exam

Question 1

The licensee generally pays:

Answer 1

a fixed sum when signing the licensing agreement, and then pays a royalty of 2 to 5 percent of sales over the life of the contract

Question 2

Licensing

Answer 2

one firm (the licensor) will grant to another firm (the licensee) the right to use any kind of expertise

Question 3

Advantages of licensing

Answer 3

*improve the cost to profit ratio by licensing manufacturing responsibilities to another company
*the opportunity to utilize additional marketing and distribution channels in new geographic locations

Question 4

Disadvantages of licensing

Answer 4

*fear that a licensee will become a competitor upon expiration of the agreement
*or that it will aggressively seek to market the products outside of its territory

Question 5

Franchising

Answer 5

a contractual agreement by which the franchisor who owns the business idea and brand, sells (franchises) the right to operate the business in a specified area, subject to compliance with prescribed modus operandi

Question 6

The franchisee pays …

Answer 6

the franchisee then pays a fee to the franchisor in return for access to the business, the fee is usually made up of a fixed charge on signing the agreement, plus regular payments of royalties-based on sales

Question 7

Other Franchising requirement

Answer 7

in many cases, the terms of operation of the franchise also require that inputs are purchased from the central franchisor. This requirement is a way of both ensuring consistency of product quality, and also increasing the franchisor’s profits

Question 8

The role of the franchisor …

Answer 8

is to provide guidance, training and support to the franchisees

Question 9

The franchisor receives …

Answer 9

the fee and commission income, together with the potential to gain rapid expansion of a business at very low risk.

Question 10

The biggest difficulty for the franchisor …

Answer 10

is that of successful co-ordination of a wide network of businesses, all with different managers.

Question 11

In the case of international franchising the risk is …

Answer 11

increased because cultural variations in management styles may greatly impede the use of a common approach.

Question 12

The Advantages of the Franchising

Answer 12

*it stimulates international trade
* it allows the rapid expansion of the franchisor’s business (with low risks compared to the risks to which the franchisee is exposed)
*the franchisor’s purchasing power can impose smaller costs and can generate higher profits for the franchisee
*the franchisor can help solving some special problems as the company’s location, the obtaining of the registers, of the taxes and of other commitments.
*the possibility of a rapid expansion without reducing the company’s capital.

Question 13

The Disadvantages of the Franchising - franchiSEE point of view:

Answer 13

*disadvantages are related to the financial side of the contract
*they do not have enough flexibility in the decision making process,
*this too strict control from the franchisor part results in a reduced initiative and creativity from the franchisee part
*difficulties in prolonging the contract or in taking advantage of the accumulated experience at the end of the contract.
*the assistance provided by the owner of the franchise is insufficient.

Question 14

The Disadvantages of the Franchising - franchiSOR point of view:

Answer 14

*the risk that the beneficiary may not fulfill the contracting obligations,
(by not respecting the quality standard, by not maintaining the brand image)
*the difficulties that can be encountered in exerting control
*the possible competition attempts from the franchisee’s part

Question 15

The economic risk

Answer 15

represents an alternative (the other being the chance) of the conditions for completing a commercial or financial business

Question 16

The commercial risk is understood as

Answer 16

the possibility that a future and probable event will cause negative patrimonial consequences to the parties involved in an international commercial contract, the injured party not being able to hold the debtor liable.

Question 17

Nowadays, one of the risks with extensive consequences upon parties (exporters, importers, banks) is

Answer 17

the foreign exchange risk

Question 18

Foreign exchange risk refers to

Answer 18

the losses that an international financial transaction may incur due to currency fluctuations.

Question 19

For the exporter (or creditor) the foreign exchange risk occurs if

Answer 19

there is depreciation of the currency

Question 20

For the importer (or debtor) the foreign exchange risk occurs if

Answer 20

there is appreciation of the currency

Question 21

In order to reduce (or even avoid) the unfavorable influences on the financial results of the transactions, certain covering techniques can be used:

Answer 21

*contractual techniques
*non-contractual/extracontractual techniques

Question 22

Contractual techniques for preventing and reducing foreign exchange risk =

Answer 22

techniques and procedures that the partners (in a contract) can initiate and carry out as a result of their own activity, including:
*Currency clause
*Choice of currency
*Use of insurance margin in the price
*Synchronising receivings and payments in the same currency
*Leads and lags
*The correct, operative development of the international commercial contract.

Question 23

EXTRACONTRACTUAL COVERING TECHNIQUES:
*SPOT operation

Answer 23

• might be used by the buyer
• the necessary currency for payment is bought at To using the existing spot exchange rate - So

Question 24

EXTRACONTRACTUAL COVERING TECHNIQUES:
*FORWARD Operations

Answer 24

the necessary currency for payment is purchased by concluding forward transactions on the foreign exchange market based on the forward exchange rate,
the forward exchange rate is a forecast;

Question 25

EXTRACONTRACTUAL COVERING TECHNIQUES
*forward operations can be:

Answer 25

*simple: selling/buying currency for a given maturity using the forward exchange rate F

*complex: 2 simultaneous foreign exchange transactions - one for selling and one for buying at different maturities (one Spot transaction, the other one Forward)

*hedging operations: involves establishing some benchmarks that give the bank a margin to operate within

Question 26

Price Risk occurs

Answer 26

due to the fact that most international trade transactions are forward transactions. Between t0 and t1 the world market “moves”, causing changes - some substantial - in commodity prices.

Question 27

The following contractual techniques can be used to cover the price risk:

Answer 27

1. Update clause:
   the price is recalculated: Sp = Si (1 + d) n
2. General UN / EC recalculation clause:
   Sp = Si (a + bM1 / M0 + cL1 / L0), where a + b + c = 1
3. Buy-back value consolidation clause

Question 28

Covering the price risk through commodity hedging operations

Answer 28

*involves a combination of a Sale / Purchase on the cash market, with a forward operation (usually executed on the commodity exchange) of the opposite direction to the initial one.
*with such a gain and loss offsetting each other, the hedging effectively locks in an ACCEPTABLE MARKET PRICE.

Question 29

Foreign exchange clauses

Answer 29

involves linking the currency in which the payment / encashment is made (contract currency) to one or more currencies, with a more stable exchange rate or an international currency (SDR clause).

Question 30

Commodity hedging can be:
long hedging =

Answer 30

= consists in buying on the commodity exchange the necessary quantity of commodity whose price is desired to remain constant, in the form of a number of reprezentative contracts, then the entire purchased quantity (namely the futures contracts) will be resold to the commodity exchange closing the position.
- On the commodity exchange, gains or losses will be registered, which will offset the losses or gains registered on the physical market from the actual sales.

Question 31

Types of foreign exchange clause:

Answer 31

• the simple foreign exchange clause
• the foreign exchange basket clause
• simple
• weighted
• the international currency or SDR (special drawing rights) clause

Question 32

Commodity hedging can be:
short hedging =

Answer 32

• is initiated by the buyer on the cash market who fears a future decrease of the price
• this operation involves a sale of futures contracts for the entire quantity of goods whose price he wants to lock.
• then the entire amount sold will be redeemed from the commodity exchange through the exact number and type of futures contracts,
• the gain obtained from the price difference, offsets the loss on the cash market

Question 33

For the simple foreign exchange clause, in t0 the two parties will agree on:

Answer 33

-the reference currency ;
-financial institution or bank;
-limit of assumed risk (fluctuation / oscillation / variation margin) ;

Question 34

For the foreign exchange basket clause, in t0 the two parties will agree on:

Answer 34

-the number of the currencies in the basket ;
-the reference currencies in the basket (the structure of the basket);
-weight of each currency in the case of weighted exchange basket ;
-fluctuation margin (the limit of risk assumed);
-bank or financial institution ;

Question 35

Contractual techniques to prevent and mitigate price risk:

Answer 35

*Price update clause
*The UN/ECE (CEE/ONU) general clause to recalculate the beneficiary’s obligations
*The “buy-back” clause (value consolidation clause)
*The price rectification clause according to its evolution on the representative market of the product

Question 36

For the international currency or SDR/XDR (special drawing rights) clause

Answer 36

-an officially weighted currency basket (composed of EUR, USD, CNY, JPY, and GBP);

Question 37

Price risk

Answer 37

= means the possibility of incurring a loss under an import, export or cooperation agreement as a result of the change over time of the international market price for a similar product (in terms of quality and functional parameters etc.).

Question 38

Price update clause

Answer 38

• It’s usually used in the case of:
• products with a longer manufacturing process,
• or in the event that the payment is staggered in successive instalments, over a longer period of time
• The price update can be calculated as follows :
  Sf = S0 (1 + ri)

Question 39

The UN/ECE (CEE/ONU) general clause to recalculate the beneficiary’s obligations

Answer 39

• applies to contracts that have long completion times, over one year
  *these contracts have as object the sale of some complex machines, installations, equipment
  *the application of this clause is intended to ensure the equivalence of the supplier’s benefits and the amount ultimately paid by the beneficiary of the benefit. The supplier’s benefits may experience significant variations over the initial contract as a result of a large number of factors (such as the change in costs with raw material, materials, fuel, wages, etc.).

Question 40

Value consolidation clause (buy-back)

Answer 40

*is mainly used in buy-back contracts (commodity against commodity)
*upon reimbursement of the original credit, based on the actual market price of the products serving as payment (in return), the market value of each batch of products delivered to the credit repayment shall be recalculated to the penultimate rate, inclusive
*the resulting amount will be deducted from the total amount due to the beneficiary of the initial benefit, which includes interest and commissions related to the lending period
*the result is divided to the actual market price at the time of the last delivery, obtaining the actual quantity of products to be delivered for the last instalment to ensure the equivalence of the two transactions.

Question 41

The price rectification clause according to its evolution on the representative market of the product

Answer 41

the partners agree that the price of the commodities subject to the transaction is adjusted accordingly to the evolution of the prices of those products on the representative market or markets
the inclusion in the contract of such a clause requires the establishment of the representative market for that product, the reference publication, which highlights the evolution of the price of the product in those markets and the manner in which price changes are applied and calculated
The price at which the delivery will be made will be determined by the contract price, multiplied by the price index of the product on the market, selected from the publication:
Pf = (P0 /100)* Pi , Pi = (P1/ P0)*100
where:
Pf - the price after applying the clause,
P0 - the price in t0 (contract price),
P1 – the price in t1,
Pi - the price index selected from a publication for that product