International Trade & Role of FI

7/23/2019 International Trade & Role of FI

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International Trade &

Role of FinancialInstitutions


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Overview of the Last Lecture

Investment Banks

Organizational Structure of an

Investment Bank Primar Function

Front Office

Investment !anagement Sales and Trading


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Research

Structuring

!iddle Office

Back Office

Technolog Recent "volution of the Business

Possi#le $onflicts of Interest

%ational Role for Investment Banks


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InternationalTrade


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International tradeis the exchange of

goods and services across

international boundaries or territories.In most countries, it represents a

significant share of GDP. While

international trade has been present

throughout much of history its

economic, social, and politicalimportance has been on the rise in

recent centuries.


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Industrialization, advancedtransportation, globalization,

multinational corporations, and

outsourcing are all having a maorimpact. Increasing international

trade is basic to globalization!.


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"etter of #redit


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Elements of a Letter of Credit

$ payment underta%ing given by aban% &issuing ban%'

(n behalf of a buyer &applicant'

)o pay a seller &beneficiary' for agiven amount of money

(n presentation of specifieddocuments representing the supplyof goods


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Issuing Bank


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)he issuing ban%*s liability to payand to be reimbursed from its

customer becomes absolute uponthe completion of the terms andconditions of the letter of credit.

+nder the provisions of the +niform#ustoms and Practice forDocumentary #redits, the ban% is

given a reasonable amount of timeafter receipt of the documents tohonor the draft.


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)he issuing ban%s* role is to provide

a guarantee to the seller that ifcompliant documents are

presented, the ban% ill pay the

seller the amount due and toexamine the documents, and only

pay if these documents comply ith

the terms and conditions set out inthe letter of credit.


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)ypically the documents re-uested

ill include a commercial invoice, a

transport document such as a bill of

lading or airay bill and an

insurance document but there aremany others. "etters of credit deal

in documents, not goods.


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dvising Bank


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$n advising ban%, usually a foreign

correspondent ban% of the issuing

ban% ill advise the beneficiary.Generally, the beneficiary ould

ant to use a local ban% to insure

that the letter of credit is valid. In

addition, the advising ban% ould

be responsible for sending thedocuments to the issuing ban%.


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)he advising ban% has no other

obligation under the letter ofcredit. If the issuing ban% does

not pay the beneficiary, the

advising ban% is not obligated to

pay.


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$onfirming Bank


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)he correspondent ban% may confirm

the letter of credit for the beneficiary.

$t the re-uest of the issuing ban%, thecorrespondent obligates itself to

insure payment under the letter of

credit. )he confirming ban% ould not

confirm the credit until it evaluated the

country and


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ban% here the letter of credit

originates. )he confirming ban% isusually the advising ban%.


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Letter of $redit

$haracteristics


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%egotia#ilit


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"etters of credit are usually

negotiable. )he issuing ban% is

obligated to pay not only the

beneficiary, but also any ban%

nominated by the beneficiary./egotiable instruments are passed

freely from one party to another

almost in the same ay as money.


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)o be negotiable, the letter of credit

must include an unconditional

promise to pay, on demand or at adefinite time. )he nominated ban%

becomes a holder in due course. $s

a holder in due course, the holder

ta%es the letter of credit for value, in

good faith, ithout notice of anyclaims against it.


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$ holder in due course is treated

favorably under the +##. )hetransaction is considered a straight

negotiation if the issuing ban%*s

payment obligation extends only tothe beneficiary of the credit.


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If a letter of credit is a straight

negotiation it is referenced on its

face by !e engage ith you! or

!available ith ourselves!. +nder

these conditions the promise doesnot pass to a purchaser of the draft

as a holder in due course.


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Revoca#ilit


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"etters of credit may be either

revocable or irrevocable. $revocable letter of credit may be

revo%ed or modified for any reason,

at any time by the issuing ban%ithout notification. $ revocable

letter of credit cannot be confirmed.


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If a correspondent ban% is engaged

in a transaction that involves a

revocable letter of credit, it serves

as the advising ban%. (nce the

documents have been presentedand meet the terms and conditions

in the letter of credit, and the draft is

honored, the letter of credit cannotbe revo%ed.


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)he revocable letter of credit is not

a commonly used instrument. It isgenerally used to provide guidelines

for shipment. If a letter of credit is

revocable it ould be referenced onits face.


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)he irrevocable letter of credit may

not be revo%ed or amended ithout

the agreement of the issuing ban%,

the confirming ban%, and the

beneficiary. $n irrevocable letter of

credit from the issuing ban% insures

the beneficiary that if the re-uired

documents are


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presented and the terms and

conditions are complied ith,

payment ill be made. If a letter ofcredit is irrevocable it is referenced

on its face.


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Transfer and

ssignment


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)he beneficiary has the right to

transfer or assign the right to dra,

under a credit only hen the credit

states that it is transferable or

assignable. #redits governed by the+niform #ommercial #ode

&Domestic' maybe transferred an

unlimited number of times.


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+nder the +niform #ustoms

Practice for Documentary #redits

&International' the credit may betransferred only once. 0oever,

even if the credit specifies that it is

nontransferable or non1assignable,

the beneficiary may transfer their

rights prior to performance ofconditions of the credit.


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Sight and Time'rafts


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$ll letters of credit re-uire the

beneficiary to present a draft and

specified documents in order to

receive payment. $ draft is a ritten

order by hich the party creating it,orders another party to pay money

to a third party. $ draft is also called

a bill of exchange.


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)here are to types of drafts2 sight

and time. $ sight draft is payable as

soon as it is presented for payment.

)he ban% is alloed a reasonable

time to revie the documentsbefore ma%ing payment.


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$ time draft is not payable until thelapse of a particular time period

stated on the draft. )he ban% isre-uired to accept the draft as soonas the documents comply ithcredit terms. )he issuing ban% hasa reasonable time to examine thosedocuments. )he issuing ban% isobligated to accept drafts and pay

them at maturity.


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Standard Forms

of 'ocumentation


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When ma%ing payment for product

on behalf of its customer, the issuing

ban% must verify that all documentsand drafts conform precisely to the

terms and conditions of the letter of

credit. $lthough the credit can

re-uire an array of documents, the

most common documents that mustaccompany the draft include2


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$ommercial

Invoice


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)he billing for the goods and

services. It includes a description of

merchandise, price, 3(4 origin,and name and address of buyer

and seller. )he buyer and seller

information must correspond

exactly to the description in the

letter of credit.


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+nless the letter of credit

specifically states otherise, ageneric description of the

merchandise is usually acceptable

in the other accompanyingdocuments.


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Bill of Lading


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$ document evidencing the receipt

of goods for shipment and issued

by a freight carrier engaged in the

business of forarding or

transporting goods. )he documentsevidence control of goods. )hey

also serve as a receipt for the

merchandise shipped and


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as evidence of the carrier*s

obligation to transport the goods to

their proper destination.


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(arrant of Title


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$ arranty given by a seller to a

buyer of goods that states that thetitle being conveyed is good and

that the transfer is rightful. )his is a

method of certifying clear title toproduct transfer.


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It is generally issued to the

purchaser and issuing ban%expressing an agreement to

indemnify and hold both parties

harmless.


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Letter ofIndemnit


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5pecifically indemnifies the

purchaser against a certain statedcircumstance. Indemnification is

generally used to guaranty that

shipping documents ill be

provided in good order hen

available.


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$ommon 'efects

in 'ocumentation

$b t h lf f ll d i t d


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$bout half of all draings presented

contain discrepancies. $

discrepancy is an irregularity in thedocuments that causes them to be

in non1compliance to the letter of

credit. 6e-uirements set forth in the

letter of credit cannot be aived or

altered by the issuing ban% ithoutthe express consent of the

customer.


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)he beneficiary should prepare and

examine all documents carefully

before presentation to the paying

ban% to avoid any delay in receipt of

payment. #ommonly founddiscrepancies beteen the letter of

credit and supporting documents

include2


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Inconsistent description of goods.

Insurance document errors.

Invoice amount not e-ual to draft

amount.

Ports of loading and destination notas specified in the credit.


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Description of merchandise is not

as stated in credit.

$ document re-uired by the credit is

not presented.

Documents are inconsistent as togeneral information such as

volume, -uality, etc.


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/ames of documents not exact as

described in the credit. 4eneficiaryinformation must be exact.

Invoice or statement is not signed

as stipulated in the letter of credit.


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When a discrepancy is detected by

the negotiating ban%, a correction to

the document may be alloed if itcan be done -uic%ly hile

remaining in the control of the ban%.

If time is not a factor, the exporter

should re-uest that the negotiating

ban% return the documents forcorrections.


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If there is not enough time to ma%e

corrections, the exporter shouldre-uest that the negotiating ban%

send the documents to the issuing

ban% on an approval basis or notifythe issuing ban% by ire, outline the

discrepancies,


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and re-uest authority to pay.

Payment cannot be made until allparties have agreed to ointly aive

the discrepancy.


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Reca) International Trade Letter of $redit

Issuing Bank

dvising Bank $onfirming Bank

Letter of $redit $haracteristics

%egotia#ilit

Revoca#ilit


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Revoca#ilit

Transfer and ssignment

Sight and Time 'rafts Standard Forms of 'ocumentation

$ommercial Invoice

Bill of Lading

(arrant of Title

Letter of Indemnit

$ommon 'efects in 'ocumentation

International Trade & Role of FI

Documents

Transcript of International Trade & Role of FI