Certificate in

International Trade and

Finance
Michele Donnelly FCIB
Original edition written by Adrian Garai
The Institute of Financial Services is a division of the ifs School of Finance,
a registered charity, incorporated by Royal Charter.
June 2011
9 781845 169107
ISBN 978-1-84516-910-7
Published by the Institute of Financial Services, a division of the ifs School of Finance, a
registered charity, incorporated by Royal Charter.
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ifs School of Finance 2011
ISBN 9781845169107
ifs School of Finance 2011 iii
Contents
Acknowledgements vii
About the authors ix
Certificate in International Trade and Finance Syllabus (CITF) xi
Chapter 1 Introduction 1
1.1 Background 1
1.2 What does a business actually do? 1
1.3 The different types of business entities 2
1.4 The concept of international trade 6
1.5 The value of world trade 7
1.6 The International Chamber of Commerce 9
1.7 What will be covered in the course 11
Chapter 2 The international trade environment 13
2.1 The external factors faced in international trade markets 13
2.2 Considerations of the risks involved in international trade 16
2.3 Researching the market 18
2.4 Method of entering an overseas market 23
Summary 30
Chapter 3 Contracts 33
3.1 The contract 33
3.2 1980 United Nations Convention on Contracts for the
International Sale of Goods 39
3.3 Dispute handling and arbitration 42
Summary 45
Chapter 4 The role of intermediaries such as banks and the principles
under which they operate 47
4.1 The banker/customer relationship 47
4.2 Banks and international trade the principles 48
4.3 The range of services 50
4.4 Correspondent banking 52
Summary 59
Chapter 5 Documents 61
5.1 Introduction to documents used in international trade 61
5.2 Financial documents 63
5.3 Other documents used in international trade 69
Summary 80
Contents
ifs School of Finance 2011 iv iv
Chapter 6 Terms of payment 81
6.1 Definitions of payment terms 81
6.2 Basic principles of the risk ladder 82
6.3 Open account 82
6.4 Documentary collection 83
6.5 Documentary credit 83
6.6 Payment in advance 83
Summary 85
Chapter 7 Documentary collections 87
7.1 Basic principles of documentary collections 87
7.2 Example of the operation of a documentary collection 92
7.3 Finance against documentary collections 99
7.4 Benefits to the exporter and importer 99
Summary 100
Chapter 8 Documentary credits 103
8.1 Basic principles for documentary credits 103
8.2 Example of the operation of a documentary credit 114
8.3 Various forms of credit 120
Summary and risk review 124
Chapter 9 Short-term trade finance 129
9.1 Definition of short-term trade finance 130
9.2 Understanding the concept of the trade cycle 130
9.3 Open account trade 130
9.4 When short-term trade finance is required 132
9.5 Examples of short-term trade finance 133
Summary 144
Chapter 10 Medium- and long-term trade finance 147
10.1 Introduction to medium- to long-term trade credit 147
10.2 Supplier and buyer credit 148
10.3 Lines of credit 151
10.4 Forfeiting 151
10.5 Eurobonds 153
Summary 154
Chapter 11 Standby letters of credit, bonds and guarantees 157
11.1 Introduction to bonds 157
11.2 Standby letters of credit 166
11.3 Unfair calling and insurance of bonds and standby L/Cs 169
11.4 Standby L/Cs and bonds credit considerations for the issuing bank 170
Summary and comparison between standby L/Cs and demand guarantees 171
Contents
ifs School of Finance 2011 vv
Chapter 12 Export credit insurance 175
12.1 Risk summary 175
12.2 Export credit insurance in detail 177
12.3 Risks covered in such policies 178
12.4 Example of an Atradius export credit policy 180
Summary 182
Chapter 13 Foreign currencies and the exchange risk 183
13.1 Introduction and strategy 183
13.2 Terminology and foreign exchange conventions 185
13.3 The spot rate and the forward rate 186
13.4 Foreign currency accounts 191
13.5 Options and futures 192
Summary 195
Chapter 14 Money laundering and fraud 199
14.1 Introduction to money laundering 199
14.2 Financial Action Task Force 202
14.3 The USA PATRIOT Act 206
14.4 The Wolfsberg Group 206
14.5 Other types of commercial fraud 208
Summary 209
Index 211
Acknowledgements
The Institute of Financial Services acknowledges permission to reproduce
material from the following copyright holders:
The extracts and summaries from the following publications of the International
Chamber of Commerce (ICC), which appear in chapters 58 and 10, are
included with the kind permission of ICC: Incoterms 2000 & (ICC
publication 560), Uniform Rules for Collection (ICC publication 522), Uniform
Customs and Practice (ICC publication 600), Uniform Customs and Practice
2007 Revision (ICC publication 600E), International Standard Banking Practice
(ICC publication 645), International Standby Practices (ISP98) (ICC publication
590) and Uniform Rules for Demand Guarantees (ICC publication 458). All
materials are copyright ICC and are available from www.iccbooks.com.
ICC Uniform Rules for Collections
ICC Publication N 522 - ISBN 92.842.1184.0
Copyright 1995, International Chamber of Commerce.
ICC Uniform Customs and Practice for Documentary Credits
ICC Publication N 600 ISBN 92-842-1257-X
Copyright 2006, International Chamber of Commerce.
ICC Uniform Customs and Practice for Documentary Credits 2007 Revision
ICC Publication N 600E ISBN 978.92.842.1257.6
Copyright 2006, International Chamber of Commerce.
International Standard Banking Practice for the examination of documents under
documentary credits
ICC Publication N 645 ISBN 92.842.1314.2
Copyright 2003 International Chamber of Commerce (ICC)
ICC Uniform Rules for Demand Guarantees
ICC Publication N 458 ISBN 92.842.1094.1
Copyright 1992, International Chamber of Commerce.
International Standby Practices
ICC Publication N 590 ISBN 92.842.1247.2
Copyright 1998 The Institute of International Banking Law & Practice, Inc.
ifs School of Finance 2011 vii
The materials for chapter 14 on the Wolfsberg Group and the Financial Action
Task Force are reproduced with their kind permission.
I would like to thank Pam Hardy for all of the encouragement she gave me
whilst I was writing this book and for providing feedback on all of the chapters.
In addition I would like to also say a big thank you to Soren Tattam and Tony
Brown for their input on International Contracts.
Thank you also to David Powers at RBS for his expert knowledge on Money
Laundering.
Finally thank you to my husband Garry, without whose patience and co-
operation I would not have completed the book.
ifs School of Finance 2011 viii
Acknowledgements
About the authors
Michele Donnelly FCIB works full time as a Director for the Royal Bank of
Scotland. In addition to a 25-year career in banking, Michele has worked for
the ifs in the capacity of Chief Examiner for the BSc option subject International
Trade Finance, assistant examiner for The Certificate of International Trade
Finance and Certified Documentary Credit Specialist paper. She is married
with three children and enjoys practising Iyengar yoga in her spare time.
Adrian Garai is an Associate of the Chartered Institute of Bankers. Following
a long career in banking, including more than ten years in senior management
positions in the international division of one the major UK clearing banks,
Adrian now spends his time writing and consulting on finance topics for leading
financial organisations.
ifs School of Finance 2011 ix
ifs School of Finance 2011 xi
Certificate in International Trade and Finance
Syllabus (CITF)
Nature of the subject
International trade is a vital part of the global economy. This module examines
the roles and responsibilities of banks, importers and exporters and the
products available to assist them to find satisfactory solutions to the problems
of international trade finance. The module contains an introduction to the
international trade environments, the commonly used documents and
international trade terms, key methods of trading and exchange risk. Those
already involved in international trade will recognise the processes described
and be able to extend their knowledge, whilst the novice should find the
material provides an excellent introduction to the subject.
NB Students who require an in depth knowledge of Documentary Credits
are advised to study the Certified Documentary Credit Specialist (CDCS)
module. Coverage of documentary credits within this syllabus will be covered
in less depth than other methods of international trading.