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Strictly Private and Confidential


Risks

2

Dealing with buyers and sellers of unknown standing

Restrictions imposed by governments

Transport related risks

Language/Communications

Sorting out disputes / quality of goods

Extent of insurance coverage

Foreign exchange risk/currency risk

2


Partnerships

Transport

Bank

Insurance

Credit Bureau

3

Exporter

3

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http://www.google.co.za/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&docid=r9MyaEP04q494M&tbnid=CglmYCAqLAxhTM:&ved=0CAUQjRw&url=http://www.ber.ac.za/RMBBERBCI/2024.aspx&ei=GzjOU9qBJYrK0QWH3IHwDA&bvm=bv.71198958,d.ZGU&psig=AFQjCNEW2rfV3iAqOixkwcSTcDyt9j6Q3Q&ust=1406110097861462

http://www.google.co.za/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&docid=vLWFYq9p1uZBWM&tbnid=484Q16hjyV-TJM:&ved=0CAcQjRw&url=http://www.shutupabout.com/blog/&ei=-LEfVOjmFMzmatDfgkg&psig=AFQjCNHit5ppaVELTluY2UKE731z7uVYMQ&ust=1411449632758977


Types of risks

• There are three main risks in international trade that must always be taken into account:

• Commercial risk

• Country risk

• Currency risk

• The risks in international trade should never be underestimated

• Risk analysis plays a major role in determining the method of payment to be used for settlement between the buyer

and the seller

4 4


Currency risk

Effect on companies:

• Lower profitability

• Lower rate of growth

• Loss of competitive position

• Vulnerability to: • takeover • bankruptcy

5


ZAR Volatility

6


Forward Exchange Contracts

A forward exchange contract (FEC) is a contract between two parties to exchange a

specific amount of currencies, on a specified future date, or between specified future

dates at an exchange rate agreed at the time of entering into the contract

FEC

contract

7


Forward exchange contracts

Transaction without FEC (Importer)

• You enter a transaction for USD10,000 with a foreign buyer

• The buyer gives you three months credit (90 days)

• Spot rate 11,0000

• ZAR equivalent and expected amount to receive ZAR 110,000

• On due date, spot rate 10,0000

• ZAR equivalent and amount received ZAR 100,000

• A loss of ZAR 10,000

8


Forward exchange contracts

Transaction with a FEC (Importer)

• You enter a transaction for USD10,000 with a foreign buyer

• The buyer gives you three months credit (90 days)

• Spot rate 11,0000. Takeout Forward Cover at 11,2000

• ZAR equivalent and expected amount to receive ZAR 112,000

• On due date, spot rate is 10,0000

• Drawdown FEC at 11.2000

• Receive ZAR 112,000

9


Forward exchange flow

Importer

Exporter

2. Applies for FEC

4. 10%

5. Sells Currency Forward

3. Longer or shorter than six months?

“Active Currency Management”

1. S

ale

s c

on

tract

10

ACM: No proof of firm currency commitment is required

before taking out a hedge, only on pay away


Forward Exchange flow

Importer

Exporter

2. Delivery of ZAR

3. Delivery of Currency

1. S

hip

s g

oo

ds

4. P

aym

en

t

11


Advantages

• Protection from unfavourable movements in future spot rates

• Future cash flows - certain and predictable

• Flexibility resulting from the availability of early drawdowns, extensions and cancellations

• Amounts and delivery dates tailored to meet requirements

12


CFC account

• Importers

• Exporters

• Importers and exporters

13


Payment methods

14

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http://www.google.co.za/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&docid=Zh53ZNq3l1pdlM&tbnid=NDEwSJ-dgucYAM:&ved=0CAUQjRw&url=http://www.girlguides.co.za/2012/11/15/app-starter-kit/&ei=uLEVU7m_HsuS7AaLyoDwBg&bvm=bv.62286460,d.ZGU&psig=AFQjCNH-MXejFZmXr9z6Qy5uvWKgOVUONA&ust=1394017048491430

https://www.google.co.za/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&docid=FxH7m6_QgbDD6M&tbnid=VuXqIDeCZH3uOM:&ved=0CAUQjRw&url=https://www.fnb.co.za/promotions/The-New-Online-Banking/&ei=XLEVU5OJNoG57AbAqoHYBQ&bvm=bv.62286460,d.ZGU&psig=AFQjCNFO_OmOOrXfWtMJk3thEWERCQqG-w&ust=1394016735895642


Payment methods

Most secure to buyer

Most secure to seller

Documentary collections

Documentary credits

Open account

Advance payment

Buyer

Seller

15


Advance payment

• Reduces buyer risk

• The seller obtains finance from the buyer

Buyer

Seller Seller’s

Bank

Sale

s C

on

tract

Pa

ym

en

t

Payment

Payment S

hip

men

t

17


Advance payment

18

If requesting an advance payment the importer may request that you approach your bank to have them issue an

Advance Payment Guarantee

Strictly Private and Confidential 19


Open account

• Eliminates supplier performance risk

• Affords no protection to the supplier

• SWIFT transfer/draft

20

Buyer Buyer’s bank

Seller

Sale

s C

on

tract

Paym

en

t

Payment

Payment S

hip

men

t


Documentary collections

Importer Buyer’s Bank

Exporter

Sa

les

co

ntr

ac

t

Sh

ipm

en

t

Documents

Documents

Do

cu

me

nts

Payment

Payment

Pa

ym

en

t

Documents against payment Documents against acceptance

22


Benefits

For the drawer (seller)

For the drawee (buyer)

• Maintains control over the goods

• Instead of cash on delivery for goods, cash (contracted promise to pay) on delivery for title document

• The bill of exchange is an acknowledgement of debt

• Can be noted and protested for non payment and/or non acceptance

• Settlement is usually quicker then open account if reputable remitting and collecting banks are used

• Accepted bills of exchange can be used to obtain finance

• Goods can be inspected before payment, provided D/A

• Obtain extended payment terms

• Does not require a banking facility

• Opportunity for refinance

23


Documentary credits

25

Importer

Advising bank Exporter

Sa

les

Co

ntr

ac

t

Sh

ipm

en

t

Documents

Documents

Do

cu

me

nts

Payment

Payment

Iss

ue

LC

Pa

ym

en

t

Advice/confirm LC

Application


Benefits

For the beneficiary (seller)

For the applicant (buyer)

• Receives a payment undertaking from the issuing bank instead of the applicant

• Is assured that he will receive payment provided he presents conforming documents

• Payment is reliant only on the documents and not the underlying contract or the quality of the goods. – Production Risk

• It is possible to discount the proceeds where usance credits are used, and in doing so, gives the applicant extended payment

terms

• Can obtain extended payment terms.

• He is protected, in that payment will not take place unless the beneficiary presents correct documentation.

• Time of shipment and presentation of documents can be controlled.

26 26


Types of credits

Revocable High risk to beneficiary

Irrevocable and unconfirmed

Irrevocable and confirmed Low risk to beneficiary

27 27


Discounting export credits

28

• Post shipment finance

• Finance after submission of a complying presentation under a credit

• Main risk is the exporters non-compliance of the credit terms and conditions

• RMB offers to advance you the letter of credit payment before due date

• Discount rate for foreign currency denominated credit is linked to the LIBOR rate

• Advisable to get discount approval from RMB prior to the issuance of the credit (discount conditions can be applied to

requested credit).


Discounting a confirmed credit

29

Applicant

buyer Issuing bank

Beneficiary

seller

4. Raises Euro loan

2. Presents conforming documents

5. Pays discounted amount

6. Releases shipping documents

29

3. F

orw

ard

s c

on

form

ing

do

cu

me

nts

1. S

hip

me

nt

29


Discounting a confirmed credit

Applicant

buyer Issuing bank

Beneficiary

seller

3. Repays Euro loan

with interest

1. Makes payment on due date

30

2. M

ake

s p

aym

en

t

30


Closing

31 31 31


Strictly Private & Confidential

This presentation has been prepared by FirstRand Bank Limited, acting through Rand Merchant Bank (“RMB”).

The information contained in this presentation is confidential and intended solely for the use of the intended recipient. This presentation may contain information

proprietary to RMB and accordingly may not be reproduced, acted upon or disseminated in whole or in part without RMB’s prior written consent. By attending this

presentation, the intended recipient undertakes to keep the information contained in the presentation confidential and not to do any act or allow same to be done on

his behalf which is in breach of the above mentioned prohibition.

This presentation contains information which has not been independently verified by RMB. RMB and its directors, officers, employees and agents make no

representation and give no warranty with respect to, and assume no responsibility for:

the correctness, accuracy and completeness or otherwise of the information contained in this presentation; or

the correctness or otherwise of the conclusions based on such information.

Any liability of whatsoever nature and howsoever arising on the part of RMB, their directors, officers, employees and agents relating to the contents of this

presentation is hereby expressly disclaimed.

This presentation is intended for discussion purposes only and does not represent a commitment, proposal, recommendation, advice, offer open for acceptance or

agreement to enter into a transaction. Any transaction is subject to the agreement of final terms to be set out in a separate written agreement. You are required to

seek your own legal, tax and financial advice before entering into any transaction. The decision to enter into any transaction and to assume the risks associated

with the transaction rests solely with the intended recipient.

June 2014

Disclaimer

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