Part V

Short-Term Asset and Liability Management

Deposits Subsidiaries Purchase

of MNC with Securities
Excess Funds
Provision Provision
of Loans of Loans
Purchase
Deposits Securities
Eurobanks in International
Eurocurrency MNC Commercial
Market Parent Paper Market
Borrow Borrow
Funds Funds
Borrow Borrow
Funds Funds
Borrow Funds Subsidiaries Borrow Funds
of MNC with
Deficient Funds
 Chapter
19
Financing International Trade

South-Western/Thomson Learning © 2003

 Chapter Objectives

• To describe the methods of

payment for international trade;
• To explain common trade finance
methods; and
• To describe the major agencies that
facilitate international trade with export
insurance and/or loan programs.

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 Payment Methods
for International Trade
• In any international trade transaction, credit
is provided by either
¤ the supplier (exporter),
¤ the buyer (importer),
¤ one or more financial institutions, or
¤ any combination of the above.

• The form of credit whereby the supplier

funds the entire trade cycle is known as
supplier credit.

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 Payment Methods
for International Trade
Method  : Prepayments
• The goods will not be shipped until the buyer
has paid the seller.
• Time of payment : Before shipment
• Goods available to buyers : After payment
• Risk to exporter : None
• Risk to importer : Relies completely on
exporter to ship goods as ordered

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 Payment Methods
for International Trade
Method  : Letters of credit (L/C)
• These are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.
• Time of payment : When shipment is made
• Goods available to buyers : After payment
• Risk to exporter : Very little or none
• Risk to importer : Relies on exporter to ship
goods as described in documents

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 Payment Methods
for International Trade
Method  : Drafts (Bills of Exchange)
• These are unconditional promises drawn by
the exporter instructing the buyer to pay the
face amount of the drafts.
• Banks on both ends usually act as
intermediaries in the processing of shipping
documents and the collection of payment. In
banking terminology, the transactions are
known as documentary collections.

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 Payment Methods
for International Trade
Method  : Drafts (Bills of Exchange)
• Sight drafts (documents against payment) : When the shipment
has been made, the draft is presented to the buyer for payment.

• Time of payment : On presentation of draft

• Goods available to buyers : After payment
• Risk to exporter : Disposal of unpaid goods
• Risk to importer : Relies on exporter to ship goods
as described in documents

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 Payment Methods
for International Trade
Method  : Drafts (Bills of Exchange)
• Time drafts (documents against acceptance) : When the shipment
has been made, the buyer accepts (signs) the presented draft.

• Time of payment : On maturity of draft

• Goods available to buyers : Before payment
• Risk to exporter : Relies on buyer to pay
• Risk to importer : Relies on exporter to ship goods
as described in documents

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 Payment Methods
for International Trade
Method  : Consignments
• The exporter retains actual title to the goods
that are shipped to the importer.
• Time of payment : At time of sale to third party
• Goods available to buyers : Before payment
• Risk to exporter : Allows importer to sell
inventory before paying exporter
• Risk to importer : None

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 Payment Methods
for International Trade
Method  : Open Accounts
• The exporter ships the merchandise and expects
the buyer to remit payment according to the
agreed-upon terms.
• Time of payment : As agreed upon
• Goods available to buyers : Before payment
• Risk to exporter : Relies completely on buyer to
pay account as agreed upon
• Risk to importer : None

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 Trade Finance Methods

Accounts Receivable Financing

¤ An exporter that needs funds immediately
may obtain a bank loan that is secured by an
assignment of the account receivable.
Factoring (Cross-Border Factoring)
¤ The accounts receivable are sold to a third
party (the factor), that then assumes all the
responsibilities and exposure associated with
collecting from the buyer.

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 Trade Finance Methods

Letters of Credit (L/C)

¤ These are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.
¤ The importer pays the issuing bank the
amount of the L/C plus associated fees.
¤ Commercial or import/export L/Cs are
usually irrevocable.

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 Trade Finance Methods

Letters of Credit (L/C)

¤ The required documents typically include a
draft (sight or time), a commercial invoice,
and a bill of lading (receipt for shipment).
¤ Sometimes, the exporter may request that
a local bank confirm (guarantee) the L/C.

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 Sample Letter of Credit (Confirmation)
Advice Number: BA000000094 Amount: April 17, 2002
Issue Bank Ref: 1234/LMC/5678 US$: Advice Date: 21 March 2002
Beneficiary: ABC Company, Inc. Applicant: XYZ Company, Inc. Expire Date: 21 July 2002
5278 S. Motorized Blvd 25 Rising Sun Way Detroit, MI 48210 Tokyo, Japan 120-113
000-000-0000 +000-0000-0000
We have been requested to advise you of the following letter of credit issued by: First Bank of Japan
123 Cherry Blossom Dr
Tokyo, Japan
Please be guided by its terms and conditions and by the following:
Credit is available by negotiation of your draft(s) in duplicate at sight for 100% of invoice value drawn on us
accompanied by the following documents:
1. Signed commercial invoice, one (1) original and three (3) copies.
2. Full set ocean bills of lading consigned to the order of First Bank of Japan, Japan notify applicant and marked
freight collect.
3. Packing list, two (2) copies.
Evidencing Shipment of: 20,000 motorized tooth brushes FOB San Francisco
Shipment From: Detroit, MI through San Francisco, CA Shipment To: Tokyo, Japan
Partial Shipments not allowed. All banking charges outside Japan are for beneficiary's account. Documents must be
presented within 21 days from BILL date.
At the request of our correspondent, we confirm this credit and engage with you that all drafts drawn under and in
compliance with the terms of this credit will be duly honored by us.
Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please
communicate with your buyer to arrange for an amendment.
Sincerely,
Jill Moneybags
Account Manager
International Banking Group • Jack and Jill Bank Corp. • P.O. Box 1234 • Detroit, MI 48201

http://www.tradenet.gov/...
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 Documentary Credit Procedure

 Sale Contract
Buyer Seller
(Importer) (Exporter)
 Deliver Goods
   
Request Documents Present Deliver
for Credit & Claim for Documents Letter of
Payment Credit
 Present
Documents
Importer’s Bank Exporter’s Bank
 Payment
(Issuing Bank) (Advising Bank)
 Send Credit

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 Trade Finance Methods

Letters of Credit (L/C)

¤ Variations include
standby L/Cs : funded only if the buyer does
not pay the seller as agreed upon
transferable L/Cs : the first beneficiary can
transfer all or part of the original L/C to a
third party
assignments of proceeds under an L/C : the
original beneficiary assigns the proceeds to
the end supplier

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 Trade Finance Methods

Banker’s Acceptance (BA)

¤ This is a time draft that is drawn on and
accepted by a bank (the importer’s bank).
The accepting bank is obliged to pay the
holder of the draft at maturity.
¤ If the exporter does not want to wait for
payment, it can request that the BA be sold
in the money market. Trade financing is
provided by the holder of the BA.

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 Trade Finance Methods

Banker’s Acceptance (BA)

¤ The bank accepting the drafts charges an all-
in-rate (interest rate) that consists of the
discount rate plus the acceptance commission.

¤ In general, all-in-rates are lower than bank

loan rates. They usually fall between the
rates of short-term Treasury bills and
commercial papers.

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 Life Cycle of a Typical Banker’s Acceptance
1. Purchase
Importer Exporter
Order
5. Ship
2. Apply Goods
for L/C 4. L/C
6. Notification
10. Sign 11. Shipping
Promissory Shipping Documents 9. Pay
Note to Pay Documents & Time Discounted
14. Pay Draft Value of
Face Value BA
of BA 8. Pay Discounted Value of BA
3. L/C
Importer’s Exporter’s
Bank Bank
7. Shipping Documents
12. BA & 1 - 7 : Prior to BA
16. Pay Face Value of BA Time Draft 8 - 13 : When BA
Money Market is created
Investor 14 - 16 : When BA
13. Pay Discounted Value of BA matures
15. Present BA at Maturity
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 Trade Finance Methods

Working Capital Financing

¤ Banks may provide short-term loans that
finance the working capital cycle, from the
purchase of inventory until the eventual
conversion to cash.

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 Trade Finance Methods

Medium-Term Capital Goods Financing

(Forfaiting)
¤ The importer issues a promissory note to
the exporter to pay for its imported capital
goods over a period that generally ranges
from three to seven years.
¤ The exporter then sells the note, without
recourse, to a bank (the forfaiting bank).

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 Trade Finance Methods

Countertrade
¤ These are foreign trade transactions in which the
sale of goods to one country is linked to the
purchase or exchange of goods from that same
country.
¤ Common countertrade types include barter,
compensation (product buy-back), and
counterpurchase.
¤ The primary participants are governments and
multinationals.

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 Online Application

• Need more help on financing your trade? Visit:

¤ the U.S. Business Advisor at
http://www.business.gov/busadv/index.cfm
¤ the U.S. Small Business Administration at
http://www.sbaonline.sba.gov/
¤ the Los Angeles Area Chamber of Commerce at
http://www.tradeport.org/
¤ America's Business Funding Directory at
http://www.businessfinance.com/

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 Agencies that Motivate
International Trade
• Due to the inherent risks of international
trade, government institutions and the
private sector offer various forms of
export credit, export finance, and
guarantee programs to reduce risk and
stimulate foreign trade.

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 Agencies that Motivate
International Trade
Export-Import Bank of the U.S. (Ex-Imbank)
• This U.S. government agency aims to
create jobs by financing and facilitating
the export of U.S. goods and services and
maintaining the competitiveness of U.S.
companies in overseas markets.
• It offers guarantees of commercial loans,
direct loans, and export credit insurance.

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http://www.exim.gov/

http://www.exim.gov/

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 Agencies that Motivate
International Trade
Private Export Funding Corporation (PEFCO)
• PEFCO is a private corporation that is
owned by a consortium of commercial
banks and industrial companies.
• In cooperation with Ex-Imbank, PEFCO
provides medium- and long-term fixed-rate
financing for foreign buyers through the
issuance of long-term bonds.

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 Online Application

• Find out more about the PEFCO and its

programs at http://www.pefco.com/.

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 Agencies that Motivate
International Trade
Overseas Private Investment Corporation
(OPIC)
• OPIC is a U.S. government agency that
assists U.S. investors by insuring their
overseas investments against a broad range
of political risks.
• It also provides financing for overseas
businesses through loans and loan
guaranties.

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http://www.opic.gov/

http://www.opic.gov/

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 Agencies that Motivate
International Trade
• Beyond insurance and financing, the U.S. has
tax provisions that encourage international
trade.
• The FSC Repeal and Extraterritorial Income
Exclusion Act of 2000, which replaced the
1984 Foreign Sales Corporation provisions in
response to WTO concerns, excludes certain
extraterritorial income from the definition of
gross income for U.S. tax purposes.

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Impact of International Trade Financing
Decisions on an MNC’s Value

Trade Financing Decisions

m 
n 

E  CFj , t   E ER j , t   
 j 1 
Value =   
t =1   1  k  t

 

E (CFj,t ) = expected cash flows in

currency j to be received by the U.S. parent at
the end of period t
E (ERj,t ) = expected exchange rate at
which currency j can be converted to dollars at
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 Chapter Review

• Payment Methods for International Trade

¤ Prepayments
¤ Letters of Credit
¤ Sight Drafts and Time Drafts
¤ Consignments
¤ Open Accounts

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 Chapter Review

• Trade Finance Methods

¤ Accounts Receivable Financing
¤ Factoring
¤ Letters of Credit
¤ Banker’s Acceptances
¤ Working Capital Financing
¤ Medium-Term Capital Goods Financing
(Forfaiting)
¤ Countertrade

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 Chapter Review

• Agencies that Motivate International Trade

¤ Export-Import Bank of the U.S.
¤ Private Export Funding Corporation
¤ Overseas Private Investment Corporation
¤ Other Considerations
• Impact of International Trade Financing on
an MNC’s Value

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