Stiles 1627 Asbdc Conference 9-5

8/12/2019 Stiles 1627 Asbdc Conference 9-5

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International Trade

Payment Methods

ASBDC ConferenceSeptember 8, 2011


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Understanding International

Financial Risk

Commercial

Sovereign or Political

Foreign Exchange


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Movement of Funds

SWIFTSociety for Worldwide Interbank Financial

Telecommunication Drafts

Bank

Sight

Usance

Checks


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Foreign Exchange


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Who uses Foreign Exchange

Tourists

Importers / Exporters

Investors

Speculators

Central Banks


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Which Currencies are Traded

Local CurrencyPayment

Western Europe Japan, Hong Kong,

Singapore, Australiaand New Zealand

Canada, Mexico South Africa

Thailand, Indonesia

US$ Payment

South America

Eastern Europe China, Taiwan

Africa

Malaysia


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Instruments most commonly

used to offset risk

Spot

Forwards (up to 1 year typically)

Futures

Swaps Options


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Determinants of Spot Rate

Balance of Payments/Trade

Real rates of return

Current growth and growth prospects ofthe economy

Economic and political stability

Exchange restrictions, if any

Central Bank intervention


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Forward Contracts Purchase or sale of one currency for

another with delivery taking place on a

specific future date or within a specificwindow of time

Unlike futures traded over-the-counter

Any convertible currencyAny maturity (typically less than a year)

Any amount (typically with a $50,000 min)


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Forward Contracts Price is based on:

Current spot rate plus or minus a discount or premiumfor interest rate differentials

Determinants of Forward Rates

A currency is at a PREMIUM against another currencyin the forward market when that other currencys

interest rate is higher

A currency is at a DISCOUNT against another currencyin the forward market when that other currencys

interest rate is lower


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Options

The right but not the obligation to convert onecurrency for another on a specific future date.

Price is based on: current spot price strike price volatility factor

Example:

The right to buy Japanese Yen at a specific rate oneyear out in the future. If the Yen weakens aconversion will be made in the open market.


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Options vs Forward Contract

Forward Contract

Eliminates up anddownside potential

Good tool whencompany has firmcommitments in thefuture

Mark-to-market offsetagainst A/R or A/P

No initial cost

10% risk assessment

Option

Eliminates downside

but leaves upside

Good tool forcompany involved inprojects withuncertainty

Naked hedge for

commitments not yetrecognized on thebalance sheet

1-5% premium up

front a tough sale


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Futures Contracts

Contracts for specific quantities of a givencurrency

Chicago Mercantile ExchangeExchange rate fixed at time contract is

entered into

Mark to Market Daily settlement with profits or losses paid every

day


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Futures versus Forwards

Advantages

Smaller size

Freedom to liquidate acontract anytime

Disadvantages

Limited number of

currencies Limited delivery dates

Rigid contractualamounts


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Foreign Exchange Objectives

Maximize consolidated net after-tax cashflows without undue risk

Preserve US dollar value of cash flow

Minimize volatility in reported earnings

Maximize profitability


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Payment Methods


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International Payment Methods

Cash in Advance

Open Account

Documentary Collections

Letters of Credit


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Risk vs. Method of Payment

Low

High

High

Low

Buyer Risk Seller Risk

Open Account

DocumentaryCollection

Letter of Credit

Cash in Advance


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Cash In Advance Time of Payment

Before Shipment

Goods Available to Buyer

After Payment

Risks to Seller

None

When Appropriate

Seller has negotiating strength to demandcash in advance


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Open Account

Time of PaymentAs agreed; i.e. 30 days

Goods Available to BuyerBefore Payment

Risks to Seller

Buyer defaults on payment obligationDelays in availability of foreign exchange and

transferring of funds from buyers country


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Open Account

When AppropriateSeller has absolute trust that buyer will accept

shipment and pay at agreed timeSeller is confident that importing country will

not impose regulations deferring or blockingtransfer of payment

Seller has sufficient liquidity or access tooutside financing to extend deferred paymentterms


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Benefits of Export Credit

Insurance Risk Mitigation

Political

Commercial Market Penetration

Extended credit terms to foreign buyers

Relaxation of method of payment reducing

bank costs and documentation

Financing U.S. exporter can borrow against insured

foreign receivables


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Documentary Collection

CharacteristicsAllows exporters to retain ownership of the goods

until they receive payment or are reasonablycertain they will receive it

Bank acts as agent for exporter by holding the titledocuments

Bank assumes no risk but must act in good faithand exercise reasonable care


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Seller Buyer

Sellers Bank Buyers Bank

Documents

$

Documents Documents$ $

Documentary Collection


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Draft or Bill of Exchange

______________________________________ ________________________________ NO.___________(CITY) (DATE)

AT _____________________________________________________ SIGHT OF THIS BILL OF EXCHANGE

PAY TO THE ORDER OF ________________________________________ ___________________(AMOUNT IN FIGURES)

THE SUM OF___________________________________________________________________________

______________________________________________________________________________________

TO ________________________________________ ______________________________________DRAWER

__________________________________________________________________________________ ______________________________________

DRAWEE BY: AUTHORIZED SIGNATURE


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Documentary Collection - D/P Time of Payment

On presentation of sight draft by a bank tobuyer

Goods Available to BuyerAfter payment

Risks to SellerBuyers nonacceptance of shipment

Payment delays due to unavailability offoreign exchange in buyers country

Payment blocked due to political actions inbuyers country


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Documentary Collection - D/P

When Appropriate

Seller is confident that buyer will accept

shipmentSeller is confident that importing country will

not impose regulations deferring or blockingtransfer of payment


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Documentary Collections - D/ATime of Payment

At maturity of accepted draft

Goods Available to Buyer

Before paymentRisks to Seller

Buyers default on payment obligation

Delays in availability of foreign exchangeand transferring of funds from buyerscountry

Payment blocked due to political events in

buyers country


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Documentary Collections - D/A

When Appropriate

Seller has confidence that buyer will acceptshipment and pay on agreed date

Seller is confident that importing countrywill not impose regulations deferring or

blocking the transfer of payment


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Documentary Collections Risk

Unscrupulous buyer

Insolvent buyer

Buyer changes mind Buyers country is in turmoil

Foreign exchange may not be available

Seller may have to pay return freight Buyer may not honor promise to pay


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Letter of CreditKey Parties

Advising Bank

authenticates LC

Confirming Bankguarantees

payment if Issuing

Bank defaults

Applicant

Buyer/Importer

BeneficiarySeller/Exporter

Issuing Bank

Guaranteespayment


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L/C Terminology

Irrevocable

ICCUCP 600

ISP 98

Incoterms

Tenor

Sight

Usance

Discrepancies


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Uniform Customs and Practices for

Documentary CreditsThe U.C.P. 600 (2007 Revision)

General provisions and definitions.

Form and notification of credits. Liabilities and responsibilities of parties.

Documents of commerce.

Miscellaneous provisions.

Transferability of letters of credit.


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Commonly Used Documents

Commercial Invoice Transport Document

Ocean Bill of LadingAir Waybill

Packing Lists/Weight Lists Insurance Policy or Certificate Draft or Bill of Exchange Other Documents

Inspection Certificate Special Customs Invoices Certificate of Origin


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Draft or Bill of Exchange

______________________________________ ________________________________ NO.___________(CITY) (DATE)

AT _____________________________________________________ SIGHT OF THIS BILL OF EXCHANGE

PAY TO THE ORDER OF ________________________________________ ___________________(AMOUNT IN FIGURES)

THE SUM OF_________________________________________________________________________________________________________________________________________________________________DRAWN UNDER ________________________________________________________________________LC NO. ________________ DATED __________TO ________________________________________ ______________________________________

DRAWER__________________________________________________________________________________ ______________________________________

DRAWEE BY: AUTHORIZED SIGNATURE


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Letter of Credit IssuanceImporter

Advising Bank

in

Exporters City

Issuing Bank

in Importers City

Step 1

Step 2Step 4

Step 3

L/C Forwarded

to Beneficiary with

or without

confirmation

Application Made

for Letter of Credit

Letter of Credit

Forwardedby the Issuing

Bank

Contract

Exporter


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Letter of Credit Payment

Issuing /Opening

Bank

Advising/Confirming

Bank

Seller/ Exporter

Beneficiary

Buyer Importer

Account Party

Carrier

Step 3

Step 2

Step 1Step 5

Step 4Documents

Money

Documents Money Money Documents

Surrenders

Bill of

Lading

Receives

GoodsSurrenders

Goods

Receives

Bill of Lading


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Letter of Credit

Risks to SellerDiscrepancies in the documents

Buyers Bank (opening bank) defaults on itspayment obligation

Payment blocked due to political events inbuyers country

When AppropriateSeller is unsure of creditworthiness of buyer


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Letter of Credit Variations

Back to Back

Assignment of Proceeds

Transferable

Revolving

Standby


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Standby Letter of Credit

Commercial documents generally flow outsidethe letter of credit (between buyer and seller).

Funds generally flow outside of a letter of credit(between buyer and seller).

These credits are Standing By for an event of

default or non-performance before they can be

drawn on.


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Standby Letter of Credit

FinancialAssures account partys performance of a

financial obligation, i.e., to pay an invoice by acertain date.

PerformanceAssures account partys performance of a non-

financial contract obligation, i.e., to deliverproducts under a contract.


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Factors to Consider in Determining

Payment Terms Under a ContractQuestion Letter of Credit Collection Open Account

What is customer relationship New Established Parent/Sub

Impact of total loss ($) Substantial Normal Small

Nature of order Custom Normal

Production

Excess Inventory

Political situation buyers

countryUnstable Stable Strong

Economic situation buyers

countryUnstable Stable Strong

Competition to sell goods No Some Heavy

Changing price environment Yes No No

Experience in preparingdocuments

Extensive Some None

Company policy for protection Strong Medium Unwritten


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Other Financing Options

Countertrade

i.e. barter, counterpurchase, compensation

FactoringOutright sale of short term receivables

Forfaiting

Outright sale of medium term (large)obligation


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International Trade

Payment Methods

Cassie Stiles

[email protected]

Stiles 1627 Asbdc Conference 9-5

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