Review for Final Exam - Itf

8/2/2019 Review for Final Exam - Itf

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Navjot Sethi

Abhijit Singh Kahlon

Misbah Hassan


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PRICING


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Many entrepreneurs lose money in international transactions,because they were unable to precisely determine their export costs,foreign exchange risks or price they should have negotiated. Sotherefore it is very important to take into consideration all cost factorsbefore finalizing the price.

Inco Terms

Export Costing Sheet

Pricing Strategies

Other Important Definitions Evaluating the Viability of the Transaction


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Related to transfer of ownership/liability/obligation from exporter toimporter

Are internationally recognized

Important for resolving contractual disputes

Four categories- E term, F terms, C terms and D terms


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E term- (Ex Works-EXW) exporter makes good available atimporters premises

F terms- (FCA-Free Carrier, FAS-Free alongside ship, FOB-Free onBoard) exporter delivers the goods to a carrier appointed by the

importer C terms- (CFR-Coast and Freight, CIF-Cost, Insurance and Freight,

CIP-Carriage and insurance paid to, CPT-Carriage paid to) exporterdelivers the goods at a decided destination and is free obligationsafter that

D terms-(DAF-Delivered at frontier, DES-Delivered Ex Ship, DEQ-Delivered Ex Quay Duty Paid, DDP-Delivered Duty Paid, DDU-Delivered Duty Unpaid) exporters responsibility to bring goods to thecountry of destination

EXW- minimum responsibility of exporterDDU-hi hest res onsibilit of ex orter


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is break down of total cost into categories, such as production, cost ofsale, marketing, promotion and shipping.

Following elements are included

Product Cost

Cost of Sales and Promotion

Preparation for Transport

Other Costs of Preparation for Transport

Inland Transportation Costs

Port Charges and loading

Main Carriage

Insurance Coverage

Unloading Charges

Import Duties and Delivery

Export Financing Cost


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Market Skimming- charging premium prices from a particular set ofcustomers to maximize profits from a relatively low sales volume

Market Maintenance Pricing- firm decreasing its prices to gain a

market share

International Pricing Constraints- three price constraints that areanti dumping, resale price maintenance, price ceiling & level to beconsidered.


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Determining the Export Cost- all real costs to be included andprofit margin being added

Elaborating the Pricing Strategy- internal, market, environmental

factors to be considered

Assessing the Transaction- transaction assessed takingconstraints into account.


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Time and risk closely linked

Variables: Economic downturns, civil unrest

Currency changes, currency shortages

Volatility of commodity prices

Longer term increases financing costs Funds committed for longer term

Greater risk

Higher reserve requirements

Management and monitoring

Short term financing extends to maximum limit of24 months


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Choose the financial solution that best suitsa companys needs

Various tools and term available Right choice is key to transaction success

and trading relationship Payment delays and risk Cash flow challenges


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Payment methods effectively become financing solutions

Documentary collections and letters of credit chosenbecause they often satisfy the needs of both buyer andseller

Nature of transactions need to be considered before

choosing payment and/or financing methods


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Cash in Advance Open Account

Exporter Importer

Most secure

Least secure

Importer Exporter


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Cash in advance

Open account

Sale of foreign receivables for cash

Import financing

Bank financing

Supply chain finance


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Determining factors in choosing payment methods

Low Medium High

Relationship

Expertise

New

Proven

Evolving

New relationship, low expertise in trade,represents highest risk


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Intended to finance operations and increase investmentin inventory to expand exports

Type and amount of lending takes into accountcommercial performance, financial health and client list

Secured by charge against receivables, inventory andother assets

Margin for lending Export credit insurance


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Outright purchase of receivables at a discount

Factoring company pays seller for receivable, buyer pays

factoring company when invoice is due Factor assumes credit risk of invoice and pays seller, less

a discount (non-recourse)

Restrictions for certain buyers or countries based onhistory and ability to collect payables

Expensive: Discount can be 1-9% of invoice, plus 10%holdback


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Similar to factoring except seller sells a purchase order

Financing agency buys goods and sells to purchaser

Useful when seller has firm order from reputable buyerbut cant complete manufacture or delivery of goods

Allows access to financing earlier in the transaction cycle

Last resort financingvery expensive; for sales with highprofit margin


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Useful for receivables from proven buyer where lender isfamiliar with exporters business

On recourse or non-recourse basis to exporter Reduces pressure on operating lines and improves cash

flow and exporting capacity

Usually results in most risky receivables remaining on

exporters books


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used to support capital goods and services Larger value transactions from $50,000 to millions

Financing provided by banks, other financialinstitutions, or by ECAs, directly or collaboratively

Time period 2-7 years for medium term and 7-15for long term


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Buyer credits Financing for exports through loan to buyer

Direct loans

Negotiated between lender and foreign buyer on

individual basis to meet terms of underlyingcommercial transaction

Line of creditallocations

Used to avoid lengthy and costly negotiations of directloan financing

Supplier

credits

Financing arranged with the exporter which has

extended terms of credit to the buyer (importer)


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Whether a Buyer Credit or Direct Loan, the lendingagreement has several major components

Identity of the borrower and guarantor

Loan amount and related costs/expenses

Security and disbursement conditions

Borrower covenants

Event of default

Jurisdiction and governing law


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Interest for entire term is deducted in advance whendiscounting

Higher yield to lender and greater costs to borrower atmaturity

Used for larger transactions covered by series ofpromissory notes maturing semi-annually for 2-5 years,sometimes only one year

Notes avalized by buyers bank and guaranteed

Guarantee must be unconditional, irrevocable and

transferable


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Advantages Quick source of cash

No need for export credit insurance

Eliminates collection and administration tasks

Eliminates commercial, political and foreign exchange risks

Offers possibility of 100% financing

Disadvantages Not readily available to small businesses

Difficult to arrange for medium-sized ones Costs often higher than conventional financing


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Ownership of goods stays with lender (lessor)

Use of goods transferred to borrower (lessee)

Retained ownership of goods allows lender to extendlease financing to otherwise unsuitable borrower

Leases generally fall into two classes Operating lease

Financial lease

Off-balance sheet financing

Potential tax advantage


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Specialized form of lending for specific circumstances

Employed for larger capital purchases

Rarely funded entirely by a single bank

Lenders secure loans by using cash flow and collateralfrom project plus undertakings and guarantees by projectsponsors

Substantial risk

Typically require project feasibility study


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Foreign aid agencies channel financial assistance to thesupply of products

Combine, to varying degrees, elements of aid withpolitical objectives

Suppliers (exporters) must demonstrate technical abilityand competitiveness and minimum level of local content

Exporters will usually have previous experience incommercial or ECA funded transactions


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Stimulate economic activity and foster development

Operate with funds contributed by member countries Annual capital subscription

Special contributions to concessional (low-interest) funds

Technical assistance programs

Lend funds to developing countries to purchase goodsand services needed to complete projects


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Multilateral development institution affiliated with UnitedNations (UN)

Central planning and funding agency for technicalassistance provided by the UN

More than 130 countries make contributions

Financing to support international trade in professionalservices

Developing country issues tenders and reviews foreignsupplier service offers; winner performs services andreceives payment from UNDP


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EXPORT CREDIT ANDINSURANCEAGENCIES


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The Berne Union 1934 (52 members) international organisation of public and private sector providers of

export credit and investment insurance.

The Private Sector (leading providers)

Atradius Netherlands

Coface France

Euler-Hermes Germany

American International Group - USA

Borders blur Notion of providing services (export credit insurance, guarantees&

finance) globally


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Legislative Review Periodic legislative review is common among the public- sector ECAs.

Export Development Canada (EDC) Parliamentary review Export Finance Insurance Corporation (EFIC) Australian

Parliament

U.S. EXIM Bank Congressional review The OECD arrangement Organization of Economic Cooperation and Development sets forth

generous export credit terms for its members (minimum interest,appropriate risk fees and maximum repayment terms)

Member Countries: Australia, Canada, European community, Japan,

Korea, New Zeland, Norway, Switzerland and United States Corporate Social Responsibility Support Greener cleaner and environmentally friendly businesses

Note: ECAs are also subject to regulations set by World TradeOrganization


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Privatization of ECAs or aspects of their operations is anacknowledged trend. Example;

EDC operates on commercial principles but can secure financing

at favorable rates due to its Crown status. It means that market treats EDC as sovereign or government risk

not as commercial risk.


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Financing

Insurance and guarantees

Investment Solutions

Advisory services Export and trade promotion


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Financing Financing major projects for governments

Financing banks that act in import/export transactions

Financing the importer/exporter directly

Insurance and guarantees Risk and non-payment insurance

Bid and performance bonds

Insure foreign receivables

Insure against wrongful claims


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Investment Solutions Funding start-up businesses to support foreign investors

Foreign investment insurance (to protect against war,expropriation and nationalization)

Advisory services Advice and counsel on international markets while offering

financing and risk-mitigation solutions

Export and trade promotion

ECAs act as de factotrade experts to facilitate international tradeopportunities


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Credit Insurance (CI) protects exporters against non-payment of export receivables by foreign importers.

Things to consider while purchasing CI;

Risks covered by insurer (political, commercial)

Extent of risk covered (90/10 rule)

The premiums charged

Services provided by insurer viz-a-viz credit reports and

analysis, country-risk information


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Thanks

Good luck for the

exams !!!

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