Module 3 Flashcards
Three types of risks for exporters
- Trading and credit risk
- Currency risk
- Cultural risk
Types of trading risk (4)
- Physical risk > goods lost/ stolen in transit
- Credit risk > Possibility of payment default
- Trade risk > Customer refusing goods/ cancelling order
- Liquidity risk > inability to finance credit
Can minimise trading risk by (2)
- Getting help from banks, insurance companies or government agencies
- Risk transfer (eg courier pays for damaged goods whilst in transit)
Currency risk
Unexpected movements in exchange rates
Cultural risk
Different customs, laws and language
Contract…
Clearly specifies and describes what is being purchased and the terms of sale
Documents of title
Documents which evidence ownership eg bill of lading, warehouse receipt
Commercial documents
Not documents of title, but may be specified in the contract therefore accompany goods in transit eg invoice, insurance docs, certificate of origin/ quality
Three types of terms on which goods can be sold
- Open account
- Advance payment
- Documentary credit
Open account
Foreign customer given same credit terms as domestic customer
Advance payment
Foreign customer is asked to pay up front before goods/ services are delivered
Documentary credit (letters of credit)
Bank undertakes to pay for goods on behalf of importer provided exporter submits required documents within specified period
Different forms of documentary credits (2)
- Revocable credits
- Irrevocable credits
Revocable credits
Can be amended or cancelled by the importer
Irrevocable credits
Cannot be amended or cancelled without the consent of all parties. Unconfirmed or confirmed.
Greatest security for exporter
Irrevocable letter of credit confirmed by a bank
Documentary credit disadvantages (3)
- Slow to arrange
- Administratively cumbersome
- Expensive process
Documentary credit advantages
- Essential when risk of non-payment is high
- Good when dealing with unknown importer for the first time
Irrevocable credits > confirmed
Exporters’ bank agrees by confirming credit that it will honour documents
Irrevocable credits > unconfirmed
Exporters’ bank advises exporter that credit line has been opened, does not constitute undertaking to pay
Documentary credit > stage 1
- Exporter submits offer for sale
- Credit terms and T&Cs established
- PO raised and contract of sale signed
Documentary credit > stage 2
Documentary credit line opened by importer with its’ bank
Documentary credit > stage 3
Exporter delivers the ordered goods
Documentary credit > stage 4-7
Exporter obtains payment from importer’s bank by presenting complete and correct specified documents