PART-A:INTERNATIONAL TRADE

INTERNATIONAL BUSINESS METHODS:

The most common methods of international business

are as follows:

a)International Trade
b)Licensing
c)Franchising
d)Joint Ventures
e)Acquisition of existing business
f)Establishing new foreign subsidiaries.

INTERNATIONAL TRADE: It is simple import &

exports i.e. buy at lower rate & sell at high
rate.

LICENSING:

A company can give technology (copy right,

patents, trade mark& trade name etc). in exchange
of certain fee.

FRANCHISING:

It is a very popular form of SME these days like

KFC, Pizza Hut etc.
It is defined as a continuing arrangement between
the parent company i.e. franchisor and an
entrepreneur i.e. franchisee. The agreement is for
a certain period which can be extended as decided
mutually.

ADVANTAGES:
To the franchisor To the franchisee
Expand distribution Sound management,
without increased capital training and decision
investment. making may be available.
Community acceptance of Market tested product so
the product less risk will be there.
Marketing & distribution Advertising & promotion
expanses are shared. is already there.
Some operating cost may Acceptance in large
be transferred to the system of retailers.
franchisee.
Flat fee can be collected Credit may be available.
from franchisee
Through agreement, Advisory available.
quality control can be
maintained.
Percentage on sale can be Credit may be available.
earned.

DISADVANTAGES:

Franchisor Franchisee
Long distance control Gives up much freedom in
over franchisee. management decision.
Expanses on training Profits are always
sometimes very high. shared.
Loss of some ownership Franchises may be very
expensive.
Product can be stolen Undue interference.

Success depends on wise planning & its results.

The agreement may include energy, money, ideas,
location, experience, training, management, name,
know-how etc.

DIFFERNET TYPE OF FRANCISES:

1-Straight product distribution i.e. only product

is provided in salable form like general store
products.
2-Product license franchises: Only name is used but
product is manufactured as per specifications of
the franchisor.

3-Trade name franchise: Trade name is given but no

control over product or service.

JOINT VENTURES:

Jointly operated & owned by two or more entities

like General Mill & NESTLE for cereals. It helps to
penetrate the foreign market.

Existing business:

Such a business has a track record so can be run

more easily sometimes.

So advantages are as follows:

• The business is operating & success can be

judged.
• Customers are known & feedback is easy.
• Financial data is available for inspection.
• Business activity can be verified
• Bankers etc have an impression of business.
• Competitors know the business.

While purchasing an existing business following

points are required to be considered.

• Financial picture
• Why for sale, is it TITANIC?
• What are business trends?
• Books should be checked.
• All concerned should be interviewed.
START UP OR PURCHASE A FRANCHISE:

All franchises have tested programs so consider the

following while purchasing::

• Proven operational methods as part of package.

• Research is available.
• Training can be provided to entrepreneur.
• Name & reputation
• Risks are minimized.

LETTER OF CREDIT, THE SPIRIT OF INTERNATIONAL TRADE

International trade demands a flow of goods from

seller to buyer and of payment from buyer to
seller. The goods movement may be evidenced by
appropriate documents. Payment, however, is
influenced by trust between the commercial parties,
their need for finance and, possibly, by
governmental trade and exchange control
regulations.

Consequently, the documentary credit is frequently

the method of payment. The buyer’s bank pays the
seller against presentation of documents and
compliance with conditions stipulated by the buyer.

A world-wide use, with an immense daily turnover in

transactions and value, necessitates a universal
standard of practice. The International Chamber of
Commerce (ICC) provides this with its Uniform and
Practice for Documentary Credits(UCP), but their
effectiveness is reduced unless the commercial
parties and the banks involved understand the
basics of the operations.
BUT WHAT IMF SAYS:

Pakistan obtained US$ 11.3B in 2008 from IMF & so

far US$ 8.3B has been released. When IMF released
US$ 3.1B we paid US$ 3.65B to various institutions
in the same period. The foreign debt is at US$ 55B
which is estimated to increase to US$ 72.6B in
2015-16.

POSSIBLE PROBLEMS

The seller says,

“We want to be certain that the buyer is able to

pay on time once the goods have been shipped. How
can we minimize risk of non-payment?”

The buyer says,

“We do not know the seller… can we be sure that he

will deliver on time?”

The seller worries,”

We are supplying the buyer with goods that we

ourselves have bought from a sub-contractor.

How can we prevent the buyer from finding out and

contacting our supplier directly?”

The buyer thinks,

“Before we pay, how can we check that the goods are

exactly those we ordered?”

BOTH THE PARTIES WANT:

"How can the banks help us in the practical
arrangements for these transactions, specially
by assisting us with all the necessary
documentation?”

Additional services desired:

“We would prefer to delay paying for the goods

until we have sold them. Will our bank provide
credit for the intervening period?”

“Where can we get information on currency

restrictions, and import or export licenses?”

What the seller wants

Contract Fulfillment

Assurance that he will be paid in full within the

agreed time limit.

Convenience

The convenience of receiving payment at his own

bank or through a bank in his own country.

Prompt Payment

Prompt payment for the sale of the goods, so as to

improve the liquidity of his business.

Advice

The knowledge necessary to conduct complex trade

transactions.

What the buyer wants

Contract Fulfillment

Assurance that he does not have to pay the seller

until he is certain that the seller has fulfilled
his obligations correctly.

Convenience

The convenience of using an intervening third party

in whom both buyer and seller have confidence-such
as a bank with its documentary expertise-when
making payment.

Credit

A managed cash-flow, by the possibility of

obtaining bank finance.

Expert assistance

Expert assistance and facilities in dealing with

often complex transactions, particularly with the
specific procedures to be followed.
 TIME FOR PAYMENT

SELLER

In advance

He needs payment before shipment, as he cannot

otherwise finance production of the goods the buyer
has ordered.

At time of Shipment

He wants assurance of payment as soon as the goods

are shipped.

He has to meet regulations stipulating payment at

time of shipment rather than before or after it.

After shipment

He is prepared to wait for payment for a certain

time after shipment, as he trusts the buyer and
appreciates his position.

BUYER

In advance

He trusts the seller, knowing that the contract

will be carried out as agreed, and he is therefore
prepared to pay in advance.

At time of Shipment

He does not want to take the risk of paying before

being certain that the goods are shipped on time
and that they are as stipulated in his contract
with the seller.
He has to meet regulations stipulating payment at
time of shipment rather than before or after it.

After shipment

He possibly wants to sell the goods before he pays

the seller.
 DOCUMENTARY CREDITS

Definition

In simple terms, a documentary credit/letter of

credit is a conditional bank undertaking of
payment.

Expressed more fully, it is a written undertaking

by a bank (issuing bank) given to the seller
(beneficiary) at the request, and on the
instructions, of the buyer (applicant) to pay at
sight or at a determinable future date up to a
stated sum of money, within a prescribed time limit
and against stipulated documents.

These stipulated documents are likely to include

those required for commercial, regulatory,
insurance, or transport purposes, such as
commercial invoice, certificate of origin,
insurance policy or certificate, and a transport
document of a type appropriate to the mode(s) of
transport used.

Documentary credits offer both parties to a

transaction a degree of security, combined with a
possibility, for a creditworthy party, of securing
financial assistance more easily.

Buyer

Because the documentary credit is a conditional

undertaking, payment is, of course, made on behalf
of the buyer against documents which may represent
the goods and give him rights in them.

However, according to arrangements made between him

and the bank-and, in some cases, by reason of local
laws or regulations-he may have to make an advance
deposit at the time of requesting the issuance of
the credit, or he may be required to place the
issuing bank in funds at the time documents are
presented to the overseas banking correspondent of
the issuing bank.

Seller

Because the documentary credit is a bank

undertaking, the seller can look to the bank for
payment, instead of relaying upon the ability or
willingness of the buyer to pay subject to
fulfillment of certain terms and conditions.

ISSUING A CREDIT

The buyer and the seller conclude a sales contract

providing for payment by documentary credit.

The buyer instructs his bank-the “issuing” bank-to

issue a credit in favour of the seller
(beneficiary).

The advising or confirming bank informs the seller

that the credit has been issued.

The issuing bank asks another bank, usually in the

country of the seller, to advise or confirm the
credit.

Advising/ confirming bank

There are usually two banks involved in a

documentary credit operation. The issuing bank is
the bank of the buyer. The second bank, the
advising bank, is usually a bank in the seller’s
country.
The second bank can be simply an advising bank, or
it can also assume the more important role of a
confirming bank.

In either case, it undertakes the transmission of

the credit. Article 8 (UCP) requires the advising
bank to take “reasonable care to check the apparent
authenticity of the credit which it advises”.
Issuing bank

If the second bank is simply “advising the credit”,

it will mention this fact when it forwards the
credit to the seller. Such a bank is under no
commitment to make payment to the seller, even
though it may be nominated in the credit as the
bank authorized to pay, to accept drafts, or to
negotiate.

If the advising bank is also “confirming the

credit”, it will so state. This means that the
confirming bank, regardless of any other
consideration, must pay, accept, or negotiate
without recourse to the seller, provided all the
documents are in order and the credit requirements
are met.

SOME IMPORTANT RELEVANT SCHEDULE OF BANK CHARGES

IMPORTS:

Sr.# Annual Quarterly Minimum

amoun payme payme
t nt nt
for
one
LC
1 Upto Rs.25M 0.40% per Rs.1,400
quart or
er negot
iable
2 Upto Rs.50M 0.35% per
quart
er
3 Upto 0.29% per
Rs.10 quart
0M er
4 Above Negotiable
5 LC Negotiable
amend
ment
& handling
charg
es
6 One off Normal mark
trans up
actio rate
n
7 Documents No
retir commi
ed ssion
with
10
days
8 If retired From 0.29%
durin to
g 15 0.46%
days i.e.
or negot
more iable

EXPORTS:

1 LC advising Rs.1,400
per
quar
ter
2 LC advising Rs.1,200
amend
ment
3 LC Minimum
confi Rs.1
rmati ,400
on

WHERE WE STAND PRESENTLY:

INDICATORS JULY-SEPT,11 JULY-SEPT 10

GDP GROWTH 2.5%-2.8% 4.1%
FISCAL DEFICIT 1.5% OF GDP 1.6% OF GDP
RS.VS $ Rs.86.12 Rs.83.12
IMPORTS $9B $7.6B
EXPORTS $5B $4.3B
TRADE GAP $3.85B $3.15B
CURRENT A/c $545M 587M
DEFICIT

HOME REMITTANCE $2.6B $2.3B

FOREIGN $455M $636M
INVESTMEN
T
FOREX RESERVES $17B $14.4B
EXTERNAL DEBT $55.6B $52.3B
EXTERNAL DEBT $5.7B $5.3B
SERVICING

The Government borrowings are increasing and in

2010-11 so far Rs.198B has been borrowed due
to floods etc.

PAK RS.VS USD SINCE APRIL 2008

The rupee has shed 37% i.e. from Rs.62.57 in

April 2008 to Rs.87 in October 2010 in the
present Government period due to following
reasons:

• Losing investors’ confidence on the current

Political system.
 • Global recession.

• Flight of capital due to judicial crisis.

• Law and order situation after Benazir’s

Assassination.

• IMF condition to make oil/POL payments

through open market in stead of SBP.

• High oil & food import prices.

• $11.7B loan of IMF.

• Freezing of forex exchange companies.

$ =Rs.19.32 in 1989.
IMF Support Arrangements to Pakistan
(1980-2004)
Date of Amou
Disbursem
Arrangem nt Signed
Arrangem ent
ent (SDR during
ent (SDR
(expiration millio rule of
million)
) n)
EFF 24-11-80 1268.0 1079.00 Ziaul
(23-11-83) 0 Haq
SBA 28-12-88 273.15 194.48 Benazir
(7-3-90) Bhutto
SAF 28-12-88 382.41 382.41 Benazir
(27-12-91) Bhutto
SBA 16-9-93 265.40 88.00 Nawaz
EFF/ (15-9-94) 379.10 123.20 Sharif
ESAF 22-2-94 606.60 172.20
(21-2-97)
22-2-94
(21-2-97)
SBA 13-12-95 562.59 294.69 Benazir
(31-3-97) Bhutto
EFF/ESA 20-10-97 454.92 113.75 Nawaz
F (19-10- 682.38 265.37 Sharif
2000)
SBA 29-11- 465.00 465.00 Pervez
2000 Musharr
(30-9- af
2001)
PRGF 7-12-2001 1033.7 861.42 Pervez
(5-12- 0 Musharr
2004) af
LATEST LOAN:

Stand-By Arrangement (SBA) 2008-10

Main Features

a) Pakistan submitted to the IMF a Request for

Stand-By Arrangement on 20
November, 2008 amounting SDR 5.17 billion
($ 7.6 billion) equal to 500%
of Pakistan's quota in the Fund. It has
increased to $11.7B. Pakistan has
requested to extend it upto 31-12-10 as it was
expired on 30-09-10.

b) The Arrangement is for a period of 23

months.

c) It is on interest rate of 3.51-4.51%. The

amount will be disbursed in seven
tranches - the first tranche of SDR 2.067
billion has been received on 29
November, 2008 and the balance amount will
be disbursed in six quarterly
 instalments during 2009-10. The amount and
interest will be repaid in five
Years from 2011.

Objective and Economic Program (2009-2010):

The main objectives of the Arrangement are to

(i) restore confidence of domestic and external

investors by addressing macroeconomic
imbalances through a tightening of fiscal
and monetary policies; and
ii) protect the poor and preserve social stability
through a well-targeted and adequately funded
social safety net. For this purpose the
government of Pakistan has initiated an
Economic Program covering 24 months. The
main elements of the Program are:
· Reduce fiscal deficit: 7.4% of GDP in 2008
to 4.2% in 2009 and 3.3% in 2010
· Tighten monetary policy (increase interest
rate, eliminate government borrowing) to
reduce inflation to 6% in 2010
 · Increase expenditure on social safety net
(0.6% of GDP to 0.9% in 2009) -work with
World Bank to prepare a comprehensive
program of safety net
Conditionality of SBA.

OTHER MAIN POINTS:

a)The program is subject to quarterly review

and performance criteria. The
conditionality covers actions prior to the
approval of arrangement by the IMF
Board, performance criteria, benchmarks
and quantitative targets.
b) The prior actions included increasing the

State Bank's discount rate from 13%

to15% as a measure to control inflation.
c) Raise in electricity tariff by an average of
18% effective from 5 September, 2008.

Evaluation of SBA 2008-10.

The IMF arrangements can be seen from

different perspectives i.e.
It may refer to the following:

- Bail-out package.
- Investors' confidence builder.
- Economic stabilizer and revival of growth.
- Step towards greater external dependence and
source of hardship to the
people, and so on.
- Ignores protecting the poor.
-Presumes that tight monetary and fiscal policies
will ensure economic revival in later years.
-Reduced government borrowings

This scenario is based on the premise that the

government will be able to take fiscal and
monetary measures as stipulated in the
Arrangement.
Table
Economic Indicators
2008 2009 2010
GDP 5.8 3.4 5.0
growth rate
%
CPI (end 21.5 20.0 6.0
year) %
 Gross 12.9 13.5 15.7
national
savings (%
GDP)
Gross 21.3 20.0 21.3
capital
formation
(% GDP)
External 8.4 6.5 5.6
resources(%
GDP)
Fiscal 7.4 4.2 3.3
deficit (%
GDP)
Debt (% 57.9 54.6 52.4
GDP)
Current 8.4 6.5 5.7
Account
deficit (%
GDP)
External 26.5 31.4 33.2
debt (%
GDP)
Reserves ($ 8.591 8.591 11,291
 million)

CREDIT APPLICATION

The instructions to be given by the applicant to

the issuing bank will cover such items as.

1. The full (and correct) name and address of the

beneficiary (seller).
2. The amount of the credit.
3. The type of credit, whether
* revocable
* irrevocable
* irrevocable, with the added
confirmation of the advising bank.

4.How the credit is to be available, e.g. by

payment, deferred payment, acceptance or
negotiation. In most cases it will be the issuing
bank which will determine the bank authorized to
pay, or to accept drafts, or to negotiate, i.e.
the “nominated bank” – Article 11(b), UCP).

4. The party on whom drafts, if any, are to be

drawn and the tenor of such drafts.

5. A brief description of the goods, including

details of quantity and unit price, if any.
6. Whether freight is to be prepaid or not.
7. Details of the documents required. The place of
dispatch or taking in charge of the goods,
or loading on board, as the case may be, and
the place of final destination.
8. Whether transshipment is prohibited.
9. Whether partial shipments are prohibited.
10. The latest date for shipment (if
applicable). The period of time after the
date of issuance of the transport
documents(s) within which the documents must
be presented for payment, acceptance or
negotiation.
11. The date and place of expiry of the credit.
12. Whether the c
redit is to be a transferable one. (This would
have to be stated specifically by the
applicant). The specimen application form is
for a non-transferable credit.
13. How the credit is to be advised, i.e., by
mail, or by teletransmission i.e. SWIFT
 TYPES OF CREDIT

There are various types of documentary credits. A

revocable credit can be amended or cancelled at any
time without prior warning or notification to the
seller.

An irrevocable credit can be amended or cancelled

only with the agreement of the issuing bank, the
confirming bank (if the credit has been confirmed)
and the seller (as beneficiary). As there are often
two banks involved, the issuing bank and the
advising bank, the buyer can ask for an irrevocable
credit to be confirmed by the advising bank. If the
advising bank agrees, the irrevocable credit
becomes a confirmed irrevocable credit.

Revocable Credit

Involves risk, as the credit may be amended or

cancelled while the goods are in transit and before
the documents are presented, or, although
presented, before payment has been made, or in the
case of deferred payment credit, before the
documents have been taken up. The seller would then
face the problem of obtaining payment directly from
the buyer.

Irrevocable Credit

Gives the seller greater assurance of payment: but

he remains dependent on an undertaking of a foreign
bank.

Confirmed irrevocable Credit

Gives the seller a double assurance of payment,

since a bank in the seller’s country has added its
own undertaking to that of the issuing bank.
Revocable Credit:

Gives the buyer maximum flexibility, as it can be

amended or cancelled without prior notice to the
seller up to the moment of payment by the bank at
which the issuing bank has made the credit
available.

Irrevocable Credit

Gives less flexibility, as the credit can only be

amended or cancelled if all the parties named above
agree. (It must be noted, however, that the credit
is issued in this form because the commercial
parties have so agreed in the sales contract).

Confirmed irrevocable Credit

Represents an additional requirement and is more

costly.

PRESENTATION

1.As soon as the seller receives the credit and is

satisfied that he can meet its terms and
conditions, he is in a position to load the goods
and dispatch them.

2.The seller then sends the documents evidencing

the shipment to the bank where the credit is
available (the nominated bank).

3.The bank checks the documents against the credit.

If the documents meet the requirements of the
credit, the bank will pay, accept, or negotiate,
according to the terms of the credit. In the case
of a credit available by negotiation, the issuing
bank or the confirming bank will negotiate without
recourse. Any other bank, including the advising
bank if it has not confirmed the credit, which
negotiates, will do so with recourse.

4.The bank, if other than the issuing bank, sends

the documents to the issuing bank.

The issuing bank checks the documents and, if they

meet the credit requirements, either

a) effects payment in accordance with the

terms of the credit, either to the seller
if he has sent the documents directly to
the issuing bank, or to the bank that has
made funds available to him in
anticipation, or
b) reimburses in the pre-agreed manner the
confirming bank or any bank that has paid,
accepted, or negotiated under the credit
(Article 21, UCP).
 TRANSPORT DOCUMENTS

The most important thing is the relevant transport

document!

The revision of UCP aims at a less troubled future

by recognizing – and legislating for –

a) the case where the ‘credit stipulates

dispatch of goods by post’, so that the
appropriate ‘transport document’ is a ‘post
receipt or certificate of posting.

b) the case where the credit envisages

‘carriage by sea’, with the traditional
‘marine bill of lading’ stipulated as the
required transport document.
c) all other cases where the credit calls for a
transport documents, e.g. where the mode of
carriage may be a combination of more than
one mode (combined transport), or may be
air, road, rail or inland waterway, with the
appropriate transport document a combined
transport bill of lading, an air waybill, a
road or rail consignment note, an inland
waterway bill of lading, or even, if so
stipulated in the credit.

BILL OF LADING

This is the type of transport document normally

applicable to a carriage of goods solely by sea. It
is the transport document which must be presented
if the credit stipulates a ‘marine bill of lading’.

Unless otherwise stipulated in the credit this

document MUST indicate that the goods have been
loaded on board or shipped on a named vessel.
If the credit prohibits transshipment this document
will be rejected if it specifically states that the
goods will be transshipment.

COMBINED TRANSPORT BILL OF LADING

This is the type of transport document normally

applicable to a carriage of goods by more than one
mode of transport.

Unless otherwise stipulated in the credit this

document MAY indicate either dispatch or taking in
charge of the goods, or loading on board, as the
case may be.

COMMERCIAL INVOICE

A commercial invoice is the accounting document by

which the seller charges the goods to the buyer.

A commercial invoice normally includes the

following information:

* date.
* name and address of buyer and seller.
* order or contract number, quantity and
description of the goods, unit price (and
details of any other agreed charges not
included in the unit price), and the total
price.
* weight of the goods, number of packages,
and shipping marks and numbers.
* terms of delivery and payment.
* shipment details.
 CERTIFICATE OF ORIGIN

A certificate of origin is a signed statement

providing evidence of the origin of the goods.

* In many countries a certificate of origin,

although prepared by the exporter or his
agent, has to be issued in a mandatory form
and manner, with certification by an
independent official organization, e.g., a
chamber of commerce.
* Such a document contains details of the
shipment to which it relates, states the
origin of the goods, and bears the signature
and the seal or stamp of the certifying body.

INSURANCE CERTIFICATE

The insurance document must:

1. be for the purpose that specified in the

credit.
2. be consistent with the other documents in its
identification of the voyage and description of
the goods.
3. unless otherwise stipulated in the credit,
a. be a document issued and/ or signed by
insurance companies or underwriters, or
their agents.
b. be dated on or before the date of shipment
as evidenced by the transport documents,
or appear to show that cover is effective
at the latest from such date of shipment
be for an amount at least equal to the CIF
value of the goods plus 10% and in the
currency of the credit.
 SETTLEMENT

The seller may sometimes present documents that do

not meet the credit requirements. In such a case,
the bank can only act in one of the following ways:

1. Return the documents to the beneficiary

(seller) to have them amended for resubmission
within the validity of the credit and within
the period of time after date of issuance
specified in the credit, or applicable under
(UCP).
2. Send the documents for collection.
3. Return the documents to the beneficiary for
sending through his own bankers.
4. If so authorized by the beneficiary, cable or
write to the issuing bank for authority to pay,
accept or negotiate.
5. Call for an indemnity from the beneficiary or
from a bank, as appropriate i.e., pay, accept
or negotiate on the understanding that any
payment made will be refunded by the party
giving the indemnity, together with interest
and all charges, if the issuing bank refuses to
provide reimbursement against documents, that
do not meet the credit requirements.
6. Based on practical experience, and with the
agreement of the beneficiary, pay, accept or
negotiate “under reserve”, i.e. retain the
right of recourse against the beneficiary if
the issuing bank refuses to provide
reimbursement against documents that do not
meet the credit requirements. In view of a
court ruling it would be advisable to make sure
that the beneficiary fully understands this
position.
 BY PAYMENT

1. The seller sends the documents evidencing the

shipment to the bank where the credit is
available (the paying bank).
2. After checking that the documents meet the
credit requirements, the bank makes payment.
3. This bank, if other than the issuing bank, then
sends the documents to the issuing bank.
Reimbursement is obtained in the pre-agreed
manner.

BY ACCEPTANCE

1. The seller sends the documents evidencing the

shipment to the bank where the credit is
available (the accepting bank), accompanied by
a draft drawn on the bank at the specified
tenor.
2. After checking that the documents meet the
credit requirements, the bank accepts the draft
and returns it to the seller.
3. This bank, if other than the issuing bank, then
sends the documents to the issuing bank,
stating that it has accepted the draft and that
at maturity reimbursement will be obtained in
the pre-agreed manner.

Advising / Confirming bank

By accepting the draft, the bank signifies its

commitment to pay the face value at maturity. The
seller can, therefore, usually convert the accepted
draft into cash by discounting it with his own
bank, or on the local money market.

Issuing Bank
All credits must nominate the bank (nominated bank)
which is authorized to accept drafts (accepting
bank).

BY NEGOTIATION

1. The seller sends the documents evidencing the

shipment to the bank where the credit is
available (the negotiating bank), accompanied
by a draft drawn on the buyer or on any other
drawee specified in the credit, at sight or at
a tenor, as specified in the credit.
2. After checking that the documents meet the
credit requirements, the bank may negotiate the
draft. Negotiation by the issuing bank or the
confirming bank will be without recourse to the
seller. Negotiation by any other bank will be
with recourse to the seller.
3. This bank, if other than the issuing bank, then
sends the documents and the draft to the
issuing bank. Reimbursement is obtained in the
pre-agreed manner.

CLASSIFICATION OF TYPES OF LC:

1. REVOLVING CREDIT

A revolving credit is one where, under the terms

and conditions thereof, the amount is renewed or
reinstated without specific amendment to the credit
being needed.

* It can be revocable or irrevocable.

* It can revolve in relation to time and
value.
2. RED CLAUSE CREDIT

A red clause credit:

* is a credit with a special clause

incorporated into it that authorizes the
advising or confirming bank to make advances
to the beneficiary before presentation of
the documents. The clause is incorporated at
the specific request of the applicant, and
the wording is dependent upon his
requirements.
* is so called because the clause was
originally written in red ink to draw
attention to the unique nature of this
credit.
* specifies the amount of the advance that is
authorized: in some instances it may be for
the full amount of the credit.
* is often used as a method of providing the
seller with funds prior to shipment.
Therefore, it is of value to middlemen and
dealers in areas of commerce that require a
form of pre-financing and where a buyer
would be willing to make special concessions
of this nature.

3. TRANSFERABLE CREDIT

A transferable credit is one that can be

transferred by the original (First) beneficiary to
one or more other parties (second beneficiaries).It
is normally used when the first beneficiary does
not supply the merchandise himself, but is a
middleman and thus wishes to transfer part, or all,
of his rights and obligations to the actual
supplier(s) as second beneficiary(ies).

This type of credit can only be transferred once,

i.e., the second beneficiary(ies) cannot transfer
to a third beneficiary, The transfer must be
effected in accordance with the terms of the
original credit, subject to the following
exceptions:

* the name and address of the first

beneficiary may be substituted for that of
the applicant for the credit.
* the amount of the credit and any unit price
may be reduced: this would enable the first
beneficiary to allow for his profit.
* the period of validity, the period of time
after date of issuance of the transport
document for presentation of documents, and
the period for shipment may be shortened.
* the percentage for which insurance cover
must be effected may be increase in such a
way as to provide the amount of cover
stipulated in the original credit.

It should be noted that a credit would only be

issued as a transferable one on the specific
instructions of the applicant. This would mean that
both the credit application form and the credit
itself must clearly show that the credit is to be
transferable. (Only an irrevocable credit would be
issued in this form).

The transfer is affected at the request of the

first beneficiary, by the bank where the credit is
available (the bank).

BACK TO BACK CREDIT

It may happen that the credit in favour of the

seller is not transferable, or, although
transferable, cannot meet commercial requirements
by transfer in accordance with conditions. The
seller himself, however, is unable to supply the
goods and needs to purchase them from, and make
payment to, another supplier. In this case, it may
sometimes be possible to use either a “back-to-back
credit”or Counter credit.

Under the back-to-back concept, the seller, as

beneficiary of the first credit, offers it as
“security” to the advising bank for the issuance of
the second credit. As applicant for this second
credit the seller is responsible for reimbursing
the bank for payments made under it, regardless of
whether or not he himself is paid under the first
credit. There is, however, no compulsion for the
bank to issue the second credit, and, in fact, many
banks will not do so.

In the case of a counter credit, the procedure is

the same except that the seller requests his own
bank to issue the second credit as a counter to the
first one. His own bank may agree to issue such a
credit if the transaction falls within the seller’s
existing credit line or if a special facility is
granted for that purpose. The bank will, of course,
have rights against him in accordance with the
terms of the credit line or special facility.

With both the back-to-back credit and the counter

credit, the second credit must be worded so as to
produce the documents (apart from the commercial
invoice) required by the first credit-and to
produce them within the time limits set by the
first credit-in order that the seller, as
beneficiary under the first credit, may be entitled
to be paid within those limits.

Green Clause Credit:

This is an improvement over the red clause credit

and permits not only pre shipment but also provides
for storage of goods in the name of opening Bank.
Deferred payment credit:

The payment is made in installments for the

purchase of heavy machinery and other capital
goods.

The principal types will be:

a)SIGHT
b)DA

BANKING FACILITIES:

Against sight and DA(usance) LCs, the following

facilities can be made available to the customer:

i) Payment Against Documents

ii) Finance against imported merchandize (FIM)
iii) Finance against trust receipts (FTR)
iv) Finance against foreign bills (FAFB)
v) Foreign bills purchased (FBP)
vi) Finance against packing credit (FAPC)
vii) FOREIGN BILLS PURCHASED (FBP):
a) Finances the exporter’s receivable period.
b) The facility is for sight bill purchased.
c) Exporters do not stand to benefit/lose from
exchange rate fluctuations between local
and foreign
currency in which bill is denominated.

FINANCE AGAINST FOREIGN BILLS (FAFB):

a) Finances the exporter’s receivable period.

b) Exporters do not sell bills to the Bank but
get
finance.
c) Exporters stand to benefit/lose from
exchange rate
fluctuations between local and foreign
currency in which bill is denominated.
FOREIGN BILLS DISCOUNTED (FBD):

Similar with FBP except the period, this is usance

in this case.
The pre-shipment facility is risky from Bankers’
point of
View.

There are two types of documents:

FINANCIAL DOCUMENTS:

a) Cheque
b) Bill of exchange
c) Promissory note

COMMERCIAL DOCUMENTS:

a) Transport documents
b) Documents of title

EXPORT FINANCE:

It works under Export Credit Guarantee Scheme

through Pakistan Insurance Corporation. It covers
the following areas:

a) Pre-shipment
b) Post-shipment

This scheme has following salient features:

PART-I:

It is granted against cases to case basis against

confirmed L/C or firm export orders.
PART-II:

It takes place on the basis of their previous year

performance with the help of export realization.
Repayment should be made within 180 days of the
bank borrowing unless and otherwise extended by the
Bank.
Part-II is allowed at 6/12 of previous year’s
export performance from any Bank.SBP has allocated
Rs.10B for refinancing. The mark-up rate will be 8%
maximum & 5% will be of SBP.

PART-B: FOREIGN EXCHANGE

BALANCE OF PAYMENT:

It is a measurement of all transactions across the

borders over a specified time period.

FOREIGN EXCHANGE TRANSACTIONS

i) Current Transactions:

a) Goods and services during one financial

year i.e. visible items & it is called
balance of trade also. It includes non
visible items like services also & factor
income i.e. dividend payment & interest
payments across the borders.

b) Receipt and payments which do not

create new capital items or cancel
previous such items (visible or
invisible).

ii) Capital Transactions:

 a) Receipts and payments of capital nature
which do not pertain to current year.
It includes DFI, portfolio investment &
other capital investments.

b) Long term capital claims.

iii) Short term financial Transaction:

a) Citizen of a country can transfer their

foreign exchange recourses to another
country due to political or economic
reasons.

iv) Working Balances: The commercial Banks

maintain foreign currency deposit with
Banks in some other countries to avoid
various disturbances.

FOREIGN CURRENCY ACCOUNTS:

Banks play a vital role in the international

trade settlement. This settlement is made with
the help of “NOSTRO” and “VOSTRO”

NOSTRO:Latin word means OUR:

a) A bank can have relationship

with foreign correspondents.
b) In UK, can have sterling
nostro a/c and so on.
c) They are in current account
and do not earn interest.

VOSTRO: a) Latin word means “YOUR”.

b) Convertible Pak.RS. accounts
maintained by foreign Banks.

EXCHANGE CONTROL
OBJECTIVES OF EXCHANGE CONTROL

Exchange control is management of available

resources in foreign currency. It refers to
following points:

i) OVERVALUATION: More than the value determined

by market forces.

ii) UNDER VALUATION: Less than the value

determined by market forces.

iii)STABILITY OF EXCHANGE RATES: Conversion at

official rate of exchange to stabilize
value.

iv) PREVENTION OF CAPITAL FLIGHT: Gold and

foreign currency cannot be exported
without Permission.

v) PROTECTION TO DOMESTIC INDUSTRY: To encourage

business
environment in the country.

vi) CHECKING NONESSENTIAL IMPORTS: To control

import of luxury items.

vii) HELP TO PLANNING PROCESS: How to spend

foreign currency on result oriented items.

viii) BALANCE OF PAYMENT PROBLEMS: With prudent

policies BOP problem can be controlled.

ix) EARNING REVENUE: Foreign exchange is sold

to Businessmen, traders etc. at a certain
rate.

x) REPAYING FOREIGN DEBT: By earning and

conserving Foreign exchange.
xi) RETALIATION: Monopoly power and better
bargaining terms.

FORMS OF EXCHANGE CONTROL

a)EXCHANGE RATIONING:

i) To face foreign exchange difficulties, the

citizens will be required to surrender foreign
exchange earnings to SBP fully.

ii) Partial rationing

iii) Different official rate for different
transactions

b)BLOCKED ACCOUNTS:

It refers to the following:

i) Bank deposits and other assets held by

foreigners in controlling country.
ii) The interest and dividend can be used for
reinvestment in the same country but will
not be allowed to transfer or convert
funds.
iii) Allowed to be utilized within the country,
if essential.
iv) For export purposes.
v) Sometimes for traveling purposes.

c)PAYMENT AGREEMENTS:

It refers to the following points:

i) Can be made through

agreement between two countries, which
want rationing.
ii) Can be made through agreement
between debtor and creditor countries.
 iii) Sometimes forced to be formed by
creditor for encouragement of their
exports.

CLEARING AGREEMENTS:

i) Direct bilateral exchange of goods.

ii) May be between individuals and firms located
in
different countries.
ii) More comprehensive as designed to settle
debt in
shortest possible time.
iv) The transactions are settled at an official
rate of exchange.
v) Quantity and specification of goods is also
pre-defined.
vi) Results are always not fruitful.

Precisely can be done by Government intervention

i.e. purchasing of foreign currency by selling
local currency as being done in Pakistan.

PREREQUISITES OF EXCHANGE CONTROL:

i) Full control of Government over import and

export of gold and bullion.
ii) Buying and selling of Government securities
should be controlled so that foreign
transactions are restricted.
iii) Stock market operations must be monitored
closely so that conversion of foreign
assets into interest bearing foreign
securities may be avoided.
iv) An effective custom agency is
required to control import
and export.
 v) Trade control may be
exercised to ensure early
repatriation of export
proceeds while free imports
may be controlled for a
favourable BOP.

The above mentioned methods are

DIRECT METHODS in which we can call
the OVERVALUATION as PEGGING UP and
UNDERVALUATION as PEGGING DOWN.
Besides, following are other direct
methods:
a) EXCHANGE RESTRICTIONS:
As per rules of SBP, forex
is released and kept by the
Government.
b) ALLOCATION AS PER PRIORITY
c) MULTIPLE EXCHANGE RATE.

INDIRECT METHODS:
a)QUANTITATIVE RESTRICTIONS:

There is import embargoes, import

quota and other restrictions to
control disequilibrium in BOP.
b)EXPORT BOUNTIES: To encourage
exports, provided funds are
available with SBP.

c)RAISING INTEREST RATE: It will

attract the inflow of deposits in
foreign exchange.

THE FINANCIAL MARKETS:

It is a set of facilities that

makes it possible to exchange money
for goods or goods for money on
regular basis. Securities are the
goods.

Major functions of financial

markets:

a) Shifting of credit: Mobilize

the funds for users.

b) Liquefying securities.
Customer should be confident
about sale/purchase.
 c) Pricing: Mark-up rates.

d) Foreshadowing future:
Forecasting of future for
financial management.

e) Allocating resources:
Considering growth, safety
and yield.

CLASSIFICATION OF FINANCIAL MARKET:

a) Primary market.
b) Secondary market
c) Money market
d) Capital market

FUNCTIONS OF FOREIGN EXCHANGE

MARKET
Currently operating in London,
Paris, Brussels, Zurich, New York,
Hong Kong and
Tokyo.
MOTIVES FOR INVESTING IN FOREIGN
EXCHANGE MARKETS:

a) Economic Conditions: The

investors can invest in a
currency where economy is
stable so return can be
higher.
b) Exchange rate expectataions:
The securities in a currency
may be bought where
appreciation is higher than
the domestic currency.
c) International Diversification:
Risk & fluctuations can be
managed by investing in other
currencies.

MOTIVES FOR PROVIDING CREDIT IN

FOREIGN EXCHANGE MARKETS:

a) Higher interest rates: Due to

shortage of forex reserves the
country may offer better rates
on foreign currency deposits.
b) Exchange rate expectations: One
can make investment in a
 country currency which is
expected to appreciate against
domestic currency.
c) International Diversification:
The chances of risk &
fluctuations can be avoided.
The economic conditions of the
concerned country are very
important.

MOTIVES FOR BORROWING IN FOREIGN

EXCHANGE MARKETS:

a) Low interest rates: Many

countries have bulk supply of
foreign reserves so rate of
interest are relatively low.
b) Exchange rate expectations:
The risk & return can be
managed.

FUNCTIONS:
i) To transfer purchasing power
from one country to another.
ii) It takes place by debiting
and crediting accounts of
each Bank.
iii) No physical delivery of
currency takes place usually.
iv) It provides credit also to
the business community.
v) HEDGING: Hedging means
avoidance of foreign exchange
risk or covering of an
position without buying or
tying up funds. This process
is carried out in forward
Market. This promotes foreign
trade.

vi) SPECULATION:
a)It is opposite of hedging.
b)The speculator takes the
risk
Of any transaction.
c)Speculation can take place in
forward or spot market.
d)If the speculator buys a
currency in expectation of
reselling it on profit it will
be called” LONG POSITION” it
 will have STABILIZING EFFECT
otherwise it will be called
“SHORT POSITION” or
DESTABILIZING EFFECT.

VII)SWAP TRANSACTIONS:
It refers to following:
i) Simultaneous buying and
selling of foreign currency
for different delivery dates
in opposite direction.
ii) May cover spot against
forward.
iii) May take place between
commercial parties or Bank
etc.
iv) May be for a limited period
of time.
v) May be lesser risky.
vi) Very popular with
speculators, as well.

FOREIGN EXCHANGE POSITION

MANAGEMENT:
OVER BOUGHT/SOLD AND SQUARE
POSITION:

i) In order to facilitate
foreign exchange transaction
the Banks buy/sell currency
in spot or forward.
ii) The difference between buy
and sell shows the commitment
position of the Bank.
iii) If purchase side is more than
sale side it is called
overbought and the opposite
one is called oversold.
iv) If both positions are equal
it is called SQUARE.
v) If both positions are nearly
equal, it is called near
square.
vi) Sometimes delay in
transmitting takes place,
which may disturb position.

LEADS AND LAGS:

If a foreign currency weakens or
it is devalued, the importers
stand to gain on their spot
purchases from the Bank while the
exporter will lose. The importer
and exporter will move accordingly
and this pressure will weaken the
currency. If a currency is strong
and is expected to be revalued
exporter will delay shipment and
the importer will expedite
payment. This will make the
currency actually strong.
THIS PHENOMENON OF DELAYING AND
EXPEDITING SETTLEMENT BY CUSTOMERS
IN ANTICIPATION OF CURRENCY’S
DEVALUATION AND REVALUATION IS
CALLED “LEADS AND LAGS”.

SYSTEM OF EXCHANGE RATE

TWO major systems:

FIXED RATE: Remains fixed in

terms of foreign unit of currency
with the home currency. This
system has a demerit that when
there is adverse BOP, substantial
foreign exchange reserves will be
needed to maintain the rate at
fixed level.
FLOATING(FREE)RATE: It moves
in a following direction:
i) Demand and supply of the
currency.
ii) Places a currency at the
mercy of world’s judgment.
iii) May give rise to speculation.

TYPES OF EXCHANGE RATE:

DIRECT QUOTATION:
Rate of exchange is expressed in
units of national currency in most
currencies:

Rs.60=US$1

INDIRECT QUOTATION:
It values the currencies in terms
of the other currencies than in
national currencies.

US$ 0.5=Rs.1

CROSS RATES:
i) The rate of exchange between
any two currencies is kept
the same in different money
centers by “ARBITRAGE”.
ii) Sale and purchase is made in
and from money centers where
the currency is available at
lower or higher rates
respectively.
iii) When two currencies and two
centers are involved it is
called “TWO POINT ARBITRAGE’.
iv) When three currencies and
three centers are involved it
is called “THREE POINT
ARBITRAGE’ OR TRIANGULAR.
v) When national currency is not
used in the transaction and
exchange rate is calculated
on the basis of a third
 currency, it is called CROSS
RATE.
vi) It is known as calculated
parity between two money
centers through a third e.g.

The chain rule is followed….

We can buy EURO in London against

GBP then can use EURO to
buy $ in France then we can sell $
in UK.

SPOT RATE:
The spot rate of the currency is
the value quoted for the nearest
settlement date for the purchase
and sale of the currency against
another one. The transaction may be
settled in two to three working
days.

FORWARD RATE:
It covers following concepts:
i) Rate at which the currency
can be bought or sold for
the delivery on a future date.
ii) Agreement to buy or sell at a
specified future date at rate
agreed today.
iii) No payment will be made
except security deposit at
the time of signing of
contract.
iv) No consideration for spot
rate at the time of
settlement.
v) May be for one to six months
or longer.
vi) Longer period contracts are
not common due to
uncertainties involved.
vii) If forward rate is less than
spot, it is called “FORWARD
DISCOUNT” otherwise it will
be called “FORWARD PREMIUM”.

viii) With its help

the importer/exporter can
avoid
fluctuations.
 ix) The Bank can take help from
speculators.
x) There can be BULL or BEAR
run.

OTHER SYSTEM OF EXCHANGE RATE:

i) Dirty float:

a) To avoid sharp changes in

rates under any system.
b) It is a compromise between
fixed & floating rate system.
c) Can be done with interest
rate policy.
d) The objective is to stabilize
rate of exchange.

ii) Wider band:

a) The rate can be moved in 2.25%

range on either side of
official rate of exchange.
b) It was allowed by IMF in 1971
for the first time.
c) Total variation comes to 4.5%.
d) It helps in avoiding currency
uncertainty.
iii) Crawling Peg:

a) The value of currency is revised

automatically.
b) There is a support point when it
reaches then the central
bank intervenes.
c) According to previous agreed
weeks or months the support
point is changed based on
currency average.
d) If new support point is near to
low point then it will be
set downward otherwise upward.
e) It gives certainty to rate of
exchange.

CURRENCY DERIVATIVES

A forward contract is an agreement

between a company & a commercial
bank to exchange a specified amount
of currency at specified exchange
rate (forward rate) on a specified
date in the future. The normal
period is 30, 60 & multiple.
Initial deposit may be needed.

BID/ASK RATE:
The ask rate is the selling rate
whereas bid rate is the purchase
rate. The spread between bid & ask
rate is wider in forward contracts.

How to calculate BID & ASK rate in

%:

Ask rate-Bid rate/Ask rate

A future contract refers to a

specific settlement date for a
particular currency’s volume. It is
popular with speculators.

DIFFERENCE BETWEEN FORWARD & FUTURE

CONTRACTS:

FORWARD FUTURE
Size of Tailored Standardize
contract to d
individual
 needs
Delivery Tailored Standardize
date to d
individual
needs
Participant Bankers, Bankers,
s brokers, brokers,
MNC, MNC,
speculator qualified
s not speculators
encouraged
Security Not Needed
deposit essential
Transaction Set by Negotiable
cost spread

CURRENCY CALL OPTIONS:

It grants right to buy specific

currency at a designated price
within a specific period of time.
The currency options are desirable
when one wishes to lock in a
maximum price to be paid for the
currency in the future. The price
at which the person is allowed to
buy that currency is known as
exercise/strike price.
Call options are desirable when….

a) One wishes to lock maximum

price to be paid for a currency
in the future.
b) If the spot rate of currency
rises above strike price owners
of call options can exercise
option by purchasing it at
strike price.
c) Future contract is obligatory
but currency option is not.
d) Owners of call option loses
premium paid by them initially
but that is maximum.

A currency call option is said to

be in the money when present
exchange rate exceeds strike price,
at the money when both are equal &
out of money present exchange rate
is less that strike price. Higher
premium is there in the money
option.

FACTORS AFFECTING CURRENCY CALL

OPTION PREMIUM:
 a) Higher the spot rate relative
to strike price, higher the
option price will be. This will
be due to higher probability of
buying currency at lower rate
than what you could sell it
for.
b) The relationship of expiration
date & premium is there.
c) If time is long then chances of
raising the spot rate will be
higher as compared with strike
price.
d) The volatility of currency can
increase spot price more
rapidly.

CURRENCY PUT OPTIONS:

It grants right to sell specific

currency at a designated price
(strike price) within a specific
period of time. It is also not
obligatory like call option.
The owners of put option loses
premium paid by them initially but
that is maximum.
A currency put option is said to be
in the money when present exchange
rate is less than strike price, at
the money when both are equal & out
of money when present exchange rate
exceeds the strike price. For a
given currency & expiration date,
an in the money put option will
require a higher premium than
options that are there in at the
money or out of money.

EXAMPLE FOR CALL OPTION:

Call option premium on C$=$.01/unit

Strike price=$0.70
One option contract represents C$
50,000
Amount in C$
Narration Per unit Per
price contract
Selling 0.74 37,000
price of C$
Purchase -0.70 -35,000
price of C$
Premium -.01 -500
paid for
option
Net Profit 0.03 1,500

If the seller does not purchase

the C$ till option was about to be
exercised the net profit of seller
will be as follows:
Amount in C$
Narration Per unit Per
price contract
Selling 0.70 35,000
price of C$
Purchase -0.74 -37,000
price of C$
Premium .01 +500
received
for option
Net Profit -0.03 -1,500

EXAMPLE FOR PUT OPTION:

Put option premium on GBP=0.04/unit

Strike price=GBP1.40
One option contract represents GBP
31,250
Amount in GBP
Narration Per unit Per
price contract
Selling 1.40 43,750
price of
GBP
Purchase 1.30 40,625
price of C$
Premium -.04 -1,250
paid for
option
Net Profit 0.06 1,875

If the seller does not purchase

the GBP till option was about to
be exercised the net profit of
seller will be as follows:
Amount in GBP
Narration Per unit Per
price contract
Selling 1.30 40,625
price of C$
Purchase -1.40 -43,750
price of C$
Premium .04 +1,250
received
for option
Net Profit -0.06 -1,875
EURO CURRENCY MARKETS: They exist
in all countries to transfer
surplus units (savers) to deficit
units (borrowers).So out side USA
demand of $ will be called EURO
DOLLARS & so on for long term it
will be EURO BONDS.

DIRECT FOREIGN INVESTMENT:

Investment in real assets like

land, buildings etc in the foreign
countries are called DFI.

MOTIVES:

Normally the objectives are to

maximize share holders’ wealth &
to improve profitability but they
can be interested in boosting
revenue, reducing costs or both.

REVENUE RELATED MOTIVES:

a) Attract new source of demand:

This can be done to avoid
domestic competition & to
increase growth.
b) Enter profitable markets: When
the other market is profitable
MNC can take its benefit.
c) Exploit monopolistic
advantages: More chances for
technically advanced MNCs &
products in other markets.
d) React to trade restrictions:
May enter in other markets
where trade restrictions are no
there.

COST REALTED BENEFITS:

a) Fully benefit from economies

of scale: Lower average cost
with more production.
b) Use foreign factors of
production: Set up where
factors are available at cheap
rates.
c) Use foreign raw material: Let
us set up factory where raw
material is available. This is
to avoid many hindrances.
d) Use foreign technology:
Advanced technology can be
 used & can be imported to home
country of MNC.
e) React to exchange movements:
When the currency is
undervalued then MNC can go
for FDI to take benefit of
initial low outlay.

OFFSHORE BANKING:

i) Bank decides to deal with

foreign nationals.
ii) In the non-tariff area.
iii) May be free from
legislations.