Chapter 18-1

Financial Issues in International

Trade

 Choice of Currency: Which currency to

use
 Credit Checking: When and how to check
credit
 Method of Payment: Which form of
payment to use
 Financing Trade: How to arrange
financing

Chapter 18-2
Choice of Currency

Importer’s Exporter’s Third

Currency Currency Currency

Chapter 18-3
Credit Checking

 Credit References
 Established Sources of Credit Information
 Foreign Banking Operations
 National Government Agencies in Charge
of Export Promotion

Chapter 18-4
Methods of Payment

 Payment in Advance
 Open Accounts
 Documentary Collection
 Letters of Credit
 Credit Cards
 Countertrade

Chapter 18-5
Method of Payment: Payment in
Advance

EXPORTER’S PERSPECTIVE IMPORTER’S PERSPECTIVE

Reduces Risk  Risk of Non-

Faster Payment Delivery
 Losing Sales to  Poor Credit Risk:
Competitors Preferred Form

Chapter 18-6
Method of Payment: Open Account

IMPORTER’S PERSPECTIVE EXPORTER’S PERSPECTIVE

Expedites the Increases Risk of

Receipt of Goods Non-Payment
Offers Short-Term Waives Expertise of
Financing Bankers
Eliminates Fees for Lacks Supporting
Bank Services Documentation
Requires Less Requires Use of
Paperwork Working Capital

Chapter 18-7
Method of Payment: Documentary
Collection

 Documentary Collection:
 Commercial banks serve as agents to
facilitate the payment process
 A Draft/Bill of Exchange
 Payment is demanded from the buyer at a
specified time
Bills of Lading
A Contract for Transportation
A Title to the Goods

Chapter 18-8
Method of Payment: Documentary
Collection (Cont.)

Chapter 18-9
Method of Payment: Documentary
Collection (Cont.)

 Sight Draft
 Time Draft
Date Draft
Trade Acceptance
Banker’s Acceptance
Sold without Recourse
Sold with Recourse

Chapter 18-10
Method of Payment: Documentary
Collection (Cont.)

ADVANTAGES DISADVANTAGES

Reasonable Bank Importer May

Fees Refuse Shipment
Enforceable Debt Demurrage
Instruments Importer May
Simplified Collection Default on time
Process draft
Legal Recourse
Uncomplicated and May Be Expensive
Reduced Financing

Chapter 18-11
Method of Payment: Letters of Credit
 Letter of Credit
Issued by a bank
Contains promise to pay the exporter
 Required Documentations
Application
Invoice
Customs Documents
Bill of Lading
Packing List
Proof of Insurance
Export Licenses
Certificates of Product Origin
Inspection Certificates

Chapter 18-12
Method of Payment: Letters of Credit
(Cont.)

 Advised Letter of Credit

 Confirmed Letter of Credit
 Irrevocable Letter of Credit
 Revocable Letter of Credit

Chapter 18-13
Method of Payment: Credit Cards

 Small International Transactions

 Credit Card Companies:
Transaction Fees
Currency Conversion Fees

Chapter 18-14
Method of Payment: Countertrade

 Barter
 Counterpurchase
 Buy-back
 Offset Purchase

Chapter 18-15
Method of Payment: Countertrade
(Cont.)

 Clearinghouse Accounts
 Switching Arrangements

Chapter 18-16
Method of Payment: Countertrade
(Cont.)

Chapter 18-17
Financing Trade

 Exporting Firms
 Banks and Lenders
 Government Sponsors

Chapter 18-18
Managing Foreign Exchange Risk

Transaction

Foreign-Exchange
Translation
Exposure

Economic

Chapter 18-19
Transaction Exposure

 Purchasing or Selling Goods, Services, or

Assets
 Lending or Borrowing Money

Chapter 18-20
Transaction Exposure (Cont.)

Chapter 18-21
Translation Exposure

Balance Sheet
Hedge

Translation
Exposure
Chapter 18-22
Translation Exposure (Cony.)

Barclays Bank
General Motors Import & Distribution Company Ltd
(British distribution subsidiary)
£1 = $2.00  £10,000,000

$20,000,000

GM’s Consolidated Financial

Statements
£1 = $1.95 $19,500,000
GM
Translation Loss = $500,000

Chapter 18-23
Economic Exposure

Exchange Operational
Rate Experts Hedge

Economic
Exposure
Chapter 18-24
Management of Working Capital

Minimizing Working
Capital Balances

Corporate Financial Minimizing Currency

Goals Conversion Costs

Minimizing Foreign-
Exchange Risk

Chapter 18-25
Minimizing Working Capital Balances

Opportunity
Needs for Cash Cost of Holding
Financial Assets

Chapter 18-26
Minimizing Working Capital Balances
(Cont.)

Centralized Minimize
Cash Company-Wide
Management Cash Holdings

Chapter 18-27
Minimizing Currency Conversion Costs

Chapter 18-28
Minimizing Currency Conversion Costs

Bilateral Multilateral
Netting Netting

Currency
Conversion
Costs

Chapter 18-29
Minimizing Currency Conversion Costs
(Cont.)

Chapter 18-30
Minimize Foreign-Exchange Risk

Leads and Lags

Strategy

Increase Net
Holdings of
Currencies

Chapter 18-31
International Capital Budgeting

 Net Present Value

 Internal Rate of Return
 Payback Period

Chapter 18-32
International Capital Budgeting: Net
Present Value

 Risk Adjustment
 Currency Selection
 Choice of Perspective

Chapter 18-33
Internal Rate of Return

1. Estimate Cash Flows

2. Calculate Interest Rate

3. Compare to Hurdle Rate

Chapter 18-34
Payback Period

Simplicity

Ignores
Long-Term
Profits
Chapter 18-35
Sources of International Investment
Capital

External Internal
Sources of Sources of
Investment Investment
Capital Capital

Chapter 18-36
External Sources of Investment
Capital

 Investment Banks
 Stock Markets
 Borrowed Funds
 Swap Market

Chapter 18-37
Internal Sources of Investment Capital

Chapter 18-38
Strategic Use of Transfer Pricing

Market-Based
Method
Transfer Price
Calculation Nonmarket-
Based
Methods

Chapter 18-39
Strategic Use of Transfer Pricing:
Market-Based Method

 Benefits
Reduce Intra-Corporate Conflict
Promote MNC’s Overall Profitability

Chapter 18-40
Strategic Use of Transfer Pricing:
Nonmarket Method

DISADVANTAGES ADVANTAGES

Foment Conflict  Reduce Tariffs and

Reduce Efficiency Taxes
Repatriate Profits

Chapter 18-41
Tax Havens

 Minimal Corporate Income Tax

 Stable Political and Business Climate
 Efficient Court System
 Sophisticated Banking and
Communications Industries

Chapter 18-42
Tax Haven (Cont.)

 Government Response
Arm’s Length Testing
Advance Pricing Agreement

Chapter 18-43