shortterm asset and liability management 1224059406988035 8 2
TRANSCRIPT
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
1/29
Part VShort-Term Asset and Liability Management
Subsidiariesof MNC with
Excess Funds
Subsidiariesof MNC with
Deficient Funds
InternationalCommercialPaper Market
Eurobanks inEurocurrency
Market
MNCParent
Deposits Purchase
Securities
Provisionof Loans
Provisionof Loans
DepositsPurchaseSecurities
Borrow
Funds
Borrow
FundsBorrowFunds
BorrowFunds
Borrow Funds Borrow Funds
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
2/29
Financing International TradeFinancing International Trade
1919ChapterChapter
South-Western/Thomson Learning 2003
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
3/29
A19 - 3
Chapter Objectives
To describe the methods ofpayment for international trade;
To explain common trade financemethods; and
To describe the major agencies that
facilitate international trade with exportinsurance and/or loan programs.
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
4/29
A19 - 4
Payment Methods
for International Trade
In any international trade transaction,credit is provided by either
the supplier (exporter), the buyer (importer),
one or more financial institutions, or
any combination of the above.
The form of credit whereby the supplierfunds the entire trade cycle is known as
supplier credit.
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
5/29
A19 - 5
Method :Prepayments
The goods will not be shipped until the buyerhas paid the seller.
Time of payment: Before shipment
Goods available to buyers : After payment
Risk to exporter: None Risk to importer: Relies completely on
exporter to ship goods as ordered
Payment Methods
for International Trade
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
6/29
A19 - 6
Method :Letters of credit (L/C)
These are issued by a bank on behalf of theimporter promising to pay the exporter uponpresentation of the shipping documents.
Time of payment: When shipment is made
Goods available to buyers:After payment
Risk to exporter: Very little or none
Risk to importer: Relies on exporter to shipgoods as described in documents
Payment Methods
for International Trade
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
7/29
A19 - 7
Method :Drafts (Bills of Exchange)
These are unconditional promises drawn bythe exporter instructing the buyer to pay theface amount of the drafts.
Banks on both ends usually act asintermediaries in the processing of shippingdocuments and the collection of payment. Inbanking terminology, the transactions areknown as documentary collections.
Payment Methods
for International Trade
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
8/29
A19 - 8
Time of payment: On presentation of draft
Goods available to buyers : After payment Risk to exporter: Disposal of unpaid goods
Risk to importer: Relies on exporter to shipgoods as described in documents
Payment Methods
for International Trade
Method :Drafts (Bills of Exchange)
Sight drafts (documents against payment) :When the shipment has been made, the draftis presented to the buyer for payment.
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
9/29
A19 - 9
Time of payment: On maturity of draft
Goods available to buyers : Before payment Risk to exporter: Relies on buyer to pay
Risk to importer: Relies on exporter to shipgoods as described in documents
Payment Methods
for International Trade
Method :Drafts (Bills of Exchange)
Time drafts (documents against acceptance) :When the shipment has been made, thebuyer accepts (signs) the presented draft.
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
10/29
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
11/29
A19 - 11
Method :Open Accounts
The exporter ships the merchandise andexpects the buyer to remit payment accordingto the agreed-upon terms.
Time of payment: As agreed upon
Goods available to buyers:Before payment
Risk to exporter: Relies completely on buyerto pay account as agreed upon
Risk to importer: None
Payment Methods
for International Trade
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
12/29
A19 - 12
Trade Finance Methods
Accounts Receivable Financing
An exporter that needs funds immediately
may obtain a bank loan that is secured byan assignment of the account receivable.
Factoring (Cross-Border Factoring)
The accounts receivable are sold to a thirdparty (the factor), that then assumes all the
responsibilities and exposure associated
with collecting from the buyer.
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
13/29
A19 - 13
Letters of Credit (L/C)
These are issued by a bank on behalf of
the importer promising to pay the exporterupon presentation of the shipping
documents.
The importer pays the issuing bank the
amount of the L/C plus associated fees.
Commercial or import/export L/Cs are
usually irrevocable.
Trade Finance Methods
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
14/29
A19 - 14
Sometimes, the exporter may request that
a local bank confirm (guarantee) the L/C.
Trade Finance Methods
Letters of Credit (L/C)
The required documents typically include a
draft (sight or time), a commercial invoice,and a bill of lading (receipt for shipment).
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
15/29
A19 - 15
Variations include
- standby L/Cs : funded only if the buyerdoes not pay the seller as agreed upon
- transferable L/Cs : the first beneficiarycan transfer all or part of the original L/C
to a third party- assignments of proceeds under an L/C:
the original beneficiary assigns theproceeds to the end supplier
Trade Finance Methods
Letters of Credit (L/C)
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
16/29
A19 - 16
Bankers Acceptance (BA)
This is a time draft that is drawn on and
accepted by a bank (the importers bank).The accepting bank is obliged to pay the
holder of the draft at maturity.
If the exporter does not want to wait for
payment, it can request that the BA be sold
in the money market. Trade financing is
provided by the holder of the BA.
Trade Finance Methods
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
17/29
A19 - 17
In general, all-in-rates are lower than bank
loan rates. They usually fall between the
rates of short-term Treasury bills and
commercial papers.
Trade Finance Methods
Bankers Acceptance (BA)
The bank accepting the drafts charges an
all-in-rate (interest rate) that consists of thediscount rate plus the acceptance
commission.
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
18/29
A19 - 18
Working Capital Financing
Banks may provide short-term loans that
finance the working capital cycle, from thepurchase of inventory until the eventual
conversion to cash.
Trade Finance Methods
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
19/29
A19 - 19
Medium-Term Capital Goods Financing
(Forfaiting)
The importer issues a promissory note tothe exporter to pay for its imported capital
goods over a period that generally ranges
from three to seven years.
The exporter then sells the note, without
recourse, to a bank (the forfaiting bank).
Trade Finance Methods
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
20/29
A19 - 20
Countertrade
These are foreign trade transactions in
which the sale of goods to one country islinked to the purchase or exchange of
goods from that same country.
Common countertrade types include
barter, compensation (product buy-back),
and counterpurchase.
The primary participants are governments
and multinationals.
Trade Finance Methods
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
21/29
A19 - 21
Due to the inherent risks of internationaltrade, government institutions and the
private sector offer various forms ofexport credit, export finance, and
guarantee programs to reduce risk and
stimulate foreign trade.
Agencies that Motivate
International Trade
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
22/29
A19 - 22
Agencies that Motivate
International Trade
Export-Import Bank of the U.S. (Ex-Imbank)
This U.S. government agency aims tocreate jobs by financing and facilitating
the export of U.S. goods and services and
maintaining the competitiveness of U.S.
companies in overseas markets.
It offers guarantees of commercial loans,direct loans, and export credit insurance.
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
23/29
A19 - 23
Private Export FundingCorporation (PEFCO)
PEFCO is a private corporation that isowned by a consortium of commercial
banks and industrial companies.
In cooperation with Ex-Imbank, PEFCO
provides medium- and long-term fixed-ratefinancing for foreign buyers through the
issuance of long-term bonds.
Agencies that Motivate
International Trade
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
24/29
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
25/29
A19 - 25
Beyond insurance and financing, the U.S.has tax provisions that encourage
international trade. The FSC Repeal and Extraterritorial
Income Exclusion Act of 2000, which
replaced the 1984 Foreign Sales
Corporation provisions in response toWTO concerns, excludes certain
extraterritorial income from the definition
of gross income for U.S. tax purposes.
Agencies that Motivate
International Trade
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
26/29
A19 - 26
Impact of International Trade FinancingDecisions on an MNCs Value
? A
v!
n
tt
j
tjtj
k1=
1
,,
1
ERECFE
=l
E (CFj,t) = expected cash flows in currencyjto be received
by the U.S. parent at the end of period t
E (ERj,t) = expected exchange rate at which currencyjcan
be converted to dollars at the end of period t
k = weighted average cost of capital of the parent
Trade Financing Decisions
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
27/29
A19 - 27
Payment Methods for International Trade
Prepayments Letters of Credit
Sight Drafts and Time Drafts
Consignments
Open Accounts
Chapter Review
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
28/29
A19 - 28
Chapter Review
Trade Finance MethodsAccounts Receivable Financing
Factoring Letters of Credit
Bankers Acceptances
Working Capital Financing
Medium-Term Capital Goods Financing
(Forfaiting)
Countertrade
-
8/8/2019 Shortterm Asset and Liability Management 1224059406988035 8 2
29/29
A19 - 29
Chapter Review
Agencies that Motivate International Trade Export-Import Bank of the U.S.
Private Export Funding Corporation Overseas Private Investment Corporation
Other Considerations
Impact of International Trade Financing onan MNCs Value