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CHAPTER IV: INTERNATIONAL TRADE AND FINANCIAL SERVICES 1. International Trade & Financial Support 2. Interest Rate, Exchange Rate and Payment Time 1. International Trade & Financial Support 2. Interest Rate, Exchange Rate and Payment Time 12/20/2010 1 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 1. International Trade & Financial Support • Includes – Goods and Services – Financial Payments • Risks Delivery, Transport, Credit, Exchange Rate, Payment Transfer… • Includes – Goods and Services – Financial Payments • Risks Delivery, Transport, Credit, Exchange Rate, Payment Transfer… 12/20/2010 2 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 1.1 Methods of Payments • There are 4 Payment and Sponsor Methods to transfer risks between buyers and sellers – Cash deposit Advance – Open Account – Documentary Draft – Letter of Credit • There are 4 Payment and Sponsor Methods to transfer risks between buyers and sellers – Cash deposit Advance – Open Account – Documentary Draft – Letter of Credit 12/20/2010 3 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 1.1.1 Cash Deposit Advance • Buyer needs to deposit at Seller’s bank before delivery of Goods & Services • Buyer bears Costs and Risks Eg. Wire Transfer, Credit Card… • Buyer needs to deposit at Seller’s bank before delivery of Goods & Services • Buyer bears Costs and Risks Eg. Wire Transfer, Credit Card… 12/20/2010 4 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 1.1.2 Open Account • Goods and Services are delivered before Payment is made • There is no interfere of third party • Seller bears Costs and Risks • More Transparency • Used mostly in payment between associated company or company with long-term relationship • Goods and Services are delivered before Payment is made • There is no interfere of third party • Seller bears Costs and Risks • More Transparency • Used mostly in payment between associated company or company with long-term relationship 12/20/2010 5 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 1.1.3 Documentary Draft for Collection • Seller entrusts the collection of a payment to the remitting bank (Seller’s), which sends documents to the a collecting bank (Buyer’s) • Time of payment is given in the contract. • D/C involves a draft requires the importer to pay the face amount either at sight (Documents against Payment – D/P) or on a specific date (Documents against Acceptance – D/A) • Seller entrusts the collection of a payment to the remitting bank (Seller’s), which sends documents to the a collecting bank (Buyer’s) • Time of payment is given in the contract. • D/C involves a draft requires the importer to pay the face amount either at sight (Documents against Payment – D/P) or on a specific date (Documents against Acceptance – D/A) 12/20/2010 6 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 1.1.4 Letter of Credit • Most commonly used method • L/C is a guaranteed, given by the buyer’s bank, that will pay for the goods exported, on behalf of buyer • Risk is bear by Buyer’s bank • Other risk: – Liquidity of Buyer’s bank – Interbank Transfer • Most commonly used method • L/C is a guaranteed, given by the buyer’s bank, that will pay for the goods exported, on behalf of buyer • Risk is bear by Buyer’s bank • Other risk: – Liquidity of Buyer’s bank – Interbank Transfer 12/20/2010 7 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 1.2 Other methods • Credit payment of Buyer • Payment of Account Receivable • Using Intermediate Commercial Trade • Purchase Exporter’s Account Payable • Buy and Sell Credit • Counter Trade – Buy Back Agreement – Compensation Agreement – Counter Purchase Agreement • Credit payment of Buyer • Payment of Account Receivable • Using Intermediate Commercial Trade • Purchase Exporter’s Account Payable • Buy and Sell Credit • Counter Trade – Buy Back Agreement – Compensation Agreement – Counter Purchase Agreement 12/20/2010 8 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 2. Interest Rate, Exchange Rate and Payment Time • Adjusted Domestic currency to pay for export at t time is At t = 0, the above equal • Adjusted Domestic currency to pay for export at t time is At t = 0, the above equal 12/20/2010 9 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES • Let is the domestic interest rate, without calculating the interest amount • Without delay payment is execute when • Let is the domestic interest rate, without calculating the interest amount • Without delay payment is execute when 12/20/2010 10 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES . Credit, Exchange Rate, Payment Transfer… 12/20/2010 2 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 1.1 Methods of Payments • There are 4 Payment and Sponsor Methods to transfer risks between. There are 4 Payment and Sponsor Methods to transfer risks between buyers and sellers – Cash deposit Advance – Open Account – Documentary Draft – Letter of Credit 12/20/2010 3 B02013 - INTERNATIONAL. Goods & Services • Buyer bears Costs and Risks Eg. Wire Transfer, Credit Card… 12/20/2010 4 B02013 - INTERNATIONAL TRADE AND FINANCIAL SERVICES 1.1.2 Open Account • Goods and Services are delivered