liquidity or access tooutside financing to extend deferred paymentterms
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Benefits of Export Credit
Insurance Risk Mitigation
Political
Commercial Market Penetration
Extended credit terms to foreign buyers
Relaxation of method of payment reducing
bank costs and documentation
Financing U.S. exporter can borrow against insured
foreign receivables
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Documentary Collection
CharacteristicsAllows exporters to retain ownership of the goods
until they receive payment or are reasonablycertain they will receive it
Bank acts as agent for exporter by holding the titledocuments
Bank assumes no risk but must act in good faithand exercise reasonable care
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Seller Buyer
Sellers Bank Buyers Bank
Documents
$
Documents Documents$ $
Documentary Collection
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Draft or Bill of Exchange
______________________________________ ________________________________ NO.___________(CITY) (DATE)
AT _____________________________________________________ SIGHT OF THIS BILL OF EXCHANGE
PAY TO THE ORDER OF ________________________________________ ___________________(AMOUNT IN FIGURES)
THE SUM OF___________________________________________________________________________
______________________________________________________________________________________
TO ________________________________________ ______________________________________DRAWER
__________________________________________________________________________________ ______________________________________
DRAWEE BY: AUTHORIZED SIGNATURE
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Documentary Collection - D/P Time of Payment
On presentation of sight draft by a bank tobuyer
Goods Available to BuyerAfter payment
Risks to SellerBuyers nonacceptance of shipment
Payment delays due to unavailability offoreign exchange in buyers country
Payment blocked due to political actions inbuyers country
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Documentary Collection - D/P
When Appropriate
Seller is confident that buyer will accept
shipmentSeller is confident that importing country will
not impose regulations deferring or blockingtransfer of payment
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Documentary Collections - D/ATime of Payment
At maturity of accepted draft
Goods Available to Buyer
Before paymentRisks to Seller
Buyers default on payment obligation
Delays in availability of foreign exchangeand transferring of funds from buyerscountry
Payment blocked due to political events in
buyers country
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Documentary Collections - D/A
When Appropriate
Seller has confidence that buyer will acceptshipment and pay on agreed date
Seller is confident that importing countrywill not impose regulations deferring or
blocking the transfer of payment
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Documentary Collections Risk
Unscrupulous buyer
Insolvent buyer
Buyer changes mind Buyers country is in turmoil
Foreign exchange may not be available
Seller may have to pay return freight Buyer may not honor promise to pay
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Letter of CreditKey Parties
Advising Bank
authenticates LC
Confirming Bankguarantees
payment if Issuing
Bank defaults
Applicant
Buyer/Importer
BeneficiarySeller/Exporter
Issuing Bank
Guaranteespayment
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L/C Terminology
Irrevocable
ICCUCP 600
ISP 98
Incoterms
Tenor
Sight
Usance
Discrepancies
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Uniform Customs and Practices for
Documentary CreditsThe U.C.P. 600 (2007 Revision)
General provisions and definitions.
Form and notification of credits. Liabilities and responsibilities of parties.
Documents of commerce.
Miscellaneous provisions.
Transferability of letters of credit.
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Commonly Used Documents
Commercial Invoice Transport Document
Ocean Bill of LadingAir Waybill
Packing Lists/Weight Lists Insurance Policy or Certificate Draft or Bill of Exchange Other Documents
Inspection Certificate Special Customs Invoices Certificate of Origin
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Draft or Bill of Exchange
______________________________________ ________________________________ NO.___________(CITY) (DATE)
AT _____________________________________________________ SIGHT OF THIS BILL OF EXCHANGE
PAY TO THE ORDER OF ________________________________________ ___________________(AMOUNT IN FIGURES)
THE SUM OF_________________________________________________________________________________________________________________________________________________________________DRAWN UNDER ________________________________________________________________________LC NO. ________________ DATED __________TO ________________________________________ ______________________________________
DRAWER__________________________________________________________________________________ ______________________________________
DRAWEE BY: AUTHORIZED SIGNATURE
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Letter of Credit IssuanceImporter
Advising Bank
in
Exporters City
Issuing Bank
in Importers City
Step 1
Step 2Step 4
Step 3
L/C Forwarded
to Beneficiary with
or without
confirmation
Application Made
for Letter of Credit
Letter of Credit
Forwardedby the Issuing
Bank
Contract
Exporter
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Letter of Credit Payment
Issuing /Opening
Bank
Advising/Confirming
Bank
Seller/ Exporter
Beneficiary
Buyer Importer
Account Party
Carrier
Step 3
Step 2
Step 1Step 5
Step 4Documents
Money
Documents Money Money Documents
Surrenders
Bill of
Lading
Receives
GoodsSurrenders
Goods
Receives
Bill of Lading
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Letter of Credit
Risks to SellerDiscrepancies in the documents
Buyers Bank (opening bank) defaults on itspayment obligation
Payment blocked due to political events inbuyers country
When AppropriateSeller is unsure of creditworthiness of buyer
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Letter of Credit Variations
Back to Back
Assignment of Proceeds
Transferable
Revolving
Standby
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Standby Letter of Credit
Commercial documents generally flow outsidethe letter of credit (between buyer and seller).
Funds generally flow outside of a letter of credit(between buyer and seller).
These credits are Standing By for an event of
default or non-performance before they can be
drawn on.
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Standby Letter of Credit
FinancialAssures account partys performance of a
financial obligation, i.e., to pay an invoice by acertain date.
PerformanceAssures account partys performance of a non-
financial contract obligation, i.e., to deliverproducts under a contract.
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Factors to Consider in Determining
Payment Terms Under a ContractQuestion Letter of Credit Collection Open Account
What is customer relationship New Established Parent/Sub
Impact of total loss ($) Substantial Normal Small
Nature of order Custom Normal
Production
Excess Inventory
Political situation buyers
countryUnstable Stable Strong
Economic situation buyers
countryUnstable Stable Strong
Competition to sell goods No Some Heavy
Changing price environment Yes No No
Experience in preparingdocuments
Extensive Some None
Company policy for protection Strong Medium Unwritten
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Other Financing Options
Countertrade
i.e. barter, counterpurchase, compensation
FactoringOutright sale of short term receivables
Forfaiting
Outright sale of medium term (large)obligation
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International Trade
Payment Methods
Cassie Stiles