Chapter 16.5 and Incoterms
Financing covers
-cash in advance -open account -consignment with open account -Letter of credit/aval -INCOTERMS -Transaction exposure
If an apple which costs US$1.00 increases price to US$1.05, (the price/cost of) the
APPLE has strengthened.
"If you get oranges in one year and then obtain a contract in that same year that you can sell those oranges then you don't care what currency or what the price will be.. you'll be making it back and making your money back."
Adjusting Invoice Policy
Modifying invoicing policy to reduce transaction exposure; e.g., invoicing in the same currency that will be needed to pay for imports.
Adjusting Invoice Policy
If the Canadian dollar which costs US$1.00 increases price to US$1.05, (the price/cost of) the (vs the US$)
Canadian dollar has strengthened
Sellers have no risk, buyer has all the risk, it's somewhat insulting to the buyer-- and either the insult or the lack of cash may prevent the sale.
Cash in advance
An example is an international car dealership. When the dealer sells a car, the dealer orders another car. What type of financing is this?
Consignment with open account
DAF
Delivered at Frontier
"I have to put it on a truck to ship to another truck and once it gets through the gates of the warehouse it has been delivered and I'm free of my obligation."
FOB Destination
When the seller pays for all the shipping, transportation, and insurance.
FOB Destination
"Buyer has to pay for whats on ship and what fell in the ocean is the sellers fault"
FOB on board ship what stays on the ship gets delivered and whatever goes in the ocean does not.
"Once it leaves my dock anything that happens to it is YOUR problem"
FOB origin
Where does the title of ownership go and who pays breaks out between:
FOB origin and FOB destination
"I'm selling a million in cars and ill pay you in Japanese yen in 3 months. I'm going to sell the equivalent back."
Hedging
The type of financing where the bank guarantees payment. The risk is the sellers bank which is now in the middle of the process. The credit risk is my bank.
Letter of credit/Aval
Buyer has an agreed to upper limit to order goods and services. Similar to the limit on your credit card. Buyer pays balance upon receipt of goods.
Open account
Successful confirmed letter of credit circle cycle
Seller-->Sales and movement of goods--> Buyer---> Buyers bank--> Movement of Money--> Sellers bank---> back to the seller.
"When the future cash transactions of a firm are affected by exchange rate fluctuations"
Transaction exposure
Identify the degree of transaction exposure, decide whether to hedge the exposure, and then choose technique for hedging
Transaction exposure
Incoterms essentially means
WHO is responsible, WHERE does the title transfer (ownership), and WHO pays for freight.
Timing my stuff so I don't have a transaction exposure is
adjusting invoice policy
If a US company is exporting or selling a product denominated in a foreign currency (ex. Yen), and the dollar strengthens against the Yen but weakens against all other currencies= US company receives less US dollars. The impact of the other currencies in this single sale example does not matter and will not
affect the exporting company.
Difficulties of adjusting invoice policy faces difficulties of precise matching of ______ and _____ ___ _____ ____.
amounts, timing of cash flows
The US$ can strengthen against one currency (Japanese yen, (weaken against another Russian ruble), and be unchanged against a third (Euro)
at the same time
May not want to pay when the goods are not in his home countries currency
avoiding exchange risk
In a letter of credit when you're going through a bank, the bank usually requires a pledge of securities or assets from the _________ and charges a fee.
buyer
FOB origin (by plan) is
buyer pays. you have to pick it up and your paying for the charges to get there. Once it leaves my dock anything that happens to it is your problem
Seller says, "I want all the money upfront"
cash in advance
What is this letter of credit that has another bank besides the issuing bank standing behind it?
confirmed letter of credit
In a confirmed letter of credit, the second bank standing behind the transaction is called the _____ bank. And is usually (but not always) the ______ bank.
confirming, sellers
Buyer has possession of goods valued up tot he limit of the open account.
consignment with open account
Leaving the goods with the buyer. When they make the money he sends it and I send him another car, for example.
consignment with open account.
Contracts are made at one particular moment in time. Then, when the order is made and it's time to pay, the currency could have fluctuated. You can either charge more and not sell as much, or absorb the cost and then charge the company extra. This is
currency fluctuation
The confirming bank's job is to ensure payment under the letter of credit if the holder and the issuing bank ______ on the letter of credit.
default
If the currency fluctuations happen in a foreign currency I:
do care
If the currency fluctuations happen in my home currency I:
don't care
Hedge aka ______ my risk. Timing.
ensure, qualify
Currency strengthening and weakening happens
every minute of the day
In a letter of credit, the customer is called the ________ and the vendor is called the ________
holder, beneficiary
Determines where ownership, title, and charges belong
incoterms
International Cargo Terms aka __________ was established by the ______ ____ ___ ________ (ICC 1936).
incoterms, intl chamber of commerce
When the currency strengthens, currency _______ price. When the currency weakens, currency _____ price.
increases, decreases
You can avoid exchange risk and transaction exposure by ____________________________________. The transaction exposure is not eliminated, but rather shifted to the buyer. The buyer may not accept the transaction exposure by not buying your product!
insisting that the buyer pays in US dollars.
In a letter of credit, the risk to the seller is the ________ ___, or the sellers bank, rather than an unknown foreign buyer.
international bank
A letter of credit transfers the risk of non payment to the
international bank.
A US Export, in Foreign currency, where the dollar strengthens and FC weakens, makes _______ in the US dollars received. It now costs ____ FC to buy a US$.
less, more
The International Chamber of Commerce (ICC) governs LC's in the financing using
letter of credit
This type of financing is a bank's written promise that it will make a customers (the holder) payment to a vendor (called the beneficiary) if the customer does not.
letter of credit
Aval is a ____ __ _______ (looks like a letter of credit) and is mostly used overseas.
letter of guarantee
A US Export, in Foreign currency, where the dollar weakens and FC strengthens, makes _______ in the US dollars received. It now costs ____ FC to buy a US$.
more, less
A US Export, in US Dollars, with no change in currency fluctuation makes _______ in the US dollars received.
no change
Similar to running up a credit line and it gives a little more trust to the buyer but the seller takes a little more risk
open account
What type of financing is when the buyer pays the balance upon receipt of goods?
open account
A US Export, in US Dollars, where the dollar strengthens, makes the _______ in the US dollars received. They may sell ____
same amount, less
A US Export, in US Dollars, where the dollar weakens, makes the _______ in the US dollars received. They may sell ____
same amount, more
FOB Destination is
seller pays. I have to put it on a truck to ship to another truck and once it gets through the gates of the warehouse it has been delivered and I'm free of my obligation.
confirming bank is most often the ________ bank.
sellers
When you avoid exchange risk and transaction exposure by insisting the buyer pays in US dollars, the transaction exposure is not eliminated, but rather shifted to
the buyer
If a US company is exporting or selling a product denominated in a foreign currency (ex. Yen), and the dollar strengthens against the Yen but weakens against all other currencies
the dollar has strengthened against the Yen, so the US company will receive less US dollars.
Exposure to exchange rate fluctuations is what type of exposure?
transaction
If the Canadian dollar has strengthened vs. the US$, THEREFORE the US$ has_______ vs the Canadian dollar.
weakened
The marketing impact of currency fluctuations is
whether I want to make an agreement