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transactions are more risky on an international level than on a purely domestic level because of lack of accurate information, and risk such as exchange rate risk and country risk. To help reduce risk and provide financing a myriad of options including bank’s acceptance (B/A) are available to facilitate large scale international commerce. “Often, the single factor most likely to make or break an export sale is financing—especially for small and midsize exporters” (Cite 1, ????, p. 5). Therefore, banker’s acceptance is a critical financial assets that must be understood by the financial manager, banker, and investor; also, B/A has benefits for all parties which included the exporter, importer, and banks. Analysis of Banker’s Acceptance B/A provides benefits to international trade and is composed of the importer, exporter, their respective local banks, and possibly money market investors. “B/As are time drafts, drawn on and accepted by a bank, that instruct it to pay a designated party a certain sum of money at a specified time in the future” (Cite 1, ????, p. 5.) The process begins with the importer ordering goods from an exporter and simultaneously requesting a local bank to provide a letter of credit (L/C). “L/C is a written undertaking issued by a bank […] in which the bank obligates itself to make payment to the beneficiary […] within a prescribed time frame, and upon presentation of appropriate documents […] In issuing an L/C, the buyer's bank substitutes its credit standing for that of the buyer” (Cite 2, ????, para. 3 and 4). Next the L/C is accepted by the exporter’s banks and thereby creates the B/A. Additionally, “If the exporter does not want to wait until the specified date to receive payment, it can request that the banker’s acceptance be sold in the money market” (Text, 2010, p. 567). To provide incentive for investors to purchase this asset the
????. 568). 2010. the exporter faces little exposure to political risk or to exchange controls imposed by a government because banks normally are allowed to meet their payment commitments even if controls are imposed” (Text. and banks. p. “Flexibility is an advantage of acceptance financing: The trading firms need not assess the integrity of each other. brokers.B/A is sold at a discount and then receives the full payment when the B/A matures. This benefits the exporter because it is often difficult to obtain accurate credit information. Since B/A are backed by the credit worthiness of a high quality bank it serves as an investment opportunity for money market fund investors. importer. 13). Exporter B/A benefits the exporter by transferring risk. which is the yield to the investor. and the various parties to the transaction might be located in different countries” (Cite 3. and other institutional investors” (Cite 4. “Bankers’ acceptances are marketable. 2010). The only credit concern is that of the guaranteeing bank. thus reflecting the time value of money (Text. short-term investment instruments which are traded actively by banks. The credit risk and repayment risk is almost eliminated because the importers banks assumes the responsibility of payment for the received products. and providing quick repayment through money markets. 2010). This process has benefits for the exporter. 2). which is accomplished by selling the B/A at a discount. p. Importer . This benefits the exporter because it is often difficult to obtain accurate credit information. This benefits the exporter because funds can be made available prior to the maturity of the B/A. ????. The exporter benefits from the B/A because it allows the exporter to export without concern for the importers credit worthiness enabling it to penetrate new markets thus increasing sales (Madura. “In addition. increasing sales. p.
Therefore. Also.The importer benefits from the increased access to foreign markets. It is likely that the credit worthiness of the importer is already known or easily attainable by the local bank and therefore will be ready and willing to issue the B/A to the exporter’s bank. B/As provide the importer with short term financing for its inventories at a lower cost than an otherwise similar loan. Additionally. 568). ????. if the terms of the contract are not fulfilled by the export the payment will not be made. and collect the proceeds from sales to third party customers. This will reduce the time and decrease the risk to the exporter which will enable the exporter to be willing to produce and ship the products because it will be reassured of payment. ????). The commission charged by the bank reflects the credit worthiness of the customer (Madura. ship. and sells the acceptance. which occurs because it does not need to prove credit worthiness to the export only to the issuing bank. In addition to the commission the banks can benefit from the spread. Banks The primary benefit the banks receive from the B/A is the commission that is charged by the banks. the lower the credit worthiness of the customer the higher the potential return but higher risk. Also. A B/A is typically issued with maturities between 30 and 180 days (Cite 1. para 11). This can allow the importer to gain a completive advantage over its domestic competition. 2010). accepts. (Cite 2. it is actually using the investor’s money to finance the bank’s customer” (Text. “This provides buyers ample time to receive. ????. warehouse. “When a bank creates. also enabling them to accumulate the funds necessary to pay the B/A at its maturity date. the importer is better informed when the goods are shipped and when they will be received. This enables the bank to create a . by opening up foreign markets for supplies and finished goods the importer may be able to obtain all the benefits from imports such as reduced input costs and better quality products. p.
which is the profit earned by the bank.financial asset at one price and sell it at higher price. . the differential between the buy and sell price is the spread.