International Finance Case

CHAPTER 20

Unaffiliated Buyers

The reason why there is a need for different documentation is because an exporter may not able to judge the credit worthiness of an importer due to many different reasons such as location, language, culture ect.  It is obvious that the exporter would want to know if the importer is able to pay. On the other hand the importer would want to make sure that the exporter is able to provide the goods and services on time and there will be no delay in the process of importer.

Once the trade goes on for some time both the parties know each other because of the letter of credit and other documents provided. These would  have both a financial cost and a cost for the time and energy involved in handling the documents, direct billing for exports is easier, faster, and lowers the final end-cost to the ultimate customer

Affiliated Buyer.

An exporter would use standard international trade documentation on an intra firm export because an affiliated buyer might pass through the standard documentation as a way to obtain financing that is easy to obtain, is possibly cheaper than alternative sources of short-term financing, or provides some protection against political or country-based interruption to payment for the transaction

Related Party Trade

Because of the globalization firm can now sell and produce in two different markets at the same time. Firms that move part of their

manufacturing operation abroad to lower costs and thus enable them to compete more effectively in the home and other markets find themselves specializing in certain products or components in one location and then exporting those items to sister subsidiaries in other countries.

Documents

A letter of credit is a banks promise to pay, issued by a bank at the request of an importer in which the bank promises to pay an exporter who is the beneficiary of the letter, upon presentation of documentation specified. On the other hand a Draft is simply an order written by an exporter (seller) instructing an importer (buyer) or its agent to pay a specified amount of money at a specified time.

These documents, L/Cs and drafts are linked because the L/C states the conditions under which the bank promises to honor a draft drawn on that bank.  

Risks

Currency risk is the risk that the currency designated for payment of the import changes in value relative to the other currency. Risk of non-completion is the risk that one of the parties fails to fulfill its obligations.

Letter Of Credit

• A bank issues a letter of credit, promising to pay for an international trade transaction if certain documents are presented to the bank.
• The applicant who is the importer, applies for the letter of credit to make the exporter sure of its credit worthiness.
• The beneficiary of the letter of credit (usually the exporter) is to receive payment under a set of conditions specified in the letter of credit.

Confirming the letter of credit.

This would be when the company importing is in a developing country and the exporter is not sure about the importers bank.  The confirmation of the letter of credit is by a better-known bank in a major country. For example a Nigerian bank asking a German bank to create a letter of credit and send it to its exporter in USA.

Documentation of  export hard frives.

• The San Jose importer applies for a letter of credit from its California bank.
• California bank issues an in favor of the San Jose importer and sends it to exporter’s Malaysian bank.
• When L/C received and opened, Penang exporter ships the hard drives to the San Jose importer, shipping on an order bill of lading made deliverable to itself; i.e., deliverable to the exporter itself so that the exporter retains legal title to the merchandise at this stage of the transaction.
• The Penang exporter draws a sight draft against the California bank in accordance with the terms of the L/C and presents the draft, along with any other required documents, to its own Malaysian bank.
• Malaysian bank forwards the draft, accompanied by the order bill of lading and any other required documents, to the California bank.
• California bank pays the Malaysian bank for the sight draft, receiving the order bill of lading, now endorsed by the Malaysian bank. At this point the California bank has legal title to the merchandise
• Proceeds collected

Documenting an Export of Lumber from Portland to

Yokohama.

1. Yokohama importer applies for a letter of credit  from its Japanese bank
2. Japanese bank issues an L/C in favor of the Yokohama importer and sends the L/C to exporter’s Oregon bank, asking the Oregon back to confirm guarantee.
3. Confirmation given to the Portland Company.
4. Portland exporter ships the lumber to the Yokohama importer
5. Portland exporter draws a 120-days’ time draft.
6. Oregon bank endorses to the 120-days draft and forwards it, accompanied by the order bill of lading and any other required documents, to the Japanese bank
7. The exporter may:

(a) hold the acceptance to maturity,

 (b) Discount it in the acceptance market.

 At this point the Japanese bank has legal title to the lumber.

1. At maturity (120 days after the Japanese bank accepted the time draft) the holder of the acceptance presents it to the Japanese bank

Inca Breweries of Peru

Hold acceptance to maturity.(choose this)

FV: 720,000

N: (90/360)

I : 20%

PV: Solve = 685718.8104

Discount it in acceptance market

Face amount                              $ 720,000

Less 1.2% commission                  – 8,640

Less 2% ((90/360)*8%)               – 14,400

Amount received                       $ 696,960

Swishing Shoe Company

Hold acceptance to maturity.

FV: 400000

N: (120/360)

I : 18%

PV: Solve = 378529.1436

Discount it in acceptance market

Face amount                               £400,000

Less 2.0% commission                    –8000

Less 4% ((120/360)*12%)            – 16000

Amount received                        376,000