Module V:

Tools. Payments and Finance in International Trade.

Case Study on Financial Risks in the Export of Consumer
Goods

11/2020

Professors: Josep Mª Cervera Casanovas ,Jan Jonckheere

Institut Químic de Sarrià 53019 International Trade, © Jan Jonckheere 1

 Risks in the Export of Consumer Products

Edesal is a company specialized in the edition of books and educative materials for learning
Spanish as a foreign language (obtaining the DELE diploma) and as a second language. Since its
creation, ten years ago, the company has published more than 100 materials (books, audios,
graded readings, workbooks, etc.), all of them produced by accredited teachers.

Thanks to its high degree of specialization and the quality of its materials, the company has
experienced a strong growth in its activity, especially in foreign markets, which demand more
and more of its publications. Currently about 80% of its turnover (around 3 million Euros) is
invoiced abroad, especially to the large countries of the European Union (France, Germany and
the United Kingdom). Most of the exports are made through book distributors, but also
directly with bookstores and language training centres. The average sales amounts to
distributors are around 1.500 Euros per order and those of bookstores and training centres
between 200 and 500 euros. The company charges its sales by bank transfer and has
established as a rule, to facilitate sales to distributors, to charge 60 days from the date of the
invoice, and to bookstores and training centres 30 days date of invoice.

Edesal has a total of 35 distributors in eight countries and more than 100 direct clients
(bookstores and training centres) in more than twenty countries (see table). Virtually all its
exports are made in Euros except for small orders that are sent to a US distributor and which
are billed in USDollars.

With regard to transport, orders to Europe are supplied by truck through the usual transport
company that Edesal uses for Spain and which also offers an international service. Orders for
the United States and Canada are made by air through an air cargo agent. In both cases the
service is rather good and the company has had very few incidents including losses or damages
to the materials.

Institut Químic de Sarrià 53019 International Trade, © Jan Jonckheere 2

Countries Distributors Bookstores Exports
Training Centres (Euros)
France 6 28 640000
Germany 5 25 550000
United Kingdom 5 21 260000
Italy 4 12 230000
Benelux 2 5 170000
Other EU Countries 4 10 200000
USA 3 7 180000
Canada 2 3 60000
Other Countries 4 9 110000
Total 35 120
Sales EU 1650000 320000 2050000
Sales other countries 250000 180000 350000
Total 1900000 500000 2400000

On the other hand, the company is currently negotiating an important order to supply books to
a Brazilian publisher. It’s an order of 15.000 copies of the book Method of Spanish for
Foreigners. A special edition with a personalized cover with the logo of the Brazilian publishing
house and a prologue of the book in Portuguese has to be created. Therefore, once the order
is signed, if it is subsequently cancelled, the books cannot be sold to other customers. The
price of the order, including transport to Brazil, is USD 160.000 and the payment conditions
offered by the Brazilian publisher are 60 days from the date of shipment of the merchandise.
Therefore, from the moment the contract is signed until the sale is cashed in, it is estimated
that 120 days will elapse. The transport will be carried out by sea and the delivery will be made
in CIF port Rio de Janeiro.

Due to its fast international expansion, Edesal has had several incidences of payment: some
defaults with distributors and, above all, many payment delays with bookstores and training
centres. The financial department is analysing the different instruments of risk coverage both
through means of payment, insurance, and factoring; it has also asked for price quotes from
different suppliers such as commercial information companies, banks, insurance and factoring
companies. Attachment 4 provides a summary of the information obtained, both in terms of
each service and its costs.

Once the information has been analysed, Edesal has to choose the best instruments of risk
coverage for the three types of clients that they are currently working with: distributors,
bookstores and training centres, as well as for the Brazilian publishing house.

Institut Químic de Sarrià 53019 International Trade, © Jan Jonckheere 3

Questions
1. Choose the most appropriate risk coverage instruments for each type of client. Mention a
maximum of three instruments for each type of client. For this question, Attachment 1 must
be completed.

2. Justify, through at least two arguments, each of the hedging instruments chosen in the
previous section. For that purpose, you have to complete Attachment 2.

3. Calculate the cost of each of the chosen coverage instruments by applying the
corresponding fees of the supplying companies to the insured amounts. Do this with the help
of Attachment 3.

Additional information is available in Attachment 4.

Institut Químic de Sarrià 53019 International Trade, © Jan Jonckheere 4

Attachment 1. Instruments of risk coverage

Type of customers Instruments of risk coverage

Distributors

Bookstores & Training centres

Brasilian Editor

Institut Químic de Sarrià 53019 International Trade, © Jan Jonckheere 5

Attachment 2. Justification of the selected risk coverage instruments

Type of customers
Confirmed Documentary Credit

International Commercial Reports

Export Credit Insurance

Export Factoring

Currency Exchange Insurance

Transport Insurance

Institut Químic de Sarrià 53019 International Trade, © Jan Jonckheere 6

Attachment 3. Costs of the coverage per type of instrument (for the USD
Currency Exchange with Brazil you have to calculate with 1 Euro = USD 1,1).

Instrument Insured amount Commision Cost in

(number of reports) (cost report) Euros

Confirmed Documentary Credit

International Commercial Reports

Export Credit Insurance

Export Factoring

Currency Exchange Insurance

Transport Insurance

Institut Químic de Sarrià 53019 International Trade, © Jan Jonckheere 7

Attachment 4. Instruments to cover risks and its costs.

➢ Confirmed Documentary Credit

The documentary credit is a means of payment that guarantees the payment to the exporter
and the delivery of the merchandise to the importer, through the intervention of the banks in
the verification and delivery of the documents, following the UCP 600 norms of the
International Chamber of Commerce. Through this means of payment, the risk of early
cancellation of the order is covered, as well as the rejection of the merchandise; on the other
hand, provided that the exporter complies with the terms of the credit and delivers the
conforming documents, it will receive the payment from the importer's bank or, if it is a
confirmed credit, from the confirming bank, which is usually the correspondent bank of the
bank of the importer in the country of the exporter.

Documentary credits are used above all to ensure the collection of export operations from
10.000 Euros on, with countries outside the European Union, and mostly made by maritime
transport. They can be at sight (the payment is made against the delivery of the
documentation) or also postponed (at 30, 60, 90, 120,… days) from the date of shipment of the
merchandise.

The costs of this method of payment are paid by commissions that banks apply on the amount
of the credit. The most important commissions are the opening commission, which is the one
that the importer pays to his bank for issuing the credit and the confirmation commission that
the exporter pays to his bank for the confirmation of the credit. In some cases, a fixed amount
is paid for the study and management of the operation. This credit study commission is paid by
the exporter.

The bank of Edesal has provided you with the following commission rates for the management
of documentary credits:

- Study fee paid by the exporter: € 250.

- Credit opening commission paid by the importer: 1.5%.
- Credit confirmation commission paid by the exporter: 0.6%.

➢ International business reports

These reports, provided by companies such as Informa D & B (Dun & Bradstreet), Iberinform or
Axesor, serve to assess the risk of new customers and thereby determine the form of payment
and hedging instruments, as well as to monitor the economic and financial evolution of
existing customers with which you may have collection difficulties.

Edesal has estimated that it needs to “buy” 20 reports per year. The supplier of chosen
commercial information has passed a proposal of 60 Euros per report, that is, 1.200 Euros. This
Institut Químic de Sarrià 53019 International Trade, © Jan Jonckheere 8
provider has in its database of reports more than 50 million companies and businesses in all
countries of the world. In the case of developed countries, reports can even be accessed
online.

➢ Export credit insurance

This is a service through which the exporting company contracts an insurance policy with an
insurance company that is normally a global policy, that is to say it contains the entire
portfolio, or a part of it, of the international clients of the company. There are several
insurance companies that offer this service, including Cesce, Crédito y Caución or Coface in
Spain.

There are different risks that can be covered by this service: commercial risk (default by the
buyer), termination of the contract (cancellation of the order by the importer), political risk
(risk arising from political or economic circumstances in the country of the importer). The
percentages of coverage usually cover up to 85% of commercial risk and contract resolution,
and 99% of the political risk. Each company that is insured is granted a risk limit which can be
an indication of the solvency and potential of that company as a customer.

The hiring of these services is done through a previous study of the client portfolio (number of
customers, their type, activity, products, countries) that the exporter hands over to the
insurance company. Once the portfolio study of Edesal’s customers is done, the export credit
insurance company chosen by Edesal has passed a proposal consisting of applying a fee of
0.5% on the amount of all export sales that are insured. This company ensures exports in 120
countries around the world, including all those to which Edesal exports.

➢ Export Factoring
Export factoring is a risk hedging instrument whereby the company that provides the service -
called “factor”, usually linked to a bank - performs the collection management and finances
the operations (anticipates the payment) and, if it is the "non-recourse" factoring modality
also guarantees the collection of the payment of the sales. In other words, the exporting
company transfers a portfolio of clients to the factoring company for the company to manage
and assume the risk of collection. Normally, these are transactions of small and medium
amounts.

The contracting of these services is similar to that of export credit insurance, with a previous
study of the client portfolio (number, type, activity, products, countries) that serves the Factor
for assessing the risk. Once the study of Edesal's client portfolio has been made, the selected
factoring company has given Edesal a proposal consisting in applying a 3,5% fee on the amount
of the export sales that it cedes to the Factor. That would be in the mode of factoring without
recourse; that is, the 3,5% fees cover both the collection management and the collection risk
and the financial cost of advancing the amounts receivable. This factoring company only offers
the service for the sales that take place in the countries of the European Union.

Institut Químic de Sarrià 53019 International Trade, © Jan Jonckheere 9

 ➢ Currency Exchange Insurance
This insurance is contracted for international trade operations of certain amounts, the
collection of which has been postponed and will also be done in a different currency in which
the company usually works. It is a service offered by banks. The collection is made through a
commission on the insured amount.

In this case, the same bank that has provided Edesal with the commissions of the documentary
credit, charges a fee of 0,15% on the insured amount for the currency exchange insurance.

➢ Transport Insurance
It serves to cover the risks of deterioration or loss of merchandise during international
transport.

By means of transport insurance, the insurance company, in exchange for a premium, which is
established as a percentage of the amount insured, is obliged to pay compensation to the
insured, in the event of a loss. The insured value on which the premium is applied is 110% of
the value of the merchandise plus the transportation cost that appears on the invoice.

Transport insurance is used mainly for sea and air transport of high amounts since in the land
transport CMR transport contract already incorporates transport insurance, although with a
limit of compensation for transported amount.

In this case, Edesal has consulted several transport insurance companies and has paid a
premium of 0,20% of the insured value for each maritime transport operation that is carried
out.

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