A Canadian company sets upan aliuminim plant in India

Vertical Integration India hasadequate bauxite resourecs

India has adequate coal

Were to manufacfire Aluminium in Canada

Theywould have to trasnport the bauxite and coal from India to Canada
Will impact cost of operations substantially
Levi's wants to sell Jeans in India
India is a 1.3 Billion Market and tremendoues demand
India may have high import duties on apparel
It will be cheaper to produce in India to meet the domestic demand
Coke formula is a secret
Coke were to license its trand to Parle It would have to reveal the formula
Instea Coke may set up operations in India
Levis Produces in India it can cater to multiple mar
Mont Blanc Pens It can be licensed to Camlin
But can Camlin ensure the same quality India/BD/Sri Lanka/Africa
Levi's produced in the US is ofbetter quality than Levi's produced in India A lot ofcapital
So Levi's can get capital at a lower rate than
Mining company in Korea XYZ company in India
Cost of mining ay be very high because of enviromnetal restrictions Cost Pricewill com down
They may find it esier to operate in Orissa
dia it can cater to multiple markets

ital at a lower rate than

Company X has imporeted an IBM mainframe worth 1 MM USD Company X
When the order was placedthe rate was 72 USD-INR
So the ex[ected outflow was 72 MM INR Interest rate is 8% per annum
800000
By the time th emachine was delivered the ratewas 77.50 USD-INR At the beginning of the year rate
Outflow is 77.50 MM U+INR an extra 5.5 MM INR was70 USD-INR
Transaction exposure hurts in an import transaction of the doemstic currency deperciates
$xpecetd outflow was 56 MM INR
WIPRO has sold software worth 500000 UsDto a party in Ireland Howevr one year later the rate is 72.
Exchange rate is 76 USD-INR Outflow is 58 MM INR
So expected receivable is 38 MM INR payout 700 MM INR
Rupee appreciates to 72 USD-INR payout 725 MM INR
Actual receivabke is 36 MMINR
Transacion exposurehurts in an ezport transcatiob ifthe doemstic currency appreciates Inward payment you are hurt
if the Rupee appreciates
P&E 5000000 14285714.29 12500000 Interest also for Dividends
Inventory 500000 1428571.429 1250000
Cash 500000 1428571.429 1250000
Total 6000000 17142857.14 15000000 Ppaer Loss of 2.14 MM AUD XYZ
Imports raw materials from US
On paper there is a 2.14 MM AUD Loss exports finished goods to the US
This loss can tax deductible tax rate is 20%
0.428 Import 1MM USD of Raw Materials
and sell in India at 100 INR/piece
US India If the USD appreciates from 72 to 75 INR
INR is depreciating Cost ogf raw materials in INR will rise
USD ia appreciating Can I keep the Indian price atRs 100
Exports from America will go down If I ake it happends to sales
Imports into America will go up 100 110
The Fed may increse domestic interets rates to attract capital 1.388889 1.466667
In resposne the RBI may also have to hike rates in India 0.05303 10%
Financing cost for Indian producerswill go up
 has borrowed
10mm USD
ate is 8% per annum

ginning of the year rate

outflow was 56 MM INR

ne year later the rate is 72.50
s 58 MM INR

yment you are hurt

ee appreciates
lso for Dividends

ds to the US

Raw Materials
00 INR/piece
es from 72 to 75 INR
als in INR will rise
n price atRs 100
WIPRO Imports a Computer from Fujitsu
Risk for Fijitsu what if WIPRO defaults
We want an LC opened in out favour by HSBC
LC stands for Letter of Credit
It is opened at a the import's request in favour of a beneficiary
HSBC is called the Opening Bank
Fujitsu is the beneficiary
WIPRO is the Importer
HSBC says that if the goods are shipped as per the terms of the deal and all proper dcuments are submitted
The it will make the payment to Fujitsu
LC and a Bank Guarantee
LC if the documents are in order HSBChas to pay. Collecting from the importer is its headache India Japan
Bank Guarantee means HSBC will pay if WIPRO is unable or unwilling to pay Deal is in JPY
LC is unconditional More safety for the exporter and greater risk for the bank The risk is for the Indian
BG is conditional Less safety for the exporter and less risk for the bank Importer
In both cases final responsibility to pay rests with the bank If it is IN INR
Risk is for the japanese
Consignment IBM Japan Ships to IBM India If it is in USD
IBM Japan is the cosnsignor Party inMumbai Risk is for both
IBM India is the consignee Ships goods worth 1 crore to a party In Patna
IBM Japan retains the title until IBM India makes the payment Pay 100% advance
Advance 60% advance
e submitted

India Japan
Deal is in JPY
The risk is for the Indian

If it is IN INR
Risk is for the japanese
If it is in USD
Risk is for both
party In Patna
Sight Drafts and Time Draft DAA
DAP aka Usance Drafts The importer has to sign on the bill stating
Documents DAA WeAccept
against payment Doucments against acceptance Documents are immediately relaesed
The exporterhs to be paid later say 2 month later
No documents will be released Exporter has extended credit to the importer
unless tha payment is made
Withoutdoocuments importer Banks and LCs
cannot take possession
Fujitsu will send the doxuments o HSBC
Air AWB Airway Bill If it is on a DAP payment HSBCwill pay immediately
Sea Bill ofLading If it is on a DAA basis HSBC will sign its acceptance
Make the payment and collect te documents A draft or bill signed by a bank is called a Bankers' Acceptanvce
W/O documents you cannot take possession A draft or bill signed by a non-bank entity is a TradeAcceptance
DAP is when no credit is being extended by te exporter
 bill stating

say 2 month later

o the importer

ankers' Acceptanvce
s a TradeAcceptance
So if HSBC accepts is a BA
IfWIPRO accepts it is a TA ICC International Chamber of Commerce
HQ Paris
BA is a zero coupon security
HSBCsays we will pay you 1 MM USDafter 2 months CIF Cost Insurance Freight
Somebody can pay the PV of 1MM To you and take it
He can then claim 1 MM from HSBC after 2 months CIF Cost Including Freight

WIPRO HSBC FUJITSU ICC Defines terms for Global Trade

UCPCDC All terms are clearly defined to facilitate
HSBCis well known throghout the world interpretation
What ifGOI putsa hold on ayment
Despite its reputation HSBC is helpless
Fjitsu may say we want the LC to be Confirmed by a Japanese Bank say Bank Mitsubishi
If HSBCcannot pay then Bank Mitsubishi has to
er of Commerce

defined to facilitate
Fujitsu supplies computer to WIPRO BA's trade in multiples of 5 MM USD
Accepted by HSBC
3 monyhs time to pay MMMF Liquid Fund
Fijitsu gets it dsicounted by Hitachi
3 months later Hitachi approaches HSBC Discount Securities Add-on securities
But HSBC has collapsed
Wit recourse Without recourse Principak 500,000
Hitachi Htachi;s bad luck Interestrat7.2% per annum
can go to Fijitsu Time is 3 months
and say please pay because HSBC is bankrupt US assumes money market year of 360 days

Add-on 500000 509000 7.20%

7.2
Discount 491000 7.20%

7.331976