Deck 18: Financing International Trade

Question 1

How is a documentary credit created, and what are its advantages to exporters and importers

Answer 1

A documentary credit is designed to solve problems caused by the fact that importers and exporters want to pay and be paid at different times. It also provides a way for exporters to finance the production of their goods. In a documentary credit the importer's bank undertake guarantee to pay for a shipment if exporter submit all required document.
The steps in creation of documentary credits are followings:
• The importer orders goods from the exporter and asks whether the exporter is willing to ship the goods under a documentary credit containing a time draft.
• The exporter and importer agree to ship the goods under a documentary credit. The two parties negotiate the price of the goods and the other aspects related to how the goods will be shipped.
• Bank of exporter informed to the exporter that the document of credit has arrived. If the exporter so desires, Bank of exporter confirms the documentary credit for a fee and adds its guarantee to Bank of importer's guarantee.
• When the goods arrive, the importer collects them from the common carrier, using the order bill of lading.
• At the maturity of the promissory note, the importer pays Bank of importer.
• At the maturity of the document, Bank of importer pays the holder. The investor receives the face value of the document. The holder may present the document directly to Bank of importer or it may have Bank of exporter to collect the amount through its normal banking relationships with Bank of importer.
There are its advantages to exporters and importers which are followings:
Advantages for exporters:
• The most important advantage of a document of credit is that it substitutes the creditworthiness of the bank for the credit risk of the importing firm. If the exporter satisfies the requirements of the document of credit, the exporter will be paid by the bank.
• A document of credit reduces the uncertainty of a transaction by clearly establishing the acts that the exporter must carry out in order to receive payment.
• Because a document of credit is a legally binding document between a bank and an exporter, the exporter is protected if the importer desires to cancel the contract during the production process. This is especially important if the goods are being made to order.
• A document of credit makes it easy for an exporter to receive early payment because a time draft can be accepted by the bank, which creates a banker's acceptance.
Advantages for importers:
• The foremost advantage for an importer is that a document of credit clearly indicates a time frame by which the goods must be shipped. The importer knows that the exporter must ship the goods by a certain date and must provide certain documents to the bank if the exporter wants to be paid. The importer is thus assured of having the goods when they are needed for the importer's production process or for resale in the importer's market.
• Another advantage of a document of credit from the importer's perspective is that the importer's bank assumes responsibility for checking the documents provided by an exporter. Hence, if the exporter does not properly ship the goods, the bank will not pay the exporter, and the importer is protected from having to pay for goods that are not valuable. If the importer takes possession of the goods and it is discovered that there is a problem with the shipment that should have been caught by examining the shipping documents, the bank is responsible for this oversight.
• If some form of prepayment is required by an exporter, an importer is better off depositing money in an escrow account at its domestic bank than with a foreign company. If the exporter encounters some difficulty that limits its ability to follow through on its contractual commitments, the importer can recover its deposit from a local bank more easily than it could from the foreign exporter.
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Question 2

Web Question: Visit the following Web site: www. pitc.gov.ph/contracts/qinetiq.pdf. What type of international trade is described in this contract What is the rationale for such a contract

Answer 2

There is an offset agreement between Philippine international trading corporations which is government owned and QinetiQ Ltd, it is U.K government owned. In this contract, Q is to receive £10,426,798 in order to provide an upgrade of the weapon system on three Jacinto Class Patrol value equal to 60% of the contract. There are some activities in this agreement as followings:
• Establishment of the logistics support.
• Donation of equipment upgrade and other items.
• Technology/skill transfer to the Philippine defence industrial base.
The P government will receive 60% of that value as either additional investment in the P or in kind transfers from the U.K to P.

Question 3

What is a confirmed documentary credit Why would an exporter demand a confirmed, irrevocable documentary credit What are the costs of using a documentary credit

Answer 3

A confirmed documentary credit means a document get used when the credit worthiness of the issuing bank is questionable. It is a kind of credit guarantee in which a second commercial bank agrees to honour the draft presented by the exporters. The bank issues the documentary credit to the importer. Two issues arise from the perspective of the exporter as follows.
• First, the issuing bank may be a reputable international bank; it is still subject to the legal jurisdiction of the importing country and may not be well known to the exporter.
• Second, the exporter might ultimately want to present the draft to a bank in the exporting country. The bank will demand some additional compensation for the confirmation of the documentary credit, and this increase transaction cost costs of the confirmed documentary credit.
The costs of documentary credit are the direct fees charged by the financial intermediaries and the implicit costs of this documentary involved in the interest rate charge in proving the exporter with funds.

Question 4

What is the most straightforward way for an exporter to finance its accounts receivable

Question 5

What is the fundamental financing problem in international trade

Question 6

What is a banker's acceptance How is one created Whose liability is it

Question 7

What is a bill of lading Explain the difference between a straight bill of lading and an order bill of lading.

Question 8

What is the difference between an eligible and an ineligible banker's acceptance, and what are the eligibility requirements

Question 9

What is the difference between a clean bill of lading and a foul bill of lading

Question 10

How is a buyer credit arranged

Question 11

What are the purposes of a commercial invoice and a packing list

Question 12

What is forfaiting How does it work Why did it arise

Question 13

What do the INCOTERMS acronyms FOB, FAS, CFR, and CIF mean

Question 14

What is export factoring What services does a factor perform for an exporter

Question 15

Question 16

What are the differences between receiving payment on a collection basis, on an average collection basis, and on a maturity basis

Question 17

Why might a country require an exporter to acquire a consular invoice in order to clear the customs of an importing country

Question 18

How does an export-import bank work Who ultimately pays for the services of an export-import bank

Question 19

Why would a certificate of analysis be important for shipping goods internationally

Question 20

What are the major programs of the U.S. Ex-Im Bank

Question 21

What are four different methods by which an importer can pay an exporter List them in increasing order of risk to the exporter.

Question 22

What are the six different types of countertrade Describe them.

Question 23

True or false: In a documentary collection, the remitting bank is the agent of the importer.

Question 24

How would a clearing arrangement work between the Ukraine and Lithuania, whereby the Ukraine exports grain and Lithuania exports shoes

Question 25

What is the difference between a documents against payment collection and a documents against acceptance collection

Question 26

There are major natural resource deposits in the People's Republic of China (PRC). How might a buyback arrangement work in which the PRC purchases earthmoving equipment from the Japanese firm Komatsu

Question 27

How is a trade acceptance created Whose liability is it Can it be sold in the international money market

Question 28

The Indonesian government is concerned that it may contribute to the country's balance-of-trade deficit if it follows through with plans to import a large order of trucks from Germany that will be used to develop Indonesian timber resources. How might the Indonesian government use a counterpurchase to its advantage

Question 29

What is meant by a document discrepancy How might one arise How can it be resolved

Question 30

Web Question: Go to the Trade Finance magazine Web site at www.tradefinancemagazine.com and report on the latest innovations in trade finance.