International Risks

1
Managing Financial and Commercial Risks in Trade
Transactions
2
Buyers and Sellers Objectives in Global Trade

• Both have a vested interest in closing the
  transaction,
• but there is an inherent conflict in objectives
• Buyer wants to delay payment as long as possible
• Until
• Receipt and Processing of Goods
• Sale of Goods
• Collection of Receivables
• Seller wants payment as soon as possible
• At...
• Contract Signing, or
• At Time of Shipment

3
Key Functions to Consider in Global Trade

• A structuring of payment terms between Buyers and
  Sellers
• Properly structured, trade finance provides an
  orderly, cost effective and secure method of
  assuring satisfaction to all parties in a trade
  transaction
• Mitigation or reduction of financial and
  commercial risks
• Availability of financing for the exporter and
  importer

4
Warning to Exporters!

• Dont assume that your trading partners
  understand the proper use of the conventional
  customs, practices, obligations, risks and
  costs that drive the global trade transaction
• Do assume that they are ready, willing and able
  to exploit the innocent or unknowing U.S.
  exporter
• Know the Rule of Law
• Dont leave your judgement at the border

5
Methods of Payment

• Cash in Advance
• Letter of Credit
• Documentary Collection
• Open Account

6
The Basic Question Will My Customer Pay Me on
Time?

• Credit Risks
• Liquidity
• Financial Difficulties
• Disputes
• Intentional Delay
• Fraud

• Country Risks
• Access to Foreign Exchange
• Stable FX Environment
• Import Restrictions
• Political unrest
• Expropriation

7
Country Risk

• A measure of the ability and willingness of the
  countrys central bank to make foreign currency
  available to service debt
• Anything and everything that will alter the
  ability and/or willingness of the obligor to pay
• A measurement that is both an art and a science

8
As a Science
Look at the major macroeconomic data

• Debt service
• Political outlook
• Economic outlook
• Reserves current account
• Access to capital markets
• Income distribution

• Trade balance
• Foreign direct investment
• Fiscal policy
• Inflow of portfolio investments
• Domestic savings rate

9
As an Art

• Quality and transparency of public and private
  sector data and financial information
• Degree of government intervention in capital
  allocation and fixing of FX rate
• Level of corruption, cronyism
• Independence of central bank
• Quality of bank oversight and regulations
• Effectiveness of legal system

10
How Can Banks Broadly Help Exporters?

• Financial Supply Chain Assistance
• Working Capital Facilities
• Pre and Post Export Working Capital Facilities
• International Cash Management Services
• Cross-Border Risk Mitigation Products

11
How Can Banks Specifically Help Exporters?

• Export Letters of Credit
• Standby Letters of Credit
• Documentary Collections
• Foreign Exchange
• Export Receivable Insurance
• Export-Import Bank of the U.S. Working Capital
  Guarantee Program
• Small Business Administration Working Capital
  Guarantee Program
• Internet-Based Electronic Delivery Systems

12
International Risk Management Considerations
13
Sales Contract

• Pro-Forma Invoice or Purchase Order should
  indicate
• Description of goods, quantity and unit price
• Ex-Works Value of Goods
• The appropriate Incoterms and any additional
  charges
• Payment Terms
• Sales Contract transmitted by
• Fax
• Email
• Verbal Agreement
• Formal Agreement

14
Export Pricing Considerations

• Domestic
• Cost of Merchandise
• Export, add
• Export Packing
• Inland Freight
• International Freight
• Insurance Premiums
• Banking Fees
• Forwarders Fees
• Consular Fees

15
Export Documentation

• Documentation is the engine that drives global
  trade
• Documentation facilitates
• the movement of freight
• transfer of title
• processing of payment
• customs clearance

16
Role of the Freight Forwarder

• Physical Supply Chain Assistance
• Exporters agent in moving cargo to buyers
  destination
• Should be familiar with
• Import Rules and Regulations of Foreign Countries
• U.S. Government Export Regulations
• Trade Documents
• Incoterms

17
Common Shipping Documents

• Commercial Invoice
• Bill of Lading
• Packing List
• Certificate of Origin
• Insurance Certificate
• Inspection Certificate
• Consular Invoice

18
Incoterms
19
Incoterms 2000

• Most commonly used pricing terms that deal with
  the relation between seller and buyer under the
  sales contract
• Incoterms address
• the sellers transport obligation and transfer of
  title to the buyer
• the party responsible for the contract of
  carriage and cost of carriage
• the party responsible for the contract of
  insurance and cost of insurance
• Critical to the success of the transaction
• Incoterms are published by the International
  Chamber of Commerce

20
Export Pricing Considerations

• Domestic
• Cost of Merchandise
• Export, add
• Export Packing
• Inland Freight
• International Freight
• Insurance Premiums
• Banking Fees
• Forwarders Fees
• Consular Fees

21
Incoterms 2000

• EXW Ex Works
• FCA Free Carrier
• FAS Free Along Side
• FOB Free On Board
• CFR Cost and Freight
• CIF Cost, Insurance, and Freight
• CPT Carriage Paid To
• CIP Carriage and Insurance Paid To
• DAF Delivered at Frontier
• DES Delivered Ex Ship
• DEQ Delivered Ex Quay
• DDU Delivered Duty Unpaid
• DDP Delivered Duty Paid