Multinational Finance

1
Country Risk and the financing of international
trade
Dr. F. Beer UCRX
2006
2
Objectives

• To present the concept of country risk
• To present I/X regulations
• To describe the methods of payment for
  international trade
• To discuss the most common trade finance methods
• To introduce the various institutions promoting
  trade

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Country Risk
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Country Risk-Euromoney
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Country Risk-Euromoney
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Euromoney
Analytical Indicators
Credits Indicators
Markets Indicators
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40
40
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Analytical Indicators
Economic Risk
Political Risk

Balance of Payment
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Balance of Payment

• Systematic procedure for measuring,
• summarizing, and stating the effect of all
  financial and economic transactions between
  residents of one country and residents of the
  remainder world during a particular time period.

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• Balance-of-Payments
• Current Account
• Capital-Financial Account
• Statistical Discrepancy
• Official Reserves

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Current Account
http//www.globalpolicy.org/socecon/crisis/2003/cu
rracctab.htm

• Factors that explain the current U.S. trade
  deficit
• the strong U.S. dollar
• reduced U.S. exports to heavily indebted
  developing countries
• faster economic growth in the U.S. compared to
  its major trading partners

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Top Five Countries with which the U.S. Trades

• For the month of February 2004
• Source US Census Bureau

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Analytical Indicators
Economic Risk
Political Risk

• Attitude of consumers in the
• host country
• Actions of host government
• Blockage of fund transfers
• Currency inconvertibility
• http//biz.yahoo.com/ifc
• War Bureaucracy
• Corruption

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Corruption

• Of late, there has been much discussion of
  corruption in the public sector of many
  developing countries. It was inevitable
  corruption of public servants that, in part, made
  it important to privatize in developing
  countries. Advocates of privatization also lauded
  the private sector's ability to compete. But I'm
  not sure these private sector advocates quite had
  in mind the abilities that American corporate
  capitalism has demonstrated so amply recently
  corruption on an almost unfathomable scale. They
  put to shame those petty government bureaucrats
  who stole a few thousand dollars or even a few
  million. The numbers bandied about in the Enron,
  WorldCom and other scandals are in the billions,
  greater than the GNP of many countries.
• -Joseph Stiglitz, July 4, 2002 in the Guardian
  of London

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Sarbanes-Oxley Act of 2002

• This law gives my administration new tools for
  enforcement. We will use them to the fullest. We
  will continue to investigate, arrest and
  prosecute corporate officials who break the law.
  The Corporate Fraud Task Force I established is
  now hard at work, overseeing investigations of
  alleged fraud and insider trading.

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Euromoney
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CREDIT AND MARKET INDICATORS
Markets Indicators
Credits Indicators
Availability of short-term finance, and access to
and discount available on forfeiting
Payment record, and ease of rescheduling
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REGULATIONS
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I/E Regulations
DOC
Bureau of Export
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Source U.S. Customs and BordersU.S. Homeland
Security

• On a Typical Day, the U.S. Customs Service...
• Processes
• Over 1.1 Million Passengers
• Over 57,006 Trucks/Containers
• 580 Vessels
• 2,459 Aircraft
• 323,622 Vehicles
• Executes Over
• 64 Arrests
• 118 Narcotics Seizures
• 11 Currency Seizures
• 116 Other Seizures
• Seizes
• 4,639 Pounds of Narcotics
• Over 23,083 in Arms and Ammunition
• 467,118 in Merchandise
• 715,652 in Currency
• Conveyances, Ammunition, Commercial Merchandise,
  Real Estates, Firearms and Weapons, Child
  Pornography

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• Export
• No restrictions
• Exceptions
• Nature
• Destination
• End-User

• Import
• Customs
• Entry
• Inspection
• Classification Appraisal
• Liquidation
• Duty
• Document

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Methods of payment for international trade
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Typical transaction
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(No Transcript)
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Exporter Dream..
French Importer
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Importer Dream..
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Risk Level of Each Payment Method
Higher Risk
IMPORTER

• Prepayment

• Letter of Credit (L/C)

• Documentary Collections

• Consignment

• Open Account

0
EXPORTER
Higher Risk
royalbank.com
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PREPAYMENT
4.Deliver Goods
3. Payment
1.Payment
2. Payment
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Letter of credit
L/C Phase 1
1. Contract
Seller
Buyer
4. Inform seller credit is issued
2. Make credit application
Advising Conforming Bank
Issuing Bank
3. Credit
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L/C Phase 2
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L/C Phase 3
Seller
Buyer
11. Documents
10. Money
Advising Conforming Bank
Issuing Bank
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Types of L/C

• Confirmed Irrevocable
• Unconfirmed Irrevocable
• Revocable
• Transferable / Assignable
• Standby
• Revolving
• Import /Export

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Draft

• A document ordering the payment of money
• Sight draft
• Time draft
• Banker
• acceptance

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Documents Against Payment
1. Trade Agreement
2. Drawing Draft
7. Document
3. Draft Document
6. Payment
8.Payment
5. Draft
4. Draft Doc
8. Payment
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Under Consignment Agreement
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Open Account
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Part 2

• To discuss the most common trade finance methods

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Trade Finance Methods A/R Financing

• AR Financing
• Factoring
• Forfeiting
• Letters of Credit
• Bankers Acceptance
• Counter trade
• Line of credit

Already discussed
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Accounts Receivable Financing
1. Trade Agreement
3. Loan Secured by A/R
2. Application For Loan
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Trade Finance MethodsFactoring

• Factoring, especially cross-border factoring
• The exporting firm sells the accounts receivable
  to a third party known as a factor.
• The factor then assumes all administrative
  responsibilities involved in collecting from the
  buyer and the associated credit exposure.

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Factoring
1. Trade Agreement
Draw Accept Time Draft
2. Shipping Goods
3. Apply To Sell A/R (Time Draft)
4. Check The Importer
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Factoring
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A/R Financing versus Factoring

• Illustration 100,000
• 90-day-time-draft.
• A/R Financing Factoring
• 9.5 Bank Loan for A/R gt 9
  Discount
• No Flat Fee 200 Flat Fee
• 100,000 x 9 x 90days 200
• 360 days
• 2,250 200 2,450
• 2,450/(100,000-2,
  450)4
• 9.84 (Compound) lt 10.05

Compound Interest Rate (1i/n)4
(10.095/4)4 1.0984 9.84
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Forfeiting

• Medium-Term Capital Goods Financing
• The importer issues a promissory note to pay for
  its imported capital goods. The exporter then
  sells the note to a forfeiting bank, which then
  assumes total responsibility for the note.

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Forfeiting
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Counter-trade

• Counter-purchase
• Buyback
• Offset
• Switch Trading
• Clearing arrangements
• Simple Barter

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Classification Forms of Counter-trade

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Classification Forms of Counter-trade(Does the
transaction involve reciprocal commitments?)- If
NO,

Switch trading
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Line of credit
A loan arrangement between a bank and a customer
allowing the customer to borrow up to a
pre-specified amount. A revolving credit where
the funds can be re-used after repayment, usually
for short durations.
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• The institutions promoting trade

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Eximbank http//www.exim.gov SBA
http//www.sba.gov OPIC http//www.opic.gov DOC
http//www.commerce.gov Department of
Agriculture http//www.fs.fed.us
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• Questions?