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Title: Multinational Financial Management Alan Shapiro 7th Edition J.Wiley


1
Multinational Financial Management Alan
Shapiro7th Edition J.Wiley Sons
  • Power Points by
  • Joseph F. Greco, Ph.D.
  • California State University, Fullerton

2

CHAPTER 18
  • FINANCING FOREIGN TRADE

3
CHAPTER OVERVIEW
  • I. PAYMENT TERMS
  • II. DOCUMENTS
  • III. FINANCING TECHNIQUES
  • IV. GOVERNMENT SOURCES OF EXPORT FINANCING
    AND CREDIT INSURANCE
  • V. COUNTERTRADE

4
I. PAYMENT TERMS
  • I. PAYMENT TERMS
  • A. Five Principal Means
  • 1. Cash in advance
  • 2. Letter of Credit
  • 3. Drafts
  • 4. Consignment
  • 5. Open Account

5
PAYMENT TERMS
  • B. Cash in Advance
  • 1. Minimal risk to exporter
  • 2. Used where there is
  • a. Political unrest
  • b. Goods made to order
  • c. New unfamiliar customer

6
PAYMENT TERMS
  • C. Letter of Credit (L/C)
  • 1. A letter addressed to seller
  • a. written and signed by
  • buyers bank
  • b. promising to honor sellers
  • drafts.
  • c. Bank substitutes its own
  • commitment
  • d. Seller must conform to terms

7
PAYMENT TERMS
  • 2. Advantages of an L/C to Exporter
  • a. eliminates credit risk
  • b. reduces default risk
  • c. payment certainty
  • d. prepayment risk protection
  • e. financing source

8
PAYMENT TERMS
  • 3. Advantages of L/C to Importer
  • a. shipment assured
  • b. documents inspected
  • c. may allow better sales terms
  • d. relatively low-cost financing
  • e. easy cash recovery if discrepancies

9
PAYMENT TERMS
  • 4. Types of L/Cs
  • a. documentary
  • b. non-documentary
  • c. revocable
  • d. irrevocable
  • e. confirmed
  • f. transferable

10
PAYMENT TERMS
  • D. DRAFTS
  • 1. Definition
  • - unconditional order in writing
  • - exporters order for importer to pay
  • - at once (sight draft) or
  • - in future (time draft)

11
PAYMENT TERMS
  • 2. Three Functions of Drafts
  • a. clear evidence of financial obliga- tion
  • b. reduced financing costs
  • c. provides negotiable and uncondi-
  • tional financial instrument
  • (ie. May be converted to a bankers
    acceptance)

12
PAYMENT TERMS
  • 3. Types of Drafts
  • a. sight
  • b. time
  • c. clean (no documents needed)
  • d. documentary

13
PAYMENT TERMS
  • E. CONSIGNMENT
  • 1. Exporter the consignor
  • 2. Importer the consignee
  • 3. Consignee attempts to sell
  • goods to a third party keeps some profit,
    remits rest to consignor.
  • 4. Use Between affiliates

14
PAYMENT TERMS
  • F. OPEN ACCOUNT
  • 1. Creates a credit sale
  • 2. To importers advantage
  • 3. More popular lately because
  • a. major surge in global trade
  • b. credit information improved
  • c. more global familiarity with exporting.

15
PAYMENT TERMS
  • 4. Benefits of Open Accounts
  • a. greater flexibility in making
  • a trade
  • b. lower transactions costs
  • 5. Major disadvantage
  • highly vulnerable to government currency
    controls.

16
II. DOCUMENTS
  • II. DOCUMENTS USED IN INTL TRADE
  • A. Four most used documents
  • 1. Bill of Lading (most important)
  • 2. Commercial Invoice
  • 3. Insurance Certificate

17
DOCUMENTS
  • B. Bill of Lading
  • Three functions
  • 1. Acts as a contract to carry the goods.
  • 2. Acts as a shippers receipt
  • 3. Establishes ownership over
  • goods if negotiable type.

18
DOCUMENTS
  • 2. Type of Bills
  • a. Straight
  • b. Order
  • c. On-board
  • d. Received-for-shipment
  • e. Clean
  • f. Foul

19
DOCUMENTS
  • C. COMMERCIAL INVOICE
  • Purpose
  • 1. Lists full details of goods shipped
  • 2. Names of importer/exporter given
  • 3. Identifies payment terms
  • 4. List charges for transport and insurance.

20
DOCUMENTS
  • D. INSURANCE
  • 1. Two Categories
  • a. Marine transport by sea
  • b. Air transport by air
  • 2. Insurance Certificate
  • issued to show proof of insurance
  • 3. All shipments insured today.

21
DOCUMENTS
  • E. CONSULAR INVOICE
  • Local consulate in host country issues
  • a visa for the exporters invoice
  • requires fee to be paid to consulate

22
III. FINANCING TECHNIQUES
  • III. FINANCING TECHNIQUES
  • A. Four Types
  • 1. Bankers Acceptances
  • a. Creation drafts accepted
  • b. Terms Payable at maturity to
    holder

23
FINANCING TECHNIQUES
  • 2. Discounting
  • a. Converts exporters drafts to cash minus
    interest to maturity and commissions.
  • b. Low cost financing with few fees
  • c. May be with (exporter still liable) or
    without recourse(bank takes
  • liability for nonpayment).

24
FINANCING TECHNIQUES
  • 3. Factoring
  • -firms sell accounts receivable to another firm
    known as the factor.
  • a. Discount charged by factor
  • b. Non-recourse basis Factor
  • assumes all payment risk.
  • c. When used
  • 1.) Occasional exporting
  • 2.) Clients geographically dispersed.

25
FINANCING TECHNIQUES
  • 4. Forfaiting
  • a. Definition
  • discounting at a fixed rate without
    recourse of medium-term accounts receivable
    denominated in a fully convertible currency.
  • b. Use Large capital purchases
  • c. Most popular in W. Europe

26
IV. GOVERNMENT SOURCES OF EXPORT FINANCING
  • IV. GOVERNMENT SOURCES OF EXPORT FINANCING AND
    CREDIT INSURANCE
  • A. Export-Import Bank of the U.S.
  • -known as Ex-Im Bank
  • -finances and facilitates U.S. exports
    only.

27
GOVERNMENT SOURCES OF EXPORT FINANCING
  • 1. Ex-Im Bank Programs
  • a. Direct loans to exporters
  • b. Intermediate loans to exporters
  • c. Loan guarantees
  • d. Preliminary commitments
  • e. Political and commercial insurance

28
GOVERNMENT SOURCES OF EXPORT FINANCING
  • B. Private Export Funding Corporation
  • (PEFCO)
  • 1. Finances large sales from private
  • sources
  • 2. May purchase loans of U.S. importers
  • 3. ExIm Bank provides loan guarantees.

29
GOVERNMENT SOURCES OF EXPORT FINANCING
  • C. Foreign Credit Insurance Association
  • (FCIA)
  • 1. Offers commercial and political
  • risk insurance
  • 2. When insured, exporter often
  • able to obtain financing faster.

30
V. COUNTERTRADE
  • V. COUNTERTRADE
  • A. Three Specific Forms
  • 1. Barter
  • direct exchange in kind
  • 2. Counterpurchase
  • sale/purchase of unrelated
  • goods but with currencies
  • 3. Buyback
  • repayment of original purchase through
    sale of a related product.

31
COUNTERTRADE
  • B. When to Use Countertrade
  • 1. With soft-currency developing
  • countries
  • 2. When foreign contractor must
  • perform.
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