Finance of International Trade

Đinh Trần Thanh Mỹ

Faculty of International Business
 Supplementary reading

- ICC (2007), “Uniform Customs and Practice for Documentary

Credits - UCP 600”, ICC Publication No. 600, 2007 Revision.
- ICC (2013), “International Standard Banking Practice – ISBP 745”,
ICC Publication No. 745 , 2013 Revision.
- ICC (1995), “Uniform Rules for Collections - URC 522”, ICC
Publication No. 522 , 1995 Revision.
- Technical Officers of Global International Trade & Business
Finance, National Australia Bank Ltd. (2000), “Finance of
International Trade”, 9th Edition, National Australia Bank.
- Edward G. Hinkelman (2010), “A Short Course in International
Payments”, 4th Edition, World Trade Press.
 Course content

1 • Introduction to International Trade Finance

2 • Commercial and Financial documents

• Payment currency and foreign exchange risk

3 management

4 • Terms of Payment – Place and Time of payment

5 • Terms of Payment – Methods of payment

6 • Finance for Importers and Exporters

 Class schedule
Week Subject(s) Remarks
1 Introduction to the course
Chapter 1 – Introduction to International Trade Finance
2 Chapter 2 – Financial documents ULB 1930
3 Chapter 2 – Commercial documents Incoterms 2020
4 Chapter 3 – Payment currency in international trade and foreign
exchange rate
5 Chapter 3 – Foreign exchange rate risk management
6 Chapter 4 – Place and Time of payment
7 Chapter 5 – Method of payment: Remittance and Open Account
8 Chapter 5 – Method of payment: Collection and Cash against URC 522
Documents
9 Midterm exam – Covers week 1-8
10 Chapter 5 – Method of payment: Documentary credit UCP 600
11 Chapter 5 – Method of payment: Documentary credit (cont.) ISBP 745
12 Chapter 5 – Method of payment: Documentary credit (cont.) URR 525
13 Chapter 5 – Method of payment: Documentary credit (cont.)
14 Chapter 6 – Finance for Importers and Exporters
15 Review & Midterm exam – Covers week 10-14
Any questions?
 “Tell me and I’ll listen.

Show me and I’ll understand.

Involve me and I’ll learn.”

Chapter 1

INTRODUCTION TO FINANCE
OF INTERNATIONAL TRADE
 Background of International Trade
Country 1

Country 2

Country 1

Country 2
Country 3

Country 3
Country 4

Country 4
Without Trade With Trade
Small national markets. Increased competition.
Limited economies of Economies of scale.
scale. Specialization.
High prices and near Lower prices.
monopoly. Interdependencies
Limited product
diversity.
 The drivers of globalization

Integration Production Transportati Transactions

Regulatory Supply on Information
chains. chains. Transport chains (ICT).
Harmonizatio Offshoring. chains. Capital for
n of Global Containerizati investments.
regulatory production on. Credit for
regimes. networks. Transborder transactions.
Trade transportation
agreements. .
The “Four Ts” in International Trade

Transaction
costs

Tariff and non-tariff Internationa Transport costs

costs
l Trade

Time costs
International Trade
 Background of international payment

The
International International
independence
economics trade finance &
between
relations payment
countries
 International payment

- International payment is the payment of the monetary

transactions related to the economic relations, trade and other
relations between the organizations, companies and other entities
across countries (Đinh Xuan Trinh, 1996).
- International payment is refer to payments (payments, receiving,
beneficiary) between the owners of this country with the subject of
other countries and with international organizations (Vo Thi Thuy
Anh, 2011).
Payment currency in international payment
Risk of non-payment in international payment
 International payment

* Some notes:
- Exporters want to be paid when their goods have been shipped or
dispatched
- Importers want to be received goods that conform to what has
been ordered
- Commercial banks play an important role in international trade –
intermediaries between importers and exporters
- Banks have correspondents in most countries, through whom they
dealt with the counter parties
 Characteristics of International payment

- Int’l payment occurs in global and serves trading transactions,

investments, int’l cooperation through a banking network.
- Int’l payment is related to the currency exchange between
countries.
- Currencies in int’l payment are payment instruments: bill of
exchange, promissory note, check, telegraphic transfer, mail
transfer…
- Payment between countries is carried out through banks and
there is non-cash transaction.
- Payment is based on laws and international customs and
practices of international trade.
 Risks in international trade

Trading internationally involves risks beyond the

normal risks of doing business in domestic markets
 Risks in international trade

• Weak partner
• Operational problems
Commercial • Timing of entry
Risk
• Competitive intensity
• Poor execution of strategy

• Cultural differences Risks in Currency • Currency exposure

• Negotiation patterns Cross- • Asset valuation
Cultural Risk International (Financial )
• Decision-making Risk • Foreign taxation
styles
Trade • Inflationary and trans
• Ethical practices pricing

• Government intervention protectionism ,

and barriers to trade and investment
• Bureaucracy, red tape, administrative delays, and
Country corruption
Risk
• Lack of legal safeguards for intellectual property
rights
• Legislation unfavorable to foreign firms
• Economic failures and mismanagement
 Risks in international trade

1. Cross-cultural risk: a situation or event where a cultural

miscommunication puts some human value at stake
2. Country risk: potentially averse effects on company
operations and profitability holes by developments in the
political, legal, and economic environment in a foreign
country
3. Currency risk: risk of adverse unexpected fluctuations in
exchange rates
4. Commercial risk: firms potential loss or failure from poorly
developed or executed business strategies, tactics or
procedures
 Cross-cultural risk

• Differences in language, lifestyles, attitudes, customs and

religion, where a cultural miscommunication jeopardizes a
culturally-valued mindset or behavior.
• Cultural blunders-hinder the effectiveness of foreign
managers.
• Language-critical dimension of culture-a window to people’s
values.
• Language differences impede effective communication.
• Cultural differences may lead to suboptimal business
strategies.
 What is country (political) risk?

Exposure to potential loss or adverse effects on company operations

and profitability caused by developments in a country’s political
and/or legal environments.
• Every country is characterized by diverse political and legal systems
that pose significant challenges for company strategy and
performance, as managers must adhere to business laws and
regulations.
• Preferential subsidies, government incentives, and protection from
competition reduce business costs and influence strategic decision
making.
• Governments encourage domestic investment from foreign MNEs
by offering tax holidays and cash incentives to employ local workers.
 Country risk

Sources of country
risks

Political system Legal systems

- Laws, regulations and rules that
- Government
aim to:
- Political parties
- Ensure order in commercial
- Legislative bodies activities
- Lobbying groups - Resolve disputes
- Trade unions
- Protect intellectual property
- Other political institutions
- Tax economic output
 Key concept

• Protectionism refers to national economic policies designed to

restrict free trade and protect domestic industries from foreign
competition.
• Government intervention arises typically in the form of tariffs
(duty), nontariff trade barriers (e.g. quote), and investment
barriers (target FDI).
• Tariff is a tax imposed on imports, effectively increasing the cost
to the buyer.
• A nontariff trade barrier refers to a government policy,
regulation, or procedure that impedes trade.
• Quota is a quantitative restriction placed on imports of a
specific product over a specified period of time.
 Political risk

• Political stability refers to the likelihood or the probability of a

country’s involvement in, or being affected by, acts of terror, war
or internal violence from groupings within the country from other
nations
• Social stability is a sociological perspective that states a group
always seeks to maintain equilibrium by forcing out ideas and
individuals that disagree with popular opinion. This helps keep
society in balance and promotes harmonious coexistence. A lack
of social stability causes revolution and unrest in the group
• Economic stability refers to an absence of excessive fluctuations in
the macro economy. An economy with fairly constant output
growth and low and stable inflation would be considered
economically stable.
=> Finding country information before doing business internationally
 Currency risk

- Currency risk-arises from changes in the price of one currency

relative to another → complicates cross-border transactions →
impacts firms with foreign currency obligations (one of the four
types of risks in international business)
- The risk contains financial loss to organizations, appearing as a
result of instability and losses in the financial market produced by
changes in interest rates, currencies, stock prices and much more
+ If supplier’s currency appreciates; you may need to hand
over a larger amount of your currency to pay for your purchase.
+ If buyer’s currency depreciates; you may receive a smaller
payment amount in your currency (sales price was expressed in the
customer’s currency).
 Currency risk (Financial risk)

• Risk of adverse exchange rate fluctuations, inflation and other harmful

economic conditions create uncertainty of returns.
• When currencies fluctuate significantly, the value of the firm’s assets,
liabilities and/or operating income may be substantially reduced.
• Traditionally, currencies are divided into 2 groups: “strong” currencies
and “weak” currencies
US dollar USD Japanese yen JPY
Euro EUR Chinese yuan CNY
Pound sterling GBP Swedish krona SEK
Swiss franc CHF HongKong dollar HKD
Canadian dollar CAD Franc FRF
 Commercial risk (purchaser risk)

- Commercial risk refers to probable losses arising from the

market or the transaction partners.
• Less than optimal formulation and/or implementation of
strategies, tactics or procedures, e.g. partnering selections,
market entry timing, pricing, product features, and promotional,
themes.
• Risk of the buyer going to bankruptcy or being in any other way
incapable of fulfilling the contractual obligations
• Absence of information about global market, cannot accurate
the region of sales -> failure in international business
• Failures in international markets are far more costly than
domestic business blunders.
 How to mitigate risks in International Trade

For the buyer

- Deal with seller with sound reputation or established track record.
- Request for performance guarantee to avoid non-performance risk
- Agree on more secure methods of payment such as documentary
credit or open account
- Acknowledge and respect cultural differences with the seller
- Buy and sell in same currency to minimize foreign exchange risk.
Alternatively, the buyer can hedge against foreign exchange risk by
entering a forward or option foreign exchange contract with a bank
- Ensure sufficient insurance coverage against transit risk
- Always have a contingency plan against unfavorable events
 How to mitigate risks in International Trade

For the seller

- Deal with buyer with sound reputation or established track records.
- Engage a reputable credit agency or credit insurer to minimize
buyer’s insolvency or credit risk
- Engage on more secured methods of payment such as
documentary credit or advance payment
- Avoid granting excessive credit period or limit to the buyer
- Ensure that the sales contract or documentary credit does not
contain ambiguous or erroneous terms and conditions that are
subject to future disputes
- Acquire sufficient knowledge in document preparation to mitigate
against documentation risk
 How to mitigate risks in International Trade

For the seller

- Acknowledge and respect cultural differences with the buyer
- Buy and sell in same currency to minimize foreign exchange risk.
Alternatively, the seller can hedge against foreign exchange risk by
entering a forward or option foreign exchange contract with a bank
- Ensure sufficient insurance coverage against transit risk
- Engage a representative in the buyer’s country to deal with the
goods or relevant parties in case of non-payment or non-acceptance
by the buyer and always have a contingency plan