London and Philadelphia ANDERS GRATH International Trade and Finance The Complete Guide to Risk Management, International Payments and Currency Management, Bonds and Guarantees, Credit Insurance and Trade Finance THE HANDBOOK OF CGT Int'l Trade Finance TP:Layout 1 30/4/08 12:54 Page 1 Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or any of the authors. First published in Great Britain in 2005 by Nordia Publishing Ltd for The Institute of Export as International Trade Finance Published in Great Britain and the United States in 2008 by Kogan Page Limited as The Handbook of International Trade and Finance Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road 525 South 4th Street, #241 London N1 9JN Philadelphia PA 19147 United Kingdom USA www.koganpage.com © Anders Grath, 2005, 2008 The right of Anders Grath to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. ISBN 978 0 7494 5320 6 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Grath, Anders, 1943– The handbook of international trade and finance : the complete guide to risk management, bonds and guarantees, credit insurance and trade finance / Anders Grath. p. cm. Includes index. ISBN 978-0-7494-5320-6 1. International trade. 2. International finance. I. Title. HF1379.G725 2008 382– –dc22 2008010589 Typeset by JS Typesetting Ltd, Porthcawl, Mid Glamorgan Printed and bound in Great Britain by Bell & Bain Ltd, Glasgow Contents Preface vii Acknowledgements/Disclaimer ix Introduction 1 1 Trade risks and risk assessment 9 International trade practices 9 Product risks 14 Commercial risks (purchaser risks) 18 Adverse business risks 20 Political risks 22 Currency risks 24 Financial risks 26 2 Methods of payment 29 Different methods of payment 29 Bank transfer (bank remittance) 32 Cheque payments 40 Documentary collection 42 Letter of credit 47 Counter-trade 65 3 Bonds, guarantees and standby letters of credit 69 The use of bonds and guarantees 69 Common forms of guarantee 76 Demand guarantees 80 Standby letters of credit 83 The structure and design of guarantees 85 iv CONTENTS __________________________________________________________ 4 Currency risk management 89 Currency risk 89 The currency markets 91 Currency exposure 95 Hedging currency risks 98 Practical currency management 105 5 Export credit insurance 109 A mutual undertaking 109 The private sector insurance market 112 Export credit agencies 116 Investment insurance 123 6 Trade finance 125 Finance alternatives 125 Pre-shipment finance 127 Supplier credits 130 Refinancing of supplier credits 134 Buyer credits 141 The international money market 145 7 Structured trade finance 149 International leasing 149 Lines of credit and local currency finance 154 Project finance and joint venture 155 Multilateral development banks 158 8 Terms of payment 163 Terms of payment and cash management 163 Contents of the terms of payment 164 Structure of the terms of payment 168 Composite terms of payment 172 The final design of the terms of payment 174 Glossary of terms and abbreviations 177 Index 193 Index of advertisers 198 THIS PAGE INTENTIONALLY LEFT BLANK v THIS PAGE INTENTIONALLY LEFT BLANK vi Preface This handbook was originally published more than 20 years ago, and has since been updated in new editions. It has also been published as separate country-specific editions in several European countries where it has become a reference handbook for companies, banks and other institutions involved in international trade, irrespective of their size or the nature of their business. However, for practical reasons it would not be possible to cover more than a handful of countries in this way, and for some time I have been considering doing a completely new and country-neutral edition that could be marketed in most countries involved in international trade around the world. The only drawback is that it is not feasible to describe the specifics for every country; on the other hand, the basic aspects of international trade, payments and finance are almost the same all over the world, and that is the foundation for this new handbook. There is great advantage in being able to combine this basic description with numerous references to places where country-specific information in a number of areas can be found. This information is readily available from internet sites from a variety of domestic institutions in most countries. Therefore it has been possible to create a situation where this book provides the foundation but readers from all over the world can add all the detailed and country-specific information they require. There is another big advantage in such an approach, namely that the basics of this handbook should be relatively stable over time, whereas detailed information from local and domestic institutions will certainly change over time; however, these changes will be constantly communicated through local internet services. Even though new editions have been published in different countries over the years, they have all been based on the same concept: their practical nature. They contain no theoretical elements, just information based on the author’s almost 30 years of payment and finance experience gained from managerial positions as head of international departments in a number of European banks. Those in such positions are necessarily involved in thousands of trade transactions each year, and the advice and comments given in this book are based on that experience. viii The HANDBOOK OF INTERNATIONAL TRADE AND FINANCE ________________________ I am very pleased with this new international edition now published by Kogan Page, and feel confident that it will become the reference handbook of choice in numerous countries around the world, for many years to come. It will certainly be of significant benefit to all international traders in the daily work of expanding their businesses or when entering new global markets, but the book will equally be used in trade education and within the international departments of commercial banks and other trade-related institutions around the world. Acknowledgements/ Disclaimer The author would like to thank the companies, banks and other institutions that have contributed with support, advice and comments when creating this book; however, the author is solely responsible for the views, illustrations and recommendations expressed. While every care has been taken to ensure the accuracy of this work, no responsi- bility for loss occasioned to any person or company acting or refraining from action as a result of any statement in it can be accepted by the author or publisher. THIS PAGE INTENTIONALLY LEFT BLANK x [...]... of these terms for both seller and buyer is to minimize not only the risks involved, but also the cost of payment and of the financing of the transaction 10 The HANDBOOK OF INTERNATIONAL TRADE AND FINANCE The negotiation process The seller will always try to get terms that will maximize the outcome and minimize the risk However, they must also be prepared to accommodate reasonable demands... which are not even listed, and in many of these, the structuring of the terms of payment is the key to more frequent and profitable business 4 The HANDBOOK OF INTERNATIONAL TRADE AND FINANCE _ Every transaction contains many different preconditions, apart from aspects such as the buyer, the country, the nature of the goods, size, extent and complexity This requires the seller to carry out... structure and design of the terms of payment as an integral part of the contract However, the terms of delivery also have to be 12 The HANDBOOK OF INTERNATIONAL TRADE AND FINANCE defined in order to determine when and where the seller has fulfilled the obligations to deliver according to the contract and what is needed in order to do so There is a clear connection between these two sets of terms... starting their payment negotiations, ie choice of currency, form of payment and terms of financing Local banks, trade councils and the chambers of commerce in both the seller’s and the buyer’s country can draw on their experience and give impartial advice on local business practice regarding both the form of payment and the more specific terms of payment, while also taking the size, commodity and other aspects... events and delays until final payment Sometimes the interaction between the seller and the buyer can make it difficult to establish the exact cause for the delay in payment and there are then fewer chances for the seller to refer to a specific breach of contract on the part of the buyer On the other hand, if the seller has paid enough attention when drafting the sales contract, including the terms of payment,... transportation route, the buyer and the nature of the goods, including the mode of transport; 14 The HANDBOOK OF INTERNATIONAL TRADE AND FINANCE standard practice, if any, in the buyer’s country or any regulation set by the authorities of that country to benefit their own transport or insurance industry; procedures, where the seller should avoid terms of delivery, which are dependent... in many countries around the world Other forms of political or similar risk Apart from the real political risks already discussed, there are other measures taken by authorities in the buyer’s home country that can affect the buyer and their ability or willingness to fulfil the transaction; for example, demands for product standards, 24 The HANDBOOK OF INTERNATIONAL TRADE AND FINANCE new... connection with international trade (more on this is explained in the final chapter concerning the practical structure and design of the terms of payment) The main composition of this handbook This handbook is intended to be a practical reference guide to help in the daily work – mainly seen from the perspective of the seller – within sales, shipping and administration The contents have, therefore, been... the cargo clauses and their coverage can be obtained through any broker, insurance or transportation company involved in international trade 18 The HANDBOOK OF INTERNATIONAL TRADE AND FINANCE Commercial risks (purchaser risks) Commercial risk, also called purchaser risk, is often defined as the risk of the buyer going into bankruptcy or being in any other way incapable of fulfilling the. .. the profitability of international trade transactions They can then also determine, with a high degree of accuracy, when, where and how payments will _ INTRODUCTION 5 be made and therefore how to minimize the capital required The concept of risk is directly connected to the probability of timely payment, the choice of currency related to the exchange rate when paid and the . also the cost of payment and of the financing of the transaction. 10 The HANDBOOK OF INTERNATIONAL TRADE AND FINANCE ________________________ The negotiation process The seller will always. with international trade (more on this is explained in the final chapter concerning the practical structure and design of the terms of payment). The main composition of this handbook This handbook. Institute of Export as International Trade Finance Published in Great Britain and the United States in 2008 by Kogan Page Limited as The Handbook of International Trade and Finance Apart from any