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Foreign Exchange Risk Mitigation Techniques

Unit 2.1- Foreign Exchange Risk Mitigation Techniques
The globalization of business generates foreign currency risks. This process is irreversible and critical to the survival of most industries and businesses. The “globalization process” affords enormous opportunities to diversify business risk, generate economies of scale and capture additional market share.

Companies can no longer state “Our company deals only in US dollars” since this approach is not sustainable in global trade. It is estimated that 40% of all international trade is denominated in foreign currency. Trillions per day move through the foreign exchange markets. Political factors determine that not all currencies are convertible. Commercial trade is full of challenges, many of which may be overcome by utilizing the options available in this section.

Unit Objective
The goal of this material is to introduce you to mitigation techniques and their required documentation related to foreign exchange (FX) risk. By the end of this unit your will be able to:
 * identify foreign currency risk.
 * identify the different instruments available in the FX market to hedge FX risk.
 * identify the features of a FX spot transaction and the documentation required for a spot transaction.
 * describe transfer pricing and its use as a FX risk mitigation tool.

Unit Outline

 * Introduction
 * Rates of Exchange
 * Market Drivers
 * Measuring FX Exposure
 * Business Needs for Foreign Currency
 * Foreign Exchange Trading
 * Common Instruments to Offset Risk
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/02/01: Knowledge of foreign exchange risk mitigation techniques and required documentation (e.g., hedging tools, currency option contracts, transfer pricing)

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Trade Finance/Commercial Risk

Module Introduction
The objective of this module is to research and analyze credit history and payment capacity of potential buyers/partners to assess the commercial risk of a buyer and maintain credit management and control procedures and documentation.

This resource on international finance is focused on the global business professional who is a generalist who may be involved in the sale of goods and/or services internationally. A global business professional needs to be able to research and analyze the credit history and payment capacity of potential buyers/partners in order to assess the commercial risks of buyers and maintain credit management and control procedures and documentation. This statement can seem overwhelming to those who are new to international finance [business]. We will break it down into pieces and discuss each piece.

The section on researching and analyzing payment capacity of potential buyers considers the most frequently used tool to perform such an analysis, the credit report.

The second part considers the aspects of risk. Assessing the commercial risks of a buyer is assessing a credit history. If you have a credit card or a loan, you as an individual have a credit history. This credit history was created by how well you paid your credit card bills or your car loan payment or your mortgage each month. With the onset of the Internet, you may have seen commercials for yourcreditreport.com or commercials that show a couple who want to buy a house and learn that their credit report does not show favorable repayment histories, so they can’t buy their dream home. Now, consider a business that wants credit in order to obtain goods without having to pay in advance. The concept is similar, but the process and the data used to assess a business to see if it has a track record of repaying business obligations is a little different.

The last part about maintaining credit management and control procedures and documentation involves the number of credit transactions a business might need to process as well as the process for managing credit decisions. These processes should be documented because extending business-to-business credit (selling on open account) can be quite complex, depending on the amount of credit, how long the buyer wants the credit for, whether a buyer and a seller are located in the same country, and what information is available.

Some may argue that the topic of credit reports alone can be a small course in itself. In this module, the focus is on the following topics:
 * the purpose of the credit report and what the data means to both a seller and a buyer.
 * the sources of credit reports. When it comes to commercial credit reports, it isn’t quite as simple as logging onto yourcreditreport.com. This module reviews several sources of credit that a seller or lender might use to research a credit history.
 * credit information and risk assessment. Once you locate a credit report for a buyer, you need to interpret the information in context with the potential risk of a buyer faulting or not repaying.
 * risks associated with methods of payment. A buyer wishing credit may have a great track record when it comes to short-term credit lines but not when it comes to long-term repayment. If a buyer needs long-term credit, the possibility of nonpayment increases  since over longer periods of time the uncertainty regarding a buyer’s ongoing creditworthiness is greater. There are options for a seller and a buyer. Modules 7 and 8 provide more details on short, medium and long-term financing whereas this module will just provide an introduction to some types of payment and not necessarily terms.
 * risk mitigation techniques. The methods of payment are actually one way to mitigate the risk that a seller may not be repaid by a buyer. However, there are some more commonly used techniques that will be introduced here.

Module Sections

 * Unit 3.1: Sources of Credit Reports
 * Unit 3.2: Costs and Value of Credit
 * Unit 3.3: Effects of Late or Non-payments
 * Unit 3.4: Payment Methods for International Transactions
 * Unit 3.5: Mitigating Techniques for Commercial Risk

About this Resource
These resources were developed by MSU Global with funding provided by a U.S. Department of Education, Business in International Education Title VIB grant.

license: Creative Commons - Attribution Share-Alike - https://creativecommons.org/licenses/by-sa/4.0/

title: Trade Finance/Commercial Risk


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Sources of Credit Reports

Unit 3.1- Sources of Credit Reports
This unit describes the purpose and components of credit reports. There are different perspectives when it comes to credit reports: from an individual, from a seller--business/ commercial-- or from a financial institution such as a bank.

The focus here is on the seller’s perspective. Assume that a person or persons within a business are responsible for assessing whether a buyer ( an individual, another business) has a credit history that demonstrates whether this party or parties can and will make payments accordingly. The credit report is obtained from a source outside the seller’s business. This type of information is contained in external credit reports.

The persons who request credit reports and analyze them have many titles--for example, analyst, credit manager, international credit manager. To keep things simple, assume that this  person is an  international credit manager (ICM).

In order to convey the purpose of a credit report, the following topics are presented:
 * the definition of a credit report and its components
 * purposes of a credit report
 * influences on a credit report.

Unit Objective
The goal of this material is to introduce you to credit reports, their purpose, uses, and components. This information will also identify reliable sources for credit report information for international transactions. By the end of this unit you will be able to
 * define a credit report and its purpose.
 * recognize components of credit reports.
 * identify reliable sources of credit information.

Unit Outline

 * Introduction
 * Credit Report Components
 * Purpose of a Credit Report
 * Direct Sources of Credit Information
 * Other Sources of Direct Investigation
 * Indirect Sources of Credit Information
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/03/01: Knowldege of sources of credit reports (e.g. credit bureau, D&B, Hoovers, US Department of Commerce, International Company Profile)

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title: Sources of Credit Reports


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Costs and Value of Credit

Unit 3.2- Costs and Value of Credit
Credit reports are an important investment of international managers to make. Although sometimes costly, offering payment terms to new international customers without conducting the appropriate due diligence can be much more costly in the long run. Assessing the type of credit reports to obtain and the necessary data to evaluate with help justify this cost.

Unit Objective
The goal of this material is to introduce you to the cost of credit reports used when extending appropriate payment terms to international customers. This information will also provide you with an understanding of the value of information provided in a credit report. By the end of this unit you will be able to
 * identify the cost of credit reports.
 * identify the value of the information contained in the credit report.

Unit Outline

 * Introduction
 * Credit Report Assessment Factors
 * Summary
 * Resources
 * Activities
 * Assessment

Resources
Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/03/02: Knowldege of costs, usage and value of credit reports)

title: Costs and Value of Credit


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Effects of Late or Non-payments

Unit 3.3- Effects of Late or Non-payments
Now that you know what a credit report is and what kind of information might be included in a credit report, the next step is to perform a credit risk assessment.

The principles of risk assessment are particularly critical for several reasons; but, most importantly, any extension of credit requires an analysis of a buyer requesting credit and a determination as to the level of risk associated with a buyer’s financial ability to pay a seller according to terms.

The risk, specifically commercial risk, associated with an international market is very important. In dealing with global or international markets, the assessment of a buyer takes on another dimension, the dimension of being international, namely, the risk of selling and getting paid in a timely manner when a buyer is in a country different from a seller.

Commercial risk in international markets refers to the same situation encountered in the domestic market, which is the risk of late/non-payment by a (foreign) buyer or intermediary for goods shipped/services completed, resulting from
 * insolvency or bankruptcy of a buyer
 * a buyer’s failure to pay for goods/services per the due date of the agreed upon payment terms
 * a buyer’s failure or refusal to accept the goods that were shipped or the services provided as agreed in the contract.

When performing a risk assessment, sellers must consider the implication of selling into the international market. A seller must take into account factors that exist in global transactions, but not in domestic sales. Such factors include changes in country governments, currency values, economic and cultural issues. Assessing political and economic risks and cultural issues of other countries is discussed in detail in Module 1, so here you will find highlighted only a few points in context with granting credit.

The bottom line point is that risk assessment is important because the impact of non-payment to a seller may result in cost of money and bad debt events.

Unit Objective
The goal of this material is to describe for you the commercial risks and the effect of late and/or nonpayment from overseas buyers. By the end of this unit you will be able to
 * identify commercial risk.
 * identify the tenets of risk assessment.
 * identify the “Eight C's" of credit risk assessment for the global seller.
 * identify the impact of nonpayment.

Unit Outline

 * Introduction
 * /Tenets of Risk Assessment/
 * /Risk and Reward/
 * /"Eight C's" of Credit Risk Assessment for A Global Seller/
 * /The 5 "C's" (Domestic and International)/
 * /The 3 "C's" (International)/
 * /Applying the "C's"/
 * /Impact of Nonpayment/
 * /Identifying Costs/
 * /Bad Debt Value/
 * /Interest/
 * /Opportunity Cost and Alternate Use of Capital/
 * /Administrative/
 * /Summary/
 * /Resources/
 * /Activities/
 * /Assessment/

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/03/03: Knowldege of commercial risks of late and/or non-payment from overseas buyer)

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title: Effects of Late or Non-payments


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Payment Methods for International Transactions

Unit 3.4- Payment Methods for International Transactions
The uncertainty of international sales reinforces the earlier discussion regarding sources of credit information. A significant reason for obtaining and effectively utilizing sources of information is to make the best decision for a seller as far as what payment terms are most appropriate, payment terms that minimize risk while allowing a seller to be competitive in the market place. Each of these payment terms can be measured by levels of risk, and an international credit manager needs to be in a position to understand and describe these methods of payments. The concept of extending credit in the international environment requires than an international credit manager learn methods for mitigating payment risks for the organization. One way to do so is with different methods of payment.

There are a variety of payment methods available for international transactions. Some companies, who are new to selling in overseas markets, believe that the letter of credit or some type of secured transaction is the “best” (or only) way to transact business when selling offshore. However, a pro-active international credit manager recognizes that in an attempt to obtain new business, many different payment terms are important in a competitive business environment. The ways these terms apply as they relate to a seller’s risk of receiving payment from a buyer are examined in this lesson.

Unit Objective
The goal of this material is to introduce you to the methods of payment available for international transactions and the risks to buyers and sellers for each method of payment. By the end of this unit you will be able to
 * identify the methods of payment available for international transactions.
 * identify the risks to a buyer associated with each method of payment.
 * identify the risks to a seller associated with each method of payment.

Unit Outline

 * Introduction
 * Methods of Payment
 * Comparing Methods of Payment and Risk
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/03/04: Knowledge of methods of payment (e.g., letters of credit, documentary collection, cash in advance, sight draft)

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Mitigating Techniques for Commercial Risk

Unit 3.5- Mitigating Techniques for Commercial Risk
This lesson discusses what an international credit manager might do to mitigate the risk of nonpayment and when to do it. An international credit manager, to be successful in global business, needs to be able to identify and describe techniques for managing nonpayment risk.

There are four types of reactions to risk situations that a seller or exporter can take regarding nonpayment by the buyer:
 * Avoidance: Don’t sell on credit.

 * Transference: Ask a third party to assume the risk, such as a buyer’s bank.

 * Mitigation: Take precautions that reduce the probability that nonpayment will occur, such as performing a complete credit check.

 * Acceptance: Establish a contingency allowance for nonpayment accounts.

Sellers will use all of the above depending on the buyer and the specific circumstances associated with the sale. This section provides a brief summary of the following techniques used for responding to and managing the risk of nonpayment.

Unit Objective
The goal of this material is to introduce you to mitigating techniques for commercial risk associated with international transactions. By the end of this unit you will be able to
 * identify techniques for mitigating commercial risk.
 * identify when to use each technique.

Unit Outline

 * Introduction
 * Commercial Banks-Mitigation
 * Loans
 * Letter of Credit
 * Documentary Draft Collection
 * Accounts Receivable Financing-Transference or Mitigation
 * Governments-Transference
 * Factoring-Transference
 * Forfaiting-Transference
 * Banker's Acceptances-Transference
 * Credit Insurance-Mitigation
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/03/05: Knowldege of mitigating techniques (e.g., credit risk insurance from Overseas Private Investment Corporation (OPIC) and U.S. Export-Import (Ex-Im) Bank)

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User:Thrash823

Hello. I'm kev. I love learning. Teach me.

title: User:Thrash823


text:
Costs and Value of Credit Reports

Unit 3.2- Costs and Value of Credit
Credit reports are an important investment of international managers to make. Although sometimes costly, offering payment terms to new international customers without conducting the appropriate due diligence can be much more costly in the long run. Assessing the type of credit reports to obtain and the necessary data to evaluate with help justify this cost.

Unit Objective
The goal of this material is to introduce you to the cost of credit reports used when extending appropriate payment terms to international customers. This information will also provide you with an understanding of the value of information provided in a credit report. By the end of this unit you will be able to
 * identify the cost of credit reports.
 * identify the value of the information contained in the credit report.

Unit Outline

 * Introduction
 * Credit Report Assessment Factors
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/03/02: Knowldege of costs, usage and value of credit reports)

title: Costs and Value of Credit Reports


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Trade Finance/Payment Methods

Module Introduction
The objective of this module is to establish the most appropriate methods and terms of payment and required documentation to ensure timely payment for the sale of goods and/or services and to facilitate external financing.

This resource on international finance is focused on the global business professional who is a generalist who may be involved in the sale and/or purchase of goods and/or services internationally. It is essential that a global business professional understand and be able to use the methods of payment available for international business transactions, the documentation required to obtain or initiate payment, and the risks involved. This module consists of nine units and is the largest module in this International Finance resource. It might seem overwhelming to those who are new to international finance/business; however, by working through each of the units in this module, you will see the scope more clearly.

Accountants have a saying, “A sale isn’t a sale until the money is in the bank.” To ensure that international sales are finalized or that the money is in the bank, as an accountant might say, a global business professional must take into consideration and understand the nine unit objectives in this module. You must have:
 * 1) knowledge of methods of payment (letters of credit, documentary collections, cash in advance).
 * 2) knowledge of commercial, economic, and political risks of buyer and buyer’s country.
 * 3) knowledge of international regulations published by the International Chamber of Commerce (Paris) governing international transactions and methods of payment (Incoterms, UCP, arbitration).
 * 4) knowledge of methods of funds remittance (checks, banker’s draft, SWIFT transfer).
 * 5) knowledge of types of letters of credit (confirmed/ unconfirmed, transferable, standby).
 * 6) knowledge of types of payment ( sight, deferred, commercial invoices, transport documents and documents relating to services).
 * 7) knowledge of documentation and requirements (e.g., commercial invoices, transport documents and documents relating to services)
 * 8) knowledge of related financial and legal costs ( bank charges, insurance premiums, legal fees).
 * 9) knowledge of communication of letters of credit, collections, and associated documents electronically via the Internet (eUCP, SWIFT).

These nine unit objectives paint a complete picture of the payment requirements, risks, methods, costs and regulations associated with obtaining or sending payment for an international transaction. The key to successfully working with this process is to have a clear understanding of the terminology associated with methods of payment (especially letters of credit). Without this, you may become confused.

Understanding how each of the unit objectives relates to and affects the others is also important. Thus you must learn the following:
 * 1) that the methods of payment create associated risks for a buyer and seller.
 * 2) that receipt of payment is often dependant on the commercial, economic and political risks evident in a country and should dictate the method of payment chosen for the transaction.
 * 3) that because companies operate in sovereign states that have different laws, the ICC has established guidelines to help businesses cross borders and interact on a global basis.
 * 4) that the way money is remitted must be stated along with the method of payment.
 * 5) that there are safeguards available to reduce risks for the buyers and sellers through letters of credit as well as other means.
 * 6) that knowing the date when the money will be remitted is critical.
 * 7) that ultimately the funds will not be remitted if the appropriate documentation is not presented by the right party who is responsible for creation of the documents.
 * 8) that, unless you are receiving payment in cash that has been stuffed into a suitcase, funds and documents will be transmitted using service providers such as banks, who must be paid for their services; and, depending on their level of involvement, these fees, whether minor or significant, will ultimately affect the profitability of a transaction if not taken into consideration.
 * 9) that global business is now taking advantage of technology and utilizing the internet not only for research but also for document transmission with guidelines for methods of payment which have been updated to include this process.

Module Sections

 * Unit 4.1: Methods of Payment
 * Unit 4.2: Buyer's Risks
 * Unit 4.3: International Regulations
 * Unit 4.4: Funds Remittance
 * Unit 4.5: Letters of Credit
 * Unit 4.6: Types of Payments
 * Unit 4.7: Payment Documentation Requirements
 * Unit 4.8: Financial and Legal Costs
 * Unit 4.9: Electronic Communications

About this Resource
These resources were developed by MSU Global with funding provided by a U.S. Department of Education, Business in International Education Title VIB grant.

title: Trade Finance/Payment Methods


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Methods of Payment

Unit 4.1- Methods of Payment
An international manager needs to be able to describe methods and types of payment and the ways payments are communicated, both within and outside of the business organization. The application of these payment terms is critical to meeting both the business and collection goals of an organization.

Unit Objective
The goal of this material is to introduce the methods of payment available to buyers and sellers conducting international transactions. By the end of this unit you will be able to:
 * identify the methods of payment available for international transactions.
 * determine when to apply different methods of payment.

Unit Outline

 * Introduction
 * Cash in Advance (Prepayment)
 * Documentary Collections
 * Letters of Credit
 * Open Account
 * Combining Methods of Payment
 * Summary
 * Resources
 * Activities
 * Assessment

Resources
Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/04/01: Knowledge of methods and costs of payment (e.g., letters of credit, documentary collections, cash in advance, time draft, banker's acceptance)

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title: Methods of Payment


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Buyer's Risks

Unit 4.2- Buyer's Risks
An international manager needs to avoid the main pitfalls of country risk assessment by looking for information in a variety of places, conducting relevant analysis, and changing opinions if necessary. A company must set acceptable risk objectives based on its reward goals and risk tolerance. The key to reducing risk is a thorough assessment of the country and customers. Maintaining a systematic approach for each customer and country in this analysis will assure that each evaluation is consistent, relevant, and objective.

Unit Objective
The goal of this material is to introduce you to the concepts of commercial, economic and political risks found in a buyer’s country, including understanding these risks and their effect on timely payment and financing international transactions. By the end of this unit you will be able to:
 * identify commercial risk and its impact on timely payment of international transactions.
 * identify economic risk and its impact on timely payment of international transactions.
 * identify political risk and its impact on timely payment of international transactions.

Unit Outline

 * Introduction
 * Ensuring Timely Payment
 * Facilitating External Financing
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/04/02: Knowledge of commercial, economic, and political risks of buyer and buyer's country.

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title: Buyer's Risks


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International Regulations

Unit 4.3-International Regulations
An international manager should understand the organizations that create international financial regulation. In addition, identifying the various options available in these organizations provides an opportunity to improve chances for timely payment from their buyers.

Unit Objective
The goal of this material is to introduce you to the regulations published by the ICC governing and affecting methods of payment such as the Incoterms and UCP. By the end of this unit you will be able to:
 * identify the international regulations published by the ICC.
 * recognize the UCP and its affect on methods of payment.
 * recognize the Incoterms and their effect on methods of payment.

Unit Outline

 * Introduction
 * ICC
 * Uniform Customs and Practice (UCP) for Documentary Credits
 * Uniform Customs and Practice-Electronic Supplement (eUCP)
 * Uniform Rules for Collections
 * ICC International Court of Arbitration
 * INCOTERMS
 * WTO
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/04/03: Knowledge of international regulations published by the International Chamber of Commerce (Paris) governing international transactions and methods of payment (e.g., Incoterms, UCP, arbitration, Uniform Rules for Collection)

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Funds Remittance

Unit 4.4-Funds Remittance
The following funds remittance tools are used to move funds between buyers and sellers, they are not methods of payment but can be used in conjunction with various methods of payment.

Unit Objective
The goal of this material is to introduce you to the methods by which funds are remitted for payment of international transactions. By the end of this unit you will be able to identify funds and remittance methods, their risks and characteristics.

Unit Outline

 * Introduction
 * Checks
 * Banker's Drafts
 * Electronic Funds Transfers
 * Money Orders
 * Cash or Bank Notes
 * Credit Cards
 * SWIFT
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/04/04: Knowledge of methods of funds remittance (e.g., checks, banker's draft, SWIFT transfer.)

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Letters of Credit

Unit 4.5-Letters of Credit
An international manager needs to be able to understand the different types of letters of credit available for use in international transactions along with the risks, costs and benefits of each. The international manager must be able to communicate these opportunities to their accounting/finance department and often to their customers. The use of these types of letters of credit may be critical in meeting both the business and collection goals of an organization.

Unit Objective
The goal of this material is to introduce you to the different types of letters of credit that are available to use for international business transactions, their risks and opportunities. This information will provide you with an understanding of the benefits of each type of letter of credit and the support they provide in obtaining timely payments for the sales of goods and/or services. By the end of this unit you will be able to
 * identify the different types of letters of credit.
 * identify the risks and opportunities for each type of letter of credit.
 * identify the appropriate transactional scenario when each could be implemented.

Unit Outline

 * Introduction
 * Letters of Credit
 * Types of Letters of Credit
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/04/05: Knowledge of types of letters of credit (e.g., confirmed/unconfirmed, irrevocable, transferable, standby, with a time draft)

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title: Letters of Credit


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Types of Payments

Unit 4.6-Types of Payments
Documentary credits and/or letters of credit are banking tools used to alleviate various levels of risk related to international business transactions. In addition to the many forms of credit-- including but not limited to irrevocable, confirmed, transferable, revolving, and standby--with each credit instrument the timing for payment must be identified. These include sight, deferred payment, acceptance and negotiation. In addition there is also much flexibility for a buyer and seller to negotiate the terms for payment. To understand this process, an international manager must be comfortable with the terminology and definitions of the parties and actions associated with this banking instrument, including but not limited to terms such as: applicant, beneficiary, issuing bank, advising bank, discrepancy and amendment.

Unit Objective
The goal of this material is to introduce you to the types of payment opportunities for international business transactions and the ways each affects the timely payment for the sale of goods and/or services, including an understanding of how and when each type of payment is utilized with the methods of payment available for international transactions. By the end of this unit you will be able to
 * identify the types of payments available for international transactions.
 * identify how each type of payment can be used.
 * identify how each type of payment affects the collections of funds.

Unit Outline

 * Introduction
 * Types of Payments
 * Negotiation
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/04/06: Knowledge of types of payment (e.g., sight, deferred, acceptance)

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title: Types of Payments


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Payment Documentation Requirements

Unit 4.7-Payment Documentation Requirements
An international manager must be able to identify major documents utilized in international trade. It is also necessary to know when and how these documents may be applied, who is responsible for creating the documents, and who uses the documents.

Unit Objective
The goal of this material is to introduce US to the documentation required to facilitate international business transactions and the way each relates to receipt of timely payment of the sale of goods and/or services in an international transaction. By the end of this unit you will be able to
 * identify the major documents utilized in international trade (commercial invoices, transport documents, etc.).
 * identify how and when they are used.
 * identify which party of the transaction is responsible for creating each document.

Unit Outline

 * Introduction
 * Required Documents and How and When to Apply Documents
 * Summary
 * Resources
 * Activities
 * Assessment

Resources
Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/04/07: Knowledge of documentation requirements (e.g., commercial invoices, transport documents and documents relating to services, inspection certificate)

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title: Payment Documentation Requirements


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Financial and Legal Costs

Unit 4.8-Financial and Legal Costs
Since an international manager is often responsible for a departmental budget, he/she must know costs of the operation. Even if an international manager has no budget responsibilities, it is important know what the costs are for related financial and legal support in order to measure successful performance. The key to being successful in this area is to understand what costs may be incurred and what specifics need to be requested from the appropriate service provider. It would impossible to provide specific costs in this context since every situation, company, and country will be different.

Unit Objective
The goal of this material is to introduce you to the financial and legal costs related to the financial aspects of international business transactions, including the ways each affects the profitability of such a transaction. By the end of this unit you will be able to
 * identify applicable financial costs.
 * identify applicable legal costs.

Unit Outline

 * Introduction
 * Bank Charges
 * Insurance Premiums
 * Export Credit Insurance
 * Legal Fees
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/04/08: Knowledge of related financial and legal costs (e.g., bank charges, insurance premiums, legal fees)

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title: Financial and Legal Costs


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Electronic Communications

Unit 4.9-Electronic Communications
Having agreed to use a letter of credit for payment in an international transaction, an international manager needs to understand how to use electronic communications for transmission of the letter of credit itself as well as the associated documentation. In addition it is essential to understand the guidelines that have been established for electronic communications and any affect this may have on smooth flow of documentation and payment.

Unit Objective
This material will introduce you to the methods by which buyers and sellers can communicate and exchange documents required by appropriate methods of payment as they relate to receipt of timely payment of goods and/or services in an international business transaction.

By the end of this unit you will be able to :

 * identify the electronic methods of communicating and exchange of documents required for the international transaction.
 * identify the risks and characteristics of each method of communication.

Unit Outline

 * Introduction
 * Communication and Technology
 * Communicating Methods of Payment and Fund Remittance
 * Communication Guidelines and Standards
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/04/09: Knowledge of communication of letters of credit, collections, and associated documents electronically via the Internet (e.g., eUCP, SWIFT)

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title: Electronic Communications


text:
User talk:Thrash823

Welcome
Hello Thrash823, and welcome to Wikiversity! If you need help, feel free to visit my talk page, or contact us and ask questions. After you leave a comment on a talk page, remember to sign and date; for it helps everyone follow the threads of the discussion. The signature icon in the edit window makes it simple. To get started, you may
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And don't forget to explore Wikiversity with the links to your left. Be bold, and see you around Wikiversity! Erkan Yilmaz ( my talk page, wiki blog ) 17:24, 25 September 2007 (UTC)

title: User talk:Thrash823


text:
Lunar Boom Town/Carbon commodity imports and futures

Carbon Commodities Dealer

Background: Carbon is extremely scarce on the moon yet it is required for everything including:  breathing, eating, carbon spacecraft components, feul (biodiesal, methane), farming, etc.

Possible sources: Earth imports, Mars (atmosphere CO2), Venus (atmosphere CO2), Titan (ambient methane), Carbonaceous Asteroids, Spacecraft waste,

Pricing: Volatile. Varies with supply and demand.


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Lunar Boom Town/Nitrogen commodity imports and futures

Background: Nitrogen is required for a breatable atmosphere for people, livestock and plants.

Customers: Air plants, farms, explosives manufacturers, fertilizer manufacturers,

Known sources: Earth atmosphere, Earth imports such as food, other?

Establishing Price: Shipping price of containerized liquid nitrogen, byproduct of food imports (amino acids have nitrogen), byproduct of some explosive imports, minute traces available from regolith processing,

Profit model. Import and resale with markup. Establish reserves. Establish commodity market. Buy low sell high. Sell options and futures.

Capital requirement: Large. Need reserve storage. Long term import transportation contracts.


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Trade Finance/Selecting Payment Methods

Module Introduction
The objective of this module is to select appropriate methods, terms, and currency of payment to agents, sales representatives, distributors, suppliers, and international joint ventures.

This resource on international finance is focused on the global business professional who is a generalist who may be involved in the sale and/or purchase of goods and/or services internationally. It is essential that a global business professional understand and be able to use the methods of payment available for international business transactions. You will need to be able to determine and select the appropriate method of payment, terms and currency that pertain to the different modes of entry available to international markets. Task 5 consists of two knowledge statements. The challenge for any global business professional in understanding this information is that decisions will be affected by the level of country and commercial risks present in the market and the product or service being offered. It is important, then, that you are comfortable with Modules 1 and 4 of this resources as well.

In this module, you will gain
 * knowledge of terms and condition of purchase or sale.
 * knowledge of resources: banks, U.S. government agencies, International Chamber of Commerce, and othersy yet that may become available.

These unit objectives provide an outline for the terms and conditions of purchase or sale as well as the resources available to support the purchase or sale. Understanding how each of the unit objectives relates to and affects the others is also important. You must
 * know the methods of payment and their associated risks for the buyer and seller.
 * be able to select the appropriate mode of entry into a market and the terms of sale, which are often dependant on the commercial, economic and political risks evident in a country and will dictate the method of payment chosen for the transaction.
 * know how the modes of entry for international transactions will dictate the ways business is conducted as well as the costs and the responsibilities for each party involved.
 * know the responsibilities of each party that should be defined clearly in a contract, realizing, however, that the rules governing such instruments are dependant on the countries and parties involved in the transactions.
 * be aware of and know how to utilize available international business resources that may reduce the risks and cost of doing business.

Module Sections

 * Unit 5.1: Terms and Conditions of Purchase or Sale
 * Unit 5.2: Resources for Selecting Payment Methods

About this Resource
These resources were developed by MSU Global with funding provided by a U.S. Department of Education, Business in International Education Title VIB grant.

title: Trade Finance/Selecting Payment Methods


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Terms and Conditions of Purchase or Sale

Unit 5.1- Terms and Conditions of Purchase or Sale
An international manager may encounter different approaches in working with international customers. Companies may use agents or manufacture representatives, while other companies utilize distributors or wholesalers. These relationships are commonly referred to as the modes of entry. The terms and conditions of the purchase or sale or goods that have been agreed to along with their advantages and disadvantages are important applications in the sales transaction process. There are three steps: 1. To understand the different modes of entry 2. To learn the commonly used terms of sale including the methods of payment 3. To understand the ways they work within commercial contracts.

Unit Objective
The goal of this material is to introduce you to the terms and conditions associated with a purchase/ sale in international business and their effect on the different relationships that are established between parties to the transaction, including agents, sales representatives, distributors, licensing, franchising and joint venture partnerships. By the end of this unit you will be able to
 * identify terms of purchase/sale.
 * identify advantages and disadvantages of terms of purchase/sale.
 * identify the different relationships that can be established between buyers and sellers.

Unit Outline

 * Introduction
 * Modes of Entry-Relationships
 * Terms of Sale – the Advantages and Disadvantages
 * Applying your Knowledge of the Advantages and Disadvantages
 * Components and Implications of Commercial Agreements
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/05/01: Knowledge of terms and conditions of purchase or sale.

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Lunar Boom Town/Outfitter Services and Supplies

Background: The moon is a very hostile place where people must immediately be working productively to survive economically. The Outfitter specializes in providing supplies and services that individual homesteads, coops and even industrial facilities need to establish a viable environment in which to live, work, and play.

Available services:
 * Available underground volume listings
 * Installation and hookup of air and water services
 * Equipment delivery and installation
 * Telemetry monitoring and alerting
 * Lunar rover listings, new and used
 * Spacesuit listing, new and used

Available equipment:
 * Air handlers and lines
 * Water handlers and lines
 * Power lines and supplies
 * Gas lines and fittings (hydrogen, methane, oxygen, carbon dioxide, chlorine, flourine, etc)
 * Flow meters, safety moniters, instrumentation, etc.
 * Radio transceivers and antennas
 * Telemetry monitoring equipment
 * Spacesuit supplies, tools
 * Lunar rover supplies, tools, options
 * Feul cells
 * Methane digesters

Operations Requirements:
 * Warehouse
 * Showroom Floor
 * Employment/Contracts with Qualified Installation and Service Technicians
 * Experienced Sales Consultants for Home and Industry Improvement projects.
 * Inventory adequate for emergency requirements
 * Stable supply and transport chain for routine requirements


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Resources for Selecting Payment Methods

Unit 5.2- Resources for Selecting Payment Methods
The world of global business is huge, to say the very least. Knowing and remembering every aspect of international business is close to impossible for any international manager. To be successful an international manager must have strong grasp of the techniques and relevant issues. One tool for success is to have a keen awareness of the resources available to help international businesses succeed and know how to find them. The categories of resources to keep in the on your list include
 * foreign government agencies
 * federal government agencies
 * state and local agencies
 * international agencies
 * industry organizations
 * private banks

Unit Objective
The goal of this material is to introduce you to the resources that are available to provide assistance in developing and successfully managing relationships between buyers and sellers in international transactions. By the end of this unit you will be able to
 * identify resources available to support international financial relationships.
 * identify advantages and disadvantages of each resource
 * describe how to find these resources.

Unit Outline

 * Introduction
 * Foreign Government Agencies
 * International Organizations
 * Industry Organizations
 * Private Banks
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/05/02: Knowledge of resources: banks, U.S. government agencies, International Chamber of Commerce.

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title: Resources for Selecting Payment Methods


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Trade Finance/Financial Plan

Module Introduction
The objective of this module is to develop a financial plan to establish whether internal/external international trade financing is required.

Module Sections

 * Unit 6.1: Resources for Developing a Financial Plan
 * Learn the benefits of Online Banking in a financial plan

About this Resource
These resources were developed by MSU Global with funding provided by a U.S. Department of Education, Business in International Education Title VIB grant.

title: Trade Finance/Financial Plan


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Resources for Developing a Financial Plan

Unit 6.1- Resources for Developing a Financial Plan
All forms of financing require financial data to be submitted and evaluated by the financier.

Financial planning demonstrates the ability based on historical data to forecast and project anticipated results. A financial plan is generally a key element of a more comprehensive business plan which covers all aspects of a company. Projections are made to see if the company can meet its objectives. The ability to understand and use the financial information contained in the plan gives outside sources, such as banks and investors, confidence. Without this understanding and confidence, an outside source will be reluctant to provide funding.

The balance sheet and income statement reveal the key financial data for a business. The two statements combined tell a story. A reader may find some aspects of these statements mysterious or confusing, and they will elicit questions that must be answered. The company’s ability to field and answer these questions to the satisfaction of that reader will determine the success of getting the financing required. The fewer the questions the better the chances are of getting funding from a bank or investor. Answering all questions does not, however, supersede the minimum requirements to become bankable: being in business for two years, having a positive net worth, and being a profitable company. These are not the only requirements; but without these at a minimum, a lender will ask for other assets or collateral. The balance sheet lists:
 * Assets consisting of:
 * cash
 * inventory
 * accounts receivable

 * Liabilities from:
 * accounts payable
 * short-term
 * long-term debt

 * Equity reflecting the owners’ investment
 * all accumulated earnings

The business plan and financial statements are prepared for internal use but are often presented to external entities to demonstrate the strength and expertise of a company. Presentation of a business plan is critical to gaining investor confidence.

Many factors may result in a company needing to borrow money. The ability to project these needs 	based on growth through a cash flow analysis or demonstrated through the planning process will convince outsiders to invest in the company. The profitability of the company should demonstrate the ability to provide a return on investment and/or pay back any debt incurred.

Unit Objective
The goal of this material is to introduce you to the resources available to aid companies in developing their financial plans for internal and external international trade financing. By the end of this unit you will be able to
 * describe the key components of a financial plan
 * identify the key financial ratios
 * identify key financial resources--the Ex-Im Bank, SBA, private banks, non-bank private sector lenders required to develop a financial plan
 * identify advantages and disadvantages of each resource
 * describe how to find these resources

Unit Outline

 * Introduction
 * A Financial Plan
 * Presentation and Customization
 * Risk Assessment and Risk Management
 * How Do I Qualify?
 * Summary
 * Resources
 * Activities
 * Assessment

Resources
Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/06/01: Knowledge of resources (e.g., Ex-Im Bank, SBA, private banks, non-bank private sector lendors)

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Trade Finance/Short-term Financing

Module Introduction
The objective of this module is to identify and arrange short-term (up to 180 days) pre- and/or post-shipment finance for a seller to ensure lowest cost financing at acceptable levels of risk.

This area of financing provides many options for an exporter and in some cases desirable financing options for an importer. It is important to remember that all options carry risk and the greater the risk the higher the cost. When evaluating risk, the associated costs must be a factor in the cost equation. The financing tools that have been presented in other sections merge at this point into potential financing options. These options include financing from vendors (suppliers), banks, insurance (making receivables eligible for financing), standby letters of credit (to provide credit terms from a seller), commercial letters of credit (under acceptance financing), government programs (pre- and post-shipment financing options) and documentary collections (under extended payment terms with an accepted draft). These options are tied to inventory and accounts receivable which are short- term in nature and turn over within a six- month period, or in some cases up to one year. Careful examination of these options is necessary to select the right option for the right price and risk level. This module will introduce you to the forms and functions of short-term financing: credit insurance, government-supported finance, discounting, time-draft letters of credit, and the Export Working Capital Program.

If you are not familiar with the basic accounting terminology covered in this module (accounts receivable, debit, credit) you need to review a basic accounting book to familiarize yourself with the terms. You will find reference to letters of credit and a variety of other payment terms covered in detail in Module 4: Payment Methods.

Module Sections

 * Unit 7.1: Forms of Short-term Financing

About this Resource
These resources were developed by MSU Global with funding provided by a U.S. Department of Education, Business in International Education Title VIB grant.

title: Trade Finance/Short-term Financing


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Forms of Short-term Financing

Unit 7.1- Forms of Short-term Financing
Short-term financing opportunities are available in a variety of ways to firms in global business. The majority of short-term transactions covered by financing are for periods of 180 days or less. Short-term financing requirements result from the need to increase inventory. Inventory is then converted to sales which, if extended payment terms are given, create accounts receivable. Inventory and accounts receivable are short-term in nature and provide a collateral base for a lender to provide financing. A company may need financing when the inventory and accounts receivable grow at a fast pace as a result of continually increasing sales. Then there is a greater need for funds to support the increase in the accounts that are growing at a faster rate than the accounts receivables can be converted to cash. The key factors in determining eligibility for short-term financing are whether the product is to be re-sold or used by the buyer. Financing is limited by the product's useful life and whether or not it is considered capital equipment or inventory. Capital equipment can usually be financed for periods greater than one year, whereas most manufactured goods and agricultural products cannot. There are always exceptions to this rule; for example, many governments promote the export of agricultural products by offering guarantees on medium-term financing. In the US, such guarantees are offered by the Commodity Credit Corporation.

Unit Objective
The goal of this material is to introduce you to the forms of short- term financing available to support international business transactions. This lesson includes an introduction to the various costs and risks of each form of financing. By the end of this unit you will be able to
 * identify short-term (180 days or less) financing opportunities (government and private).
 * identify how credit insurance is used as a form of short-term financing.
 * identify the difference between loans and guarantees.

Unit Outline

 * Introduction
 * Preparing to Borrow Needed Funds
 * Vendor Financing-Payment Terms
 * Documentary Collections
 * Bank Check
 * Personal Resources
 * Bank Financing
 * Export Credit Insurance
 * Other Guarantees Linked with an Export Product
 * Ex-Im Bank Financing (Export-Import Bank of the US)
 * Small Business Administration (SBA) of the US
 * Equity Investment
 * Earnings Requirments
 * Working Capital
 * Collateral
 * Resource Management
 * Primary Difference Between Ex-Im Bank and the SBA
 * Factoring
 * Forfaiting
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/07/01: Knowledge of forms and functions of short-term financing (e.g., credit insurance, government supported finance, discounting, time draft letter of credit, Exporting Working Capital Program.

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title: Forms of Short-term Financing


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Trade Finance/Medium- and Long-term Financing

Module Introduction
The objective of this module is to identify and arrange medium- and long-term finance for an overseas buyer (internal/external) to allow the buyer extended terms while providing cash payment to a seller without recourse.

There are fewer options in the marketplace for medium- and long-term financing of international sales. These limited options have created a need for Ex-Im Bank to provide guarantees for such programs because of the importance of increasing exports. In addition to the US Ex-Im Bank programs, medium- and long-term financing may be available from a variety of multilateral organizations, export credit agencies, regional development banks, and credit insurers. Occasionally, but not often, funding may be available in the private sector.

All of the financing options have specific qualification requirements and may be available only for specific types of projects, or in particular geographic regions, or based on political relationships between the countries involved in the transactions.

In this module, you will be introduced to of the forms of medium- and long-term financing, that is, government-supported finance, finance provided by banks and financial institutions, and lease financing.

Module Sections

 * Unit 8.1: Medium- and Long-term Financing

About this Resource
These resources were developed by MSU Global with funding provided by a U.S. Department of Education, Business in International Education Title VIB grant.


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Medium- and Long-term Financing

Unit 8.1- Medium- and Long-term Financing
Providers of medium- and long-term financing such as Ex-Im Bank’s guarantees allow banks to finance buyers who would otherwise be unable to get financing either in the United States or in their home country because of the transaction size, risk, location of the buyer and the debt servicing associated with this type of financing. Medium-term and long-term financing are available for capital goods or services that have a useful life that extends beyond one year. A creditworthy buyer who cannot get financing from a local bank may find more favorable terms through Ex-Im Bank. These programs help make international transactions more attractive for both a buyer and a seller. Ex-Im Bank provides full payment to the seller, and the buyer gets financing that would not be available otherwise, thus allowing a transaction to move forward.

Unit Objectives
The goal in this lesson is to introduce you to sources of medium- and long-term finance for an overseas buyer (internal/external) which can offer a buyer extended payment terms while providing cash payment to the seller without recourse. By the end of this unit you will be able to
 * identify providers and sources of medium- and long-term trade financing
 * identify medium- and long-term financing tenors
 * identify the role and function of the following:
 * export credit agency financing
 * multilateral organizations
 * regional development banks
 * credit insurers
 * private sector financing

Unit Outline

 * Introduction
 * Ex-Im Bank Programs
 * Other Medium- and Long-Term Financing Programs
 * Multilateral Organizations
 * Summary
 * Resources
 * Activities
 * Assessment

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/08/01: Knowledge of forms of medium- and long-term financing (e.g., government supported finance, finance provided by banks and financial institutions, lease financing)

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title: Medium- and Long-term Financing


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Introduction to Political and Economic Risk/Cultural Issues

Cultural Issues
Anthropologists view culture as “the sum total of the beliefs, rules, techniques, institutions, and artifacts that characterize human populations”1. Cultural differences can be a significant barrier to understanding and can lead to risks for both buyer and seller. You must explore some of the more common problems that arise in cross- border transactions as different languages, business practices, religions, histories, and ways of doing business collide. You will need the ability to identify and to find sources of information to determine what the level of risk may be in conducting cross-border transactions so that you can protect against some of these risks. For example, the size, shape, language, color, material content and price of a product to be sold are impacted by socio-cultural forces. These forces play an integral part in the decisions of buyers. Neglecting to evaluate the way buyers will respond to the product can be very costly for a manufacturer.


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Introduction to Political and Economic Risk/Corporate Risks

Corporate Risks
Investing in assets overseas is a form of direct foreign investment that can be done through subsidiaries, joint ventures, representative agent agreement, manufacturing or license agreements. The political environment will often dictate which form companies pursue or the level of risk an investing company is willing to take. The pursuit of manufacturing in a foreign locale presents some unique problems for a company. Incentives are often given to encourage investment. It is always important to evaluate the costs associated with these incentives. One example could be that government land is being donated. But in order to access this land the roads, utilities and labor have to be supplied by the potential manufacturer in order for the land to be useful. Housing, transportation and food may have to be supplied as well as some other essentials to entice labor to come and work for the company.

International business generally is a separation of societies not only by borders but terrain. This separation by ocean, mountains or deserts creates more distance than just physicality. Overcoming the challenges to please a buyer does not ensure payment on the debt incurred. The ability to collect on a debt has added problems because the laws in the country of the buyer may not be the same as those in the country of the seller, thereby creating additional legal expenses in order to collect the debt. There is also an exchange/loss risk potential if foreign exchange contracts were made to cover the uncollected debt. The recovery of merchandise is costly as is transport back to the seller. Sudden political or civil unrest may prevent the payment from being delivered to the seller. These are only a few of the potential problems that sellers face when extending credit to a foreign buyer.

The use of foreign credit insurance can provide many options for a seller. The foreign credit insurer will evaluate the foreign buyers and provide credit limits to the seller for them, thus eliminating the need for an internal credit department to evaluate and collect on the debts. It also allows the foreign receivable to be eligible for financing by a bank. It allows the seller to expand into the foreign markets with much less risk. Ex-Im Bank originally was the only resource for foreign credit insurance, but now many private companies compete for this business. The annual deductible for this insurance is generally less than the cost of hiring a credit clerk.

Letters of credit--both commercial and standby--are often used to control corporate risk. Letters of credit do not prevent fraud, so there is still a need to know the buyer. At a minimum, letters of credit tell you that a buyer has a relationship with a particular bank to the extent that the bank will issue the letter of credit. The buyer will either have put up cash collateral for the amount of the letter of credit or have a credit facility for the amount of the letter of credit. Remember that the bank promises to pay if there is strict compliance with the terms of the letter of credit and is a more reliable source of payment than the buyer.

Cash payment in advance provides the most protection and the least cost for a seller but the most of risk for the buyer. Selling on open account is at the opposite end of the payment term spectrum, providing the least protection for the seller. Documentary collections are more risky than letters of credit but not as risky as selling on open account. Documentary collections, when the shipment is under a “negotiable” transport document, will ensure that the seller will maintain title to the goods until payment is made at sight. Documentary collections under an accepted time draft are similar to selling on open account. The only difference is that the buyer’s bank is engaged to act as the collecting agent for the seller but provides limited communication and collection processing capabilities. The collecting bank takes no financial responsibility in the transaction, a fact that a seller must always keep in mind.

Whenever a purchase or sale is made, there are risks. This type of risk is referred to as commercial risk. The risks include the obvious ones:
 * a buyer being unable or unwilling to pay the seller
 * a buyer placing an order that must be delivered at a specific time and the seller being unable or unwilling to fulfill the order
 * a seller being unable or unwilling to provide the necessary warrantee service
 * a seller being unable or unwilling to refund advance payments or deposits
 * a buyer being unable or unwilling to accept delivery of product when it is ready for shipment
 * a seller being unable to collect payment, necessitating legal action that is costly to pursue.

These risks are common to all transactions involving the purchase and sale of goods or services. Some of the payment vehicles mentioned help mitigate some of these risks.

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Introduction to Political and Economic Risk/Country-Related Risks

Country-Related Risks
Both the seller’s country and the buyer’s country have laws governing cross-border trade. These laws may address:

 * the need for export and import licenses
 * customs and import duties
 * limitations on sending money out of the country (currency control laws and regulations)
 * embargos

There are transnational rules and agreements that may also affect trade:

 * protocols and common practices for banking transactions that may be found in International Chamber of Commerce publications for collections, letters of credit and SWIFT (Society for Worldwide Inter-bank Telecommunications systems) procedures to execute payments and to communicate on collections and letters of credit
 * terms of sale as defined in Incoterms, another International Chamber of Commerce publication that details when the costs, risks and responsibilities for transporting goods transfer from seller to buyer.

Some examples of country-related risks illustrate payment risk issues in cross-border transactions. Sovereign or country-related risks stem from the actions of one or more governments and government agencies or by civil war, civil unrest and strikes. A seller has a contract to deliver perishable goods to a buyer in another country. There are actions by the government that could prevent the delivery and the completion of the transaction. War by a third country with either the buyer’s or seller’s country could cause the goods not to be transported and/or delivered by one of the warring countries. An embargo or blockade could  bar the delivery of the goods. A strike in the logistic pipeline could also stop the goods from being delivered.

Purely political actions like transfer and convertibility risks must also be considered as a part of sovereign risk. Transfer and convertibility risks arise as the result of issues with currency used by the buyer, seller, or other parties involved in the transaction. It should be kept in mind that transfer and convertibility risks are not the same as foreign exchange risk which will be discussed later.

Political Risk
Sovereign or country-related risks fall into several major subcategories: political, transfer, and convertibility. Political risks are those risks that arise from the legal and foreign relations actions of the national governments of a seller, a buyer and sometimes third countries, especially third countries through which cargo may travel. Transfer and convertibility risks also relate to the buyer and seller’s countries, but more specifically in terms of the management of the currency and the availability of foreign currencies, also known as foreign reserves.

Sometimes when a country, usually through its central bank, needs to ration the foreign currency it has available to it, it will place controls on transfer currency, sometimes even its own currency out of the country. This situation is called transfer risk. The buyer or debtor is willing and able to pay, but restrictions have been instituted that prevent the payment from taking place.

Convertibility risk is somewhat similar. The buyer or debtor is willing and able to pay with local currency and the currency may be transferred out of the country; however, there is no ready market to convert it to a currency the seller or creditor can use. The buyer or debtor may be prevented from legally exchanging the currency in his own country because of currency controls imposed by his own country, usually through the central bank. If the buyer sends his local currency to the seller, the seller could be faced with having to exchange it for a usable currency at deep discount or not being able to exchange the currency at any rate of exchange. Foreign currency exchange under a free-floating environment can be very volatile over time and should be hedged by the inexperienced.

Documentary Risk
Documentary risks are the primary cause of slow or non-payment in international trade. In its simplest form, documentary risk arises from a missing or incorrectly prepared document that is required to complete the buy/sell transaction and/or make payment. Cross-border transactions very often involve many documents, but just one missing document or a discrepancy in a document can stop a payment temporarily or permanently.

Some of the more common document problems are caused by

 * letters of credit
 * import and export licenses
 * certifications such as certificates of origin
 * customs documents
 * transportation documents
 * other bank and legal documents.

Here are examples of letter of credit document problems. A seller has received a letter of credit that is denominated in his/her own currency. The seller has eliminated the risk that the buyer will be unable or unwilling to make payment when it is due because the bank that issued the letter of credit now has the payment obligation. The letter of credit states that the seller will be paid upon presentation of certain documents that need to be in conformity with the bank’s (and buyer’s) requirements under the letter of credit. Documents required by commercial letters of credit for payment may include but are not limited to:

 * ocean bills of lading
 * air waybills
 * certificate of the country of origin
 * invoice
 * packing list
 * insurance certificate
 * certifications of weight, quantity or technical specification.

The documents required enable the buyer to clear the goods through customs and comply with any other contractual agreements. All of the requirements for acceptable documentation examination are set for in the ICC Uniform Customs and Practice for Documentary Credits (UCP) published by the International Chamber of Commerce in its latest version. Any modification or amplification to acceptability of required documents will be found on the face of the letter of credit. If any one of the required documents is missing, is not exactly in compliance as required in the UCP and on the face of the letter of credit, is inconsistent with other documents, or is not properly endorsed, the issuing bank will not pay the seller. Some common problems with documents being used for payment with a letter of credit include the following:

 * Weights may be in pounds on one document and in kilograms on another.
 * Description of goods in the letter of credit is in Spanish, but the invoices and/or packing lists describe the goods in English.
 * Goods are not shipped in the quantity or time frame required under the letter of credit.
 * There are misspellings in the letter of credit, but other documents have those words spelled properly.
 * Negotiable transportation documents are not properly endorsed or consigned.
 * Too much or too little has been shipped.
 * The name and address of the buyer or seller is not in strict compliance with the letter of credit.
 * Documents are not properly labeled to match the documents required under the letter of credit.
 * There are inconsistencies between documents for carton, weight or number counts.
 * There are incorrect consignment or notification parties on the bill of lading.
 * These are only a few of the potential discrepancies that occur with a commercial letter of credit.

Standby letters of credit are issued to a seller by the buyer’s bank to cover for noncompliance with agreed upon payment terms. The standby letter of credit virtually “stands by” to pay if the buyer does not meet his/her payment obligations. The documentary requirement to claim under a standby letter of credit is a simple statement declaration made by the seller to the issuing bank of the standby letter of credit. Standby letters of credit are used when shipments are done consistently on a revolving basis to the same buyer. The cost of doing a standby over a commercial letter of credit needs to be evaluated before deciding which payment instrument should be used.

Other documentary risks arise as the result of export and import licenses as well as currency control requirements.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The buyer has, however, failed to obtain an import license. The goods are held by customs in the buyer’s country, and thus the delivery cannot be completed.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The buyer has a valid import license permitting the importation of a particular quantity of goods during a particular time window. The seller ships the wrong quantity and/or the goods are not shipped into the buyer’s country during the specified time window. The goods are held by customs in the buyer’s country, so the delivery cannot be completed.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The seller has failed to obtain a required export license. The goods may be held by authorities in the seller’s country, and/or there may be severe civil and/or criminal penalties imposed on the seller.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The buyer has, however, failed to obtain appropriate authority to convert his local currency to that of the purchase contract. The goods may or not be held by customs in the buyer’s country, but the seller will generally not be paid when payment is due, and/or payment may not be made at all.

Transfer Risk
Transfer risks can occur when a buyer has received the goods promised and is ready to make payment. The government of the buyer’s country sees its foreign reserves rapidly leaving the country. The law or central bank institutes regulations to stop all movement of funds out of the country without specific approval. This program halts the transfer out of the country of the buyer’s currency as well as the currency of any other country. The buyer is willing and able to make the payment to the seller; however, by government intervention, the payment is blocked from taking place.

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Introduction to Political and Economic Risk/Economic Risks

Economic Risk
Economic risks can endanger the ability of a seller to get payment for goods or services in many ways. This type of risk can sometimes be forecast but is often completely out of the control of either the buyer or seller. Purchasing transaction insurance is essential for a buyer to minimize economic risk. Elements of economic risk include but are not limited to:

 * convertibility risk
 * foreign exchange risk
 * translation risk
 * central bank activities (interest rate fluctuation, availability of funds)
 * economic indicator movement (GDP, unemployment, purchasing power, inflation, etc.)

Convertibility Risk
Convertibility risk is an issue when a buyer has received the goods promised and is now ready to make payment but can’t because, for any number of possible reasons, the buyer’s government bars the conversion of its local currency to that of any other country. The reasons for this action could be a possible war, a major building infrastructure program, or a massive negative trade balance. The buyer naturally has the currency of his own country in his bank account. When the buyer goes to the bank to exchange the local currency to the currency specified in the purchase contract or to the currency of the seller’s country – or for that matter the currency of any “hard currency” country, the conversion cannot be made without proper authorization. Convertibility risks usually occur when the buyer’s currency does not have a ready world market. Although the transfer of the local currency out of the buyer’s country may not have been specifically barred, it provides little value since the seller may not be able to find a buyer for the funds.

Foreign Exchange Risk
Foreign exchange risk is not the same as either transfer risk or convertibility risk. Foreign exchange risk occurs when the rate of exchange between the seller’s currency and the buyer’s currency changes dramatically between the time the order is quoted and the time the final payment is received. When payment is not made in a cross-border transaction, the difficulty of collection can be compounded significantly, especially if the transaction is hedged. Therefore, it is much better to assess the level of risk and know ways to mitigate, manage, transfer or accept the risks.

For example, a seller and buyer agree that the seller will be paid in the seller’s currency. The buyer has the financial strength and character at the time of the contract to be willing and able to make payment when the goods are delivered. Between the time the order is placed and the time the buyer is to make payment, however, the buyer’s currency drops significantly in value against the seller’s currency. The cost of the goods may now be more than the profit margin of the buyer, or the buyer may have to pay much more than anticipated in the buyer’s local currency. It may take the buyer much more time to obtain enough local currency to buy enough of the seller’s currency to make full payment. It may be that the buyer will never be able to make a full payment for the purchase. Hedging against foreign exchange risk is the best solution for this type of problem.

Translation Risk
Translation risk involves the revaluation of foreign assets that are held in a foreign currency. There may be a difference in the current foreign exchange rate from the time of the original transaction to time of the fulfillment of the sales contract. Assets held on the balance sheet in foreign currency must periodically be revalued to the current market price of that currency. This kind of revaluation to the current market will create an exchange loss or gain. This exchange gain or loss is unrealized but still impacts the value of the assets held overseas. An example follows:

Plant and equipment of an international company are marked to market at year-end for financial reporting purposes. Conditions throughout the year have caused a decline in the value of the currency of their foreign holdings of 20%. This decline has the immediate affect of reducing the value of these assets by 20%, which then has the direct impact of reducing the company’s profitability for the year by the same value even though no direct transaction has occurred other than the revaluation to create this loss.

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Introduction to Political and Economic Risk/Cultural Risks

Cultural Risk
Cultural risks occur as the result of different expectations, misunderstandings and miscommunications between a buyer and the seller.

 * A seller wants to make a large sale to meet a quarterly quota. The buyer wants to be polite and may be saying “yes,” acknowledging the seller’s explanation of the features and benefits of the product. The seller asks for the potential buyer’s standard shipping instructions, which are then promptly provided.  The seller enters the “order,” and the shipment is made.  But the buyer has never placed a proper order and therefore rejects the shipment.
 * A request for a quotation arrives that is misinterpreted to be a purchase order. A lack of communication resulting from language problems results in a shipment being made that has not been ordered.
 * A buyer promises to pay promptly when the goods are delivered. What the seller fails to realize is promptly will be after the month-long holiday in the buyer’s country during which the goods may be shipped but will not be picked up by the company until after the holiday.  Thus payment is delayed, and demurrage costs may accumulate.
 * A seller, by not doing extensive marketing research, exports a product for distribution only to find out that for religious and cultural reasons it will not be purchased and therefore is rendered worthless.

Risk is an inherent part of all business transactions. There is risk of slow or non-payment in domestic transactions that arise primarily from the unwillingness or inability of a buyer to pay a seller when payment is due. When international transactions take place, more risks are added because of the laws, regulations and politics of the buyers’ and sellers’ countries as well as possible third countries. The financial condition of a buyer’s country may cause delayed or blocked payments. Changes in the relative value of buyers’ and sellers’ currencies pose risks. The number of documents required in many cross- border transactions opens the possibility of missing documents or discrepancies in the forms to be filed, leading to slow or blocked payment.

There are many misunderstandings that can occur in business transactions negotiated among countries in distant time zones, with different languages, varying cultural practices and dissimilar ethical values. Any or all of these can contribute to payments not being received when due.

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Introduction to Political and Economic Risk/Summary

Summary
There are many forms of risk associated with business and more so with international business because of the added pressure caused by sovereign governments, geography and culture. A successful international business manager does not go into business with a blind eye. He/she identifies the potential risks, assesses the potential profits, and puts the appropriate risk mitigation tools into place. There are a variety of types of risk associated with international transactions, political, economic and commercial risk, all of which may render a buyer or seller incapable of conducting business (getting paid or receiving shipment). You must understand the complex interactions of the various kinds of risk. A simple way to differentiate commercial and country-risk is provided below:

 * country risk = political risk + economic risk
 * commercial risk = business transaction risk

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Introduction to Political and Economic Risk/Resources

Resources

 * I. Brady and B. Isaac, A Reader in Cultural Change, vol.1 (Cambridge, MA Schenkman Publishing, 1975) p. x.
 * V. Barnouw, An Introduction to Anthropology (Homewood, IL, Dorsey Press, 1975) p. 5.
 * FITT Skills International Trade Finance Participants Manual, Forum for International Trade Training (FITT)
 * International Business: The Challenge of Global Competition (7th ed.) Burr

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Introduction to Political and Economic Risk/Activities

Activity
The purpose of this activity is to promote discussion and understanding of the differences and similarities of risks of slow or non-payment from domestic and international trade situations.

As a class or in smaller student groups, present ways you would respond to the following situations covering the risk and the possible mitigation of that risk.

Your customer has failed to obtain an import license. Evaluate:
 * the disposition of the goods and related costs
 * international risk of payment or recovery of the goods
 * the ability to acquire the license after the fact

Your customer is located in a land-locked country. The closest port is in a country that is at war. Evaluate:
 * alternative distribution channels and logistics
 * the use of insurance if the goods might be confiscated, embargoed, or destroyed by activities associated with a war
 * the financial impact of delays in delivery caused by the war or by alternative routes

Your customer is located in a country that has an unstable government. Evaluate:
 * the impact of foreign currency fluctuations and the use of hedging mechanisms to overcome them
 * an alternative form of payment to be employed such as bartering
 * the risk of nationalization by the government of private industries

Your customer is located in a country that has hyper-inflation and anyone who has liquid assets and the ability to move those assets out of the country is doing so. Evaluate:
 * the impact on the value of the currency in the open markets
 * the impact on the foreign currency reserves of the country
 * the impact of the central bank restricting payments outside their country under these circumstances

Your customer sends you a financial statement prepared by a local accounting firm. Evaluate:
 * the translation risk of the foreign assets and the impact of a major currency fluctuation against those assets
 * whether generally-accepted accounting practices apply internationally as well as domestically
 * the ability to get credit information on the company and from what sources

Your sales department has communicated with a new customer by fax and e-mail. The customer needs your company to start work on building a unique piece of machinery. The down payment and the purchase order will follow shortly. Evaluate:
 * the payment vehicles that could or should be employed before the manufacturing process begins
 * the need for an underlying contract to bind the parties in the transaction
 * the potential for miscommunication on the required needs or functionality of the machinery being ordered

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Introduction to Political and Economic Risk/Assessment

Assessment
{Which of the following factors do companies find the most difficult to assess when initially trying to penetrate a foreign market? -the need to obtain legal advice on the country in question +evaluating the socio-cultural and socio-economic factors of the foreign environment and the need to visit and assess the foreign environment without being dependent only on information provided -the basic need for the product or potential for foreign trade or investment -the evaluation of country risk and exposure
 * type=""}

{The inability or unwillingness of the buyer to accept delivery of a shipment when it is ready is referred to as -economic risk. -political risk. +commercial risk. -country risk.
 * type=""}

{Fluctuation of exchange rates causing the price products to plummet and causing the seller to renegotiate pricing before shipment would be considered -commercial risk. -country risk. -political risk. +economic risk.
 * type=""}

{Country risk = -political risk + commercial risk. -economic risk + commercial risk. +political risk + economic risk. -commercial risk + transaction risk.
 * type=""}

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Cultural Issues Affecting International Trade/Culture Defined

Culture Defined
Culture is defined as the integrated system of learned behavior patterns that are distinguishing characteristics of the members of any given society, including everything that a group thinks, says, does and makes – its customs, religion, language, material artifacts and shared systems of attitudes and feelings. Understanding culture involves understanding people, which is, as we all know, an extremely difficult task. Today, because of technology, the internet, the media, travel, and the opening of once-closed societies, culture attitudes have shifted somewhat, becoming more dynamic and less geographically sensitive.

Geert Hofstede, a Dutch psychologist, interviewed thousands of IBM employees during his employment and subsequently developed a cultural model which he claims summarizes the different cultures.

Hofstede’s model contains five dimensions, with each dimension given a value between 1 and 120:

 * 1) individualism versus collectivism – looks at the relationship between individuals and others in their society.
 * 2) power distance – quantifies how well individuals accept the different levels of power that may be evident among them.
 * 3) uncertainty avoidance – looks at how well individuals accept uncertainty and risk.
 * 4) masculinity versus femininity – ranks the extent to which a society embraces masculine values (assertiveness, status, financial rewards) versus feminine values (quality of life). Societies with a stronger masculine culture tend to emphasize the differences in the role of the sexes.
 * 5) long-term versus short-term orientation – added to help distinguish the difference in thinking between the East and the West.

Models like Hofstede’s provide international managers with a tool to differentiate, compare, and understand cultures and the individuals they will be dealing with abroad. Two important points every international business person must remember:

 * 1) Understanding culture does not mean judging or ranking cultures or individuals. One’s own culture is not the standard against which others are to be judged.  Avoid being ethnocentric.
 * 2) Applying too many generalizations is dangerous. A manager must understand culture as a framework in which to deal with individual business partners.

There is a saying in international business, “Business is based on relationships.” Developing strong relationships with individuals is often the best way to make business ventures successful.

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Cultural Issues Affecting International Trade/Culture Applied

Culture Applied
Culture is most often viewed as the language or religion of a country, but there is obviously more to culture than these two components as Hofstede’s model shows. A successful international business manager must know what cultural matters may affect developing relationships and the impact they have financially on a business venture.

Language
Financial issues are very much affected by language. Negotiations between a buyer and seller include price, delivery dates, shipping methods, and methods of payment. If either party is not completely fluent in the other party’s language, misunderstandings may arise which could lead to late payment or no payment at all. This situation may also arise between individuals who speak the “same” language as well. Consider the differences in word connotations and spelling between the English spoken in the US, UK, Australia, South Africa, and New Zealand. English isn’t the same English everywhere.

Another language issue that may affect payment, as Hofstede indicates, is the meaning of words. Consider the classic example of the Spanish word “mañana.” Literally translated, it means “tomorrow”; however in business it more appropriately means “not today.” So, if you are asking your customer in Latin America when payment will be ready to wire transfer and the answer is “mañana,” you very likely will not know when payment will actually be made. It could be the next day, but such is not a guarantee since the word has very broad usage.

Another issue has to do with the Asian issue of saving face. Rarely will a business associate say “no” directly since this is considered too bold, direct, and rude. The issue, of course, is how then does an American business person know if payment will be made or if the shipment will be ready on time if the Asian company does not give a direct answer. Knowing and understanding the nuances of a culture will help in interpreting the meaning of statements and therefore knowing when and how business will be conducted.

Religion
In the US, business and religion are interrelated since there is consideration of both secular and religious holidays in product offerings, sales and distribution. What we rarely experience in the US is a crossover between business law and religion. Such, however, is not the case all over the world.

In countries where Islam is the predominant religion, Sharia law is the body of Islamic law which regulates the public and some private aspects of life. Islamic law prohibits usury, the collection and payment of interest, and prohibits trading in financial risk (which is considered a form of gambling). Islamic law also prohibits investing in businesses that are considered unlawful (businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). These prohibitions may limit international business dealings with companies located in the countries that practice Sharia law. Ideas to overcome these issues could include:

 * 1) utilizing a bank that does not charge interest on loans
 * 2) removing statements on invoices that add interest to balances if payments are late
 * 3) creating independent companies that do not deal in products forbidden by Islamic law
 * 4) avoiding long-term foreign exchange exposure which will eliminate the need for future or option contracts.

Another example of religion affecting financial transactions can be found in Israel. During the Passover season businesses are not allowed to come in contact with or inventory any products that contain yeast, which means destroying the product or selling it prior to Passover. Unless previous arrangements are made, this situation could increase the cost of products, or lead to spoilage and loss of inventory.

Corruption
Corruption as defined by Webster’s Collegiate Dictionary (11th edition) is an “inducement to wrong by improper or unlawful means (as bribery).” Political corruption, that is, corruption of a political system or institution where public officials seek illegitimate personal gain through actions such as bribery, is the kind of corruption that directly affects the financial side of business.

The level of corruption that is present in a system will affect how business is conducted between companies as well as the interaction or payment required by government or other officials. Being aware of the potential situation and the possible added costs to business are important for an international manager to prepare for. One tool that can be used is the Corruption Perceptions Index, which measures "the degree to which corruption is perceived to exist among public officials and politicians."

The greatest challenges occur when business is conducted between companies located in a country that is blue and one that is red. Understanding that the individuals in the red country may not consider bribery illegal or immoral but simply the way business is done can be a significant challenge for “blue country” companies. Questions that international managers may have to consider include the following:

 * 1) How much do we budget for “grease payments”?
 * 2) Can such payments be legally made?
 * 3) How are such payments accounted for on the financial records?
 * 4) Will the delay in such payments result in a slowdown of business or payment?
 * 5) Will a larger payment from a competitive company limit our ability to conduct business?

Government Involvement
The culture of a country may also determine the level of government involvement that is present in a market. Laws developed based on a society and its religion will ultimately impact the business law structure of the country as well. Issues that international managers may encounter include these:

 * 1) code law (written law) versus common law (application of precedent) systems
 * 2) level of development of the business law system: consider the British system which has been around for centuries versus the Chinese system which is being created daily
 * 3) cultures that prefer to litigate over a dispute versus those that prefer to arbitrate or mediate
 * 4) systems that require that laws be written before business is conducted (Europe) versus those that wait until issues arise to legislate (US)
 * 5) inclusive versus exclusive statements: many countries in the Middle East will not allow product to pass through Israel.  The

US does not allow exclusionary statements such as this to be made in business documents. All of the above issues may cause delays in the simple ability to conduct or understand how to conduct business, receive payment in a timely manner, or move currencies to make payment for products.

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Cultural Issues Affecting International Trade/Summary

Summary
Culture is an enormous topic because it differs over time by location and by age group. Trying to learn the details of every culture would be close to impossible; however, understanding that there are similarities and differences is the first hurdle. An important step before going abroad for business is that an international manager should prepare by researching the cultural norms, business etiquette, and the taboos. Developing strong personal relationships is critical. Culture does affect business and the ability for a business to be financially successful. Culture may also determine the ways business is conducted and the speed at which transactions take place. Research, prepare, and be ready for anything to happen.

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Cultural Issues Affecting International Trade/Resources

Print resources

 * Culture's Consequences: Comparing Values, Behaviors, Institutions, and Organizations Across Nations, by Geert Hofstede, 2nd Edition
 * The Global Entrepreneur, by James Foley, 2nd Edition

Web resources

 * Geert Hofstede
 * MSU globalEDGE Modules on Culture
 * Transparency International

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Cultural Issues Affecting International Trade/Activities

Activity
Assign each student a country. Have them research the cultural aspects of the country including:

 * 1) religion
 * 2) language
 * 3) social norms
 * 4) Hofstede’s Dimensions – www.geert-hofstede.com
 * 5) Corruption Perception Index – www.transparency.org

Once the students have completed their research, appoint each either as an importer or exporter. Pair the students and have them discuss the following issues from their countries’ perspective:
 * 1) language
 * 2) religion and government
 * 3) timely payment
 * 4) government involvement in business
 * 5) presence of corruption and the need for bribes
 * 6) possible affects on profitability of business between the countries.

Once the discussions are complete, have each group present their findings to the class with a decision as to whether it makes financial sense to conduct business between the countries.

This research and the discussions can be divided between individuals or in small groups, depending on the size of the class. This assignment would also work well in an on-line environment.

To make the assignment more specific each group could also be assigned a product or service to trade.