INTERNATIONAL FINANCIAL SETTLEMENTS

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1 INTERNATIONAL FINANCIAL SETTLEMENTS Dr Katarzyna Sum Chair of International Finance Warsaw School of Economics

2 Lecture information The material for the lectures is available on my website My office hours are on Wedesdays in Setka Cafe (building C)

3 Final note Multiple choice test Test examples will be given during the lecture The scope of the exam: the material posted on the website

4 The date of the final exam Early exam 0 exam- during the semester- date t.b.a. or Regular exam- during the examination session- the date will be scheduled by the Dean s Office

5 Broad lecture outline Methods of payment in foreign trade transactions Forms of financing foreign trade Financial risk in foreign trade

6 Readings E. Bishop, Finance of International Trade, Publication available via Science Direct Database. J. Madura, International Financial Management, South-Western. Cengage Learning, 11th edition, 2012

7 Foreign trade transactions- an introduction

8 International financial settlements International trade created the necessity to settle transactions between the respective parties The necessity to deal with several types of risk As a result several instruments, rules and institutions where established in order to enable international financial settlements

9 Market players and transaction parties (1) Exporters Importers Freight forwarders Carriers Warehousemen

10 Market players and transaction parties (2) Insurers Banks Factors Government agencies and international financial institutions

11 The role of banks (1) Banks are involved in every stage of the transaction Banks engage in pre-shipment and postshipment finance and advances against goods Banks grant guarantees and indemnities Banks issue documentary credits

12 The role of banks (2) Banks confirm credits this constitutes payment insurance for exporters Banks negotiate documents this is a guarantee for proper documentation for importers Important role of international banks- branches and subsidiaries they have access to local information about trade relations, access to a broad scope of foreign currencies

13 The development of specialist trade banks Their activity is focused only on the provision of the importing and exporting facilities These banks are active on the respective markets to attract trade operators Often- financial support from the government

14 The role of factors (1) Factors purchase receivables At first factors and banks were in competition to attract trade operators Demand for factoring services factoring subsidiaries in banks Banking finance has recourse to its customers while factoring finance is without recourse

15 The role of factors (2) Factors provide also bookkeeping for exporters The major advantage of factoring is that factors can take higher risk than banks The exporter delivers the documentation to the factor the factor takes over the debt of the buyer

16 Foreign trade transactions elements (1) Foreign trade transactions are constituted by interrelated national and foreign agreements which are aimed at the completion of the international trade contract International trade is based on establishing agreements between the respective parties The parties are located in different countries the need to make adjustment to legal differences sometimes additional contracts are needed

17 Foreign trade transactions elements (2) Main contract elements: The transaction subject Prices Delivery date The receipt of the commodity Payment conditions Insurance

18 The transaction subject The subjects of foreign trade transactions can be commodities or services The subjects of foreign trade transactions are specified by means of the SITC classification

19 The SITC classification Standard International Trade Classification The system was established by the United Nations and serves the purpose of international comparability The SITC groups the commodities according to the materials used in production, the processing stage, market practices and uses of the products, the importance of the commodities in terms of world trade technological changes

20 Prices and delivery conditions The contracts should include terms of sale, methods of settlement, exact documentation and insurance The usance conditions for contracts are defined by the International Chamber of Commerce (ICC)

21 The International Chamber of Commerce The ICC was established in 1919, and its primary goal was facilitating the flow of international trade The ICC sets uniform rules of practice for international trade transactions The ICC provides a codification of international trade practice.

22 The International Chamber of Commerce The main decision makers in the ICC are bankers and merchants this guarantees political independence The rules are incorporated voluntarily into contracts International revision of the rules takes place successively The flexibility of the rules enables the incorporation of the changing practices of the commercial parties

23 The ICC rules- examples Uniform Customs and Practice for Documentary Creditsguidelines concerning the transcations financed with documentary credits Incoterms- codification of payment, delivery and insurance methods

24 Transaction steps Preparation- demand and supply analysis, market analysis, advertising, enquiries, comparison of offers, initial negotiations Transaction establishment- final negotiations, signing of the contract Transaction completion- commission of shipping, insurance contract signing, permission to transport commodities, invoicing, documentation handling, commodity delivery, payment Transaction control- documentation checking, potential complaints

25 The risk of foreign transactions for the exporter (1) Commercial risk: delayed payment or nonpayment. Political risk: state intervention in the importer s country to delay or prevent the release of foreign exchange Exchange or market risk: currency depreciation

26 The risk of foreign transactions for the exporter (2) Non-payment or late payment puts pressure on the exporter especially in large contracts this exacerbates the company s financial situation The worsened financial condition may influence the behavior of counterparties they will demand higher prices or credit due to higher risk

27 The risk of foreign transactions for the exporter (3) A potential intervention of the central bank to prevent the foreign exchange will prevent the exporter from receiving payment Despite that fact the supplier is obliged to deliver as the importer has paid in local currency Depreciation causes financial losses as the value of the payment decreases

28 The risk of foreign transactions for the importer (1) Commercial risk: short- or non-delivery and delivery of sub-standard goods Political risk: the imposition of an export embargo in the seller s country, or an import embargo in the buyer s own country Exchange or market risk: currency appreciation

29 The risk of foreign transactions for the importer (2) Non-delivery causes a chain reaction because the imported goods are destined to be re-sold on the domestic markets this implies losses of further companies Embargos will prevent the importer from receiving the goods despite that he has settled payment Currency appreciation causes a financial loss as the value of the contract increases

30 Literature E. Bishop, Finance of International Trade, Chapter 1 and 2. Publication available via Science Direct Database. ICC reports available at

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