FINANCIAL MARKETS LEARNING GUIDE

INTERNATIONAL TRADE & THE CURRENCY

EXCHANGE MARKET
OBJECTIVES:
At the end of the topic, the student is expected to be able to:
a. Describe how international payments are made
b. Describe the nature of foreign exchange markets
c. Discuss the effect of exchange rates on international trade and explain
arbitrage and exchange quotations

1. Read Chapter 6 of the book INTRODUCTION TO FINANCE By. Melicher and

Norton (130-157).
2. Watch the following videos:
a. International Trade animation by Wian Guse.
April 15, 2016
https://www.youtube.com/watch?v=aemiFHJXrHI

b. Letter of Credit Process!Explained LC Transaction with Flow Chart By

Logistics Youtuber-IINO San. Nov. 21, 2020.
https://www.youtube.com/watch?v=OLOvu_K7gYg

c. Letters of Credit-What is a letter of credit (Trade finance Global LC Guide)

by Trade Finance Global. October 23, 2016.
https://www.youtube.com/watch?v=9bZwWuiw8hQ

d. Imports, Exports, and Exchange Rates: Crash course Economics # 15

CrashCourse. November 21, 2015
https://www.youtube.com/watch?v=geoe-6NBy10

3. Answer the following review questions and exercises:

A. THEORY. Choose 5 questions to answer (5 points each)

1. What is the purpose of an international monetary system?
2. What are currency or foreign exchange markets? How are exchange rates
quoted?
 3. Describe the various ways by which an exporter may finance an
international shipment of goods. How may commercial banks assist the
exporter in collecting drafts?
4. How do importers protect themselves against improper delivery of goods
when they are required to make payment as they place an order?
5. Describe the process by which an importing firm may substitute the credit
of its bank for its own credit in financing international transactions.
6. How may a bank protect itself after having issued a commercial letter of
credit on behalf of a customer?
7. Describe the costs involved in connection with financing exports through
banker’s acceptances.
8. Commercial letters of credit, traveller’s letters of credit, and traveller’s
checks all play an important role in international finance. Distinguish
among these three types of instruments.

B. CASES/PROBLEMS
1. Assume, as the loan officer of a commercial bank, that one of your
customers has asked for a commercial letter of credit to enable his firm to
import a supply of well-known French wines. This customer has a long
record of commercial success, yet has large outstanding debts to other
creditors. In what way might you accommodate the customer and at the
same time protect your bank?

2. As an importer of merchandise you depend on the sale of the

merchandise for funds to make payment. Although customary terms of
sale are 90 days for this type of merchandise, you are not well-known to
foreign suppliers because of your recent entry into business. Furthermore,
your suppliers require almost immediate payment to meet their own
expenses of operations. How might the banking systems of the exporter
and importer accommodate your situation?

3. Assume you are the international vice president of a small U.S.-based

manufacturing corporation. You are trying to expand your business in
several developing countries. You are also aware that some business
practices are considered to be “acceptable” in these countries but not
necessarily in the United States. How would you react to the following
situations?
a. You met yesterday with a government official from one of the
countries in which you would like to make sales. He said that he
could speed up the process for acquiring the necessary licenses for
conducting business in his country if you would pay him for his
time and eff ort. What would you do?
 b. You are trying to make a major sale of your firm’s products to
the government of a foreign country. You have identified the key
decision maker. You are considering offering the official a monetary
payment if she would recommend buying your firm’s products.
What would you do?

c. Your fi rm has a local office in a developing country where you

are trying to increase business opportunities. Representatives from
a local crime syndicate have approached you and have offered to
provide “local security” in exchange for a monthly payment to
them. What would you do?

Reference:
Melicher, R. W. & Norton, E. A. (2017). Introduction to Finance. Wiley.