Module 1: Globalization, Trade & Finance

Meaning of international trade finance
The institutions or transactions involved in the financing of international trade. Trade finance looks at banks, credit agencies, insurers, forfeiters, and any other person or institution who enables importers and exporters to trade across borders.

Features International Trade Finance
        Examine key FTA and Incoterms Foreign currency exchange rates Foreign exchange market Factors determining foreign exchange rates Role of banks and financial institutions Managing foreign currency fluctuation risks Foreign currency payment methods Managing foreign currency payment risks

         Understand foreign currency exchange rates Identify the factors that determine foreign exchange rates Appreciate the full impact of foreign currency rate fluctuations on the business Understand and evaluate options available to manage foreign currency fluctuation risks Accurately evaluate quotations in foreign currency Recognize and understand the international trade finance services available Effectively manage receipt of payments from international clients Effectively handle foreign currency payments Understand and appraise options available to manage foreign currency payment risks

What Is International Trade?
International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments.

including a person or body appointed on an interim basis.Exporter: This term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. tariffs and trade agreements. A shop owner is a retail merchant. A retail merchant or retailer. Imports. along with exports. 2. When the "imports" are the set of goods and services imported.g. usually one year Merchant: A merchant is a businessperson who trades in commodities that were produced by others. Its status can range from high (the members even eventually achieving titles such as that of Merchant Prince or Nabob) to low. as in Chinese culture. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer". authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding . It is a good that is brought in from another country for sale imported goods or services are provided to domestic consumers by foreign producers. Import of goods normally requires involvement of the customs authorities in both the country of import and the country of export and are often subject to import quotas. Export of commercial quantities of goods normally requires involvement of the customs authorities in both the country of export and the country of import. In International Trade. The advent of small trades over the internet such as through Amazon and eBay have largely bypassed the involvement of Customs in many countries because of the low individual values of these trades. these small exports are still subject to legal restrictions applied by the country of export. A merchant class characterizes many pre-modern societies. An export's counterpart is an import. a commodity) or service brought in from one country to another country in a legitimate fashion. A wholesale merchant operates in the chain between producer and retail merchant. Overseas Representative (Foreign representative): The term "foreign representative" means “a person or body. Merchants can be one of two types: 1. in order to earn a profit. "Imports" also means the economic value of all goods and services that are imported. "exports" refers to selling goods and services produced in the home country to other markets. Some wholesale merchants only organize the movement of goods rather than move the goods themselves. form the basics of international trade. An import in the receiving country is an export to the sending country. The buyer of such goods and services is referred to an "importer" who is based in the country of import where the overseas based seller is referred to as an "exporter" Thus an import is any good (e. typically for use in trade. Nonetheless. owing to the presumed distastefulness of profiting from "mere" trade rather than from labor or the labor of others as in agriculture and craftsmanship. sells commodities to consumers (including businesses). The macroeconomic variable I usually stands for the value of these imports over a given period of time. Importer: The term import is derived from the conceptual meaning as the goods and services into the port of a country.

2. . warehousing. Our skilled professionals have diverse industry expertise. equipment. These include:  Commodity and currency hedging  Foreign exchange  Structured trade finance They also offer a range of value-added services like Airway Release.Trader: 1. packaging. material handling. and energy.maximize the efficiency by concentrating on core competences. The goal is to profit from short-term gains in the market. transportation. Escrow Accounts Logistics: Logistics is the management of the flow of resources between the point of origin and the point of destination in order to meet some requirements. parts and/or finished inventory from suppliers to manufacturing or assembly plants. The resources managed in logistics can include physical items such as food. warehouses or retail stores. supplier management. not on behalf of clients. and order controlling. requirements planning. liquids. and minimization of procurement costs while maximizing the security within the supply process. Customer foreign currency accounts. and ensure that we develop the most suitable solutions by collaborating with other specialist business units within the bank. Documentary collection . The logistics of physical items usually involves the integration of information flow. The targets in procurement logistics might be contradictory .Documentary Credits. and seminar costs can be deducted as well as home office expenses in connection with investing. The stock selection is generally based on technical analysis or charting which relate only to the stock price rather than a fundamental evaluation of the company as a business. Clean Bills Of   exchange. outsourcing while maintaining the autonomy of the company. Procurement Logistics consists of activities such as market research. and staff as well as abstract items such as information. ordering. Bank Drafts. and leverage the group's geographic strength to deliver timeous and effective solutions to both established and new traders. The IRS offers some tax benefits to traders: they can deduct their interest expense without itemizing. particles. make or buy decisions. An investor who holds stocks and securities for a short period of time (a few minutes. for example of customers or corporations. and often security Inbound logistics is one of the primary processes and it concentrates on purchasing and arranging inbound movement of materials. hours or days). One who buys and sells securities for his/her personal account. production. BANKS:  Bank's representation in emerging markets globally and strong relationships with international correspondent banks in all major markets positions us well to provide superior trade services to meet our clients' cross-border trade requirements. Outbound logistics is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user. materials. inventory. We offer integrated solutions customized to our clients' specific requirements.

and quantity of consumption. warehousing. These companies will also help develop a plan to get all your items to their destination with time to spare.The reverse logistics process includes the management and the sale of surplus as well as returned items of products. as main tasks. In other words." for the cargo industry. and transportation. While freight forwarding companies do not actually move the freight themselves (though in some cases they do). Production logistics activities are related to organizational concepts. place. and Heavy Duty trucking. layout planning. a freight forwarder is a "travel agent. is a person or company that organizes shipments for individuals or corporations to get large orders from the manufacturer or producer to market or final point of distribution. and take care of all the invoicing. FTL (Full Truck Load). Handles Any Load In the shipping world there is LTL (Light Truck Load). Distribution Logistics has. Regardless of the type you need it is available. enhance service(s). Forwarders will contract with a carrier to facilitate the movement of goods. production planning. or forwarding agent. Reverse logistics stands for all operations related to the reuse of products and materials. related to the disposal of waste produced during the operation of a business. the delivery of the finished products to the customer. do a good job of keeping track of all aspects of costs from weight to mileage. Disposal Logistics' main function is to reduce logistics cost(s). . It consists of order processing. forwarder. place. The main function of production logistics is to use the available production capacities to produce the products needed in distribution logistics. A forwarder is not typically a carrier but is an expert in supply chain management. and control. Freight forwarders do have the ability to arrange any type of shipping – often at the lowest price available. Distribution logistics is necessary because the time. BENEFITS: Organization The organization of shipping freight is difficult. Handle Cost Organization Billing is one thing but you want to be billed the correct amounts for what it is you are shipping and billed for the necessary items – not extraneous things that do not make sense. A forwarder will contract with asset-based carriers to move cargo ranging from raw agricultural products to manufactured goods. As a company that is huge – saving money on all your shipping needs. and quantity of production differs with the time. or a third-party (non-asset-based) logistics provider.Production Logistics connects procurement to distribution logistics. Forwarder: A freight forwarder. they help organize the freight with other companies.

purchases the cargo insurance. whether covered or not. The Seller bears all risks involved in bringing the goods to the named place. container yard or road. • CIP – CARRIAGE AND INSURANCE PAID TO (… named place of destination) The Seller pays for moving the goods to destination. • EXW – EX WORKS (… named place of delivery) The Seller’s only responsibility is to make the goods available at the Seller’s premises. with the eighth version—Incoterms 2010—having been published on January 1. The Seller loads the goods if the Carrier pickup is at the Seller’s premises. warehouse. once unloaded from the arriving means of transport. The Seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.Incoterms: The Incoterms rules or International Commercial terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in International commercial transactions. ―Terminal‖ includes any place. The Incoterms rules are accepted by governments. A series of three-letter trade terms related to common contractual sales practices. • DDP – DELIVERED DUTY PAID (… named place) The Seller delivers the goods -cleared for import – to the Buyer at destination. the Incoterms rules have been periodically updated. It is essential that you are aware of your terms of trade prior to shipment. cleared for export. the Buyer bears the costs and risks of moving the goods to destination. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries . The Seller bears all costs and risks of moving the goods to destination. From the time the goods are transferred to the first carrier. • DAT – DELIVERED AT TERMINAL (… named terminal at port or place of destination) The Seller delivers when the goods. the Incoterms rules are intended primarily to clearly communicate the tasks. legal authorities. to the carrier selected by the Buyer. • DAP – DELIVERED AT PLACE (… named place of destination) The Seller delivers when the goods are placed at the Buyer’s disposal on the arriving means of transport ready for unloading at the names place of destination. The Buyer bears full costs and Risk of moving the goods from there to destination. the Buyer bears the risks of loss or damage. such as a quay. • CPT – CARRIAGE PAID TO (… named place of destination) The Seller pays for moving the goods to destination. INCOTERMS 2012 INCOTERMS are a set of three-letter standard trade terms most commonly used in international contracts for the sale of Goods. including the payment of Customs duties and taxes .First published in 1936. the Buyer bears the risks of loss or damage. 2011. costs. From the time the goods are transferred to the first carrier. and practitioners worldwide for the interpretation of most commonly used terms in international trade. "Incoterms" is a registered trademark of the ICC. however. are placed at the Buyer’s disposal at a named terminal at the named port or place of destination. The Seller. From that point. and risks associated with the transportation and delivery of goods. rail or air cargo terminal. • FCA – FREE CARRIER (… named place of delivery) The Seller delivers the goods.

the industry. Unfortunately. Macro risk refers to adverse actions that will affect all foreign firms. due to various reasons vitiating from an alteration in economic trends to fraudulent activities which ruin a project’s outcome. the cost of doing business in one country may vary considerably compared to another. So how can multinational companies minimize political risk? There are a couple of measures that can be taken even before an investment is made.S. For example. such as corruption and prejudicial actions against companies from foreign countries. however. or political stability. macro risk and micro risk. In a nutshell. to those of a more financial nature. Then you will have the informed option to not set up operations in countries that are considered to be political risk hot spots. Certain conditions. Because premium rates depend on the country. such as widespread destruction due to revolution. be warned: buying political risk insurance does not guarantee that a company will receive compensation immediately after an adverse event. the number of risks insured and other factors. Political risk is considered a type of unsystematic risk associated with specific countries. Adverse political actions can range from very detrimental. This typically has a very direct impact on economic and business sectors. there are two types of political risk. All in all. Even worse.What is Political Risk and what can a multinational company do to minimize exposure? For multinational companies. while financing a project. sometimes the prospect of entering a riskier country is so lucrative that it is worth taking a calculated risk. of these American companies had no recourse for getting any of that money back. economic risk refers to the risk that a venture will be economically unsustainable. Department of State's background notes ). companies usually will end up losing a lot of money if they are unprepared for these adverse situations. hundreds of millions of dollars worth of American-owned assets and companies were expropriated. The simplest solution is to conduct a little research on the riskiness of a country. regardless of the type of political risk that a multinational corporation faces. companies can sometimes negotiate terms of compensation with the host country. such as expropriation or insurrection. While that strategy can be effective for some companies. If you do go ahead and enter a country that is considered at risk. the problem with this solution is that the legal system in the host country may not be as developed and foreigners rarely win cases against a host country. which can be diversified away . it is important to consider economic risk for determining the likelihood of potential risks being outweighed by the benefits.  Portfolio Risk The political climate of foreign countries creates portfolio risks because governments and political systems are constantly in flux. a revolution could spawn a new government that does not honor the actions of the previous government. Economic risk is. whereas micro risk refers to adverse actions that will only affect a certain industrial sector or business. economic risk can be described as the likelihood that an investment will be affected by macroeconomic conditions such as government regulation. such as the creation of laws that prevent the movement of capital. In other words. such as trying other channels for recourse and the degree to which the business was affected. exchange rates. a nebulous term with various definitions. most. However. Multinational companies can go to one of the many organizations that specialize in selling political risk insurance and purchase a policy that would compensate them if an adverse event occurred. political risk refers to the risk that a host country will make political decisions that will prove to have adverse effects on the multinational's profits and/or goals. Meaning and definition of Economic Risk Generally speaking. Ultimately. However. must be met. one of the better solutions is to purchase political risk insurance. either by paying for reports from consultants that specialize in making these assessments or doing a little bit of research yourself. a company may have to wait months before any compensation is received. Before starting with the projects. if not all. so that there would be a legal basis for recourse in the event that something happens to disrupt the company's operations. the risk that the output of the project will not produce adequate revenues for covering operating costs and repaying the debt obligations. In those cases. most commonly one in a foreign country. In general. using the many free sources available on the internet (such as the U. after Fidel Castro's government took control of Cuba in 1959.

Do nothing and carry the risk yourself. Sometimes these risks work in your favor. Let your customer or supplier insure the goods . let's say your foreign investment portfolio generated a 12% rate of return last year. assets. foreign investors are also taxed on foreign-based securities. effectively accomplished with broad-based foreign mutual funds or exchange-traded funds (ETFs). Profits are then taxed again when the investor repatriates the funds. Transit Risks . securities are subject to U. and these fluctuations affect the risks of investing in non-U.Implementation and Management : Where a party to an export-import transaction seeks a guarantee to support a series or an individual transaction and ensure the protection of his assets. Taxation Foreign taxation poses another complication. Just as foreign investors with U. is strictly limited and does not always equate to the full value of the goods. In this case. Also you should remember that shipping companies’ liability for the cargo they carry is set by various internationally ratified conventions. that the goods are yours and that you bear the risks associated with them. government taxes.S. trade risk management solutions should be used to cover the perils involved in the transit of the goods.S.S. In such a case you will need the expertise and perseverance to sustain a successful claim. since a declining dollar makes international investments more attractive.  by investing in a broad range of countries. For example. there's currency risk. But the reverse is also true. but your home currency lost 10% of its value..S. dollars. it further dampens the returns of the foreign position. Taxes on foreign investments are typically withheld at the source country before an investor can realize any gains. If an incident occurs resulting in damage or loss to the goods you could take action against the carrier. Currency Risk Finally. In order for insurance cover to be valid. If a prudent trader did not have the opportunity to ensure the protection of his assets he would need to set aside a considerable sum of money as a contingency against risks and losses .There is no law to make insurance of property in transit compulsory but while property is in transit it is at risk and there are several ways to manage the risk involved in the physical movement of goods you trade across international borders: You can minimize the impact of such incidents on your business by being properly insured. your net return will be enhanced when you convert your profits to U. This could have an impact on your business. if a foreign stock declines but the value of the home currency strengthens sufficiently. other times they do not. you have to be able to show that you have an "insurable interest" in the insured goods. Fluctuations in the value of currencies can directly impact foreign investments.

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