“international finance and payments” lecture vii “international payments” lect. cristian...
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“International Finance and Payments”
Lecture VII
“International Payments”
Lect. Cristian PĂUNLect. Cristian PĂUN
Email: Email: [email protected]
URL: http://www.finint.ase.roURL: http://www.finint.ase.ro
Academy of Economic Studies
Faculty of International Business and Economics
Lecture 6: International FX Markets 2
International FX Markets - review
• FX Markets is the place where we can buy or sell different currencies;
• FX Rates;
• Convertibility of a currency;
• FX Regimes;
• Depreciation vs Appreciation of a currency;
• Direct Quote vs Indirect Quote
• FX Rate Determinants;
• Fisher Relationships;
• FX Transactions: Spot Transactions vs Forward Transactions
Lecture 6: International FX Markets 3
International payments
• Commercial banks play a fundamental role;
• More complex than local payments;
• Higher risks require specific money transfer procedures;
• In international payments are used:
• Non – cash payments (barter, compensation, clearing, buy
– back)
• Cash payments
• Payment instruments
• Payment techniques.
Lecture 6: International FX Markets 4
International Payments Methods
I. Cash in advance
II. Consignment
III. Open Account Payments
IV. Bank Drafts:
- bill of exchange (sight and time drafts)
- checks
- money orders
- promissory note
V. Letter of Credit
VI. Documentary collection
• Documents against payments
• Documents against acceptance
Lecture 6: International FX Markets 5
I. Cash in advance
• The goods will not be shipped until the buyer has paid the seller.
• Time of payment : Before shipment
• Goods available to buyers : After payment
• Risk to exporter : None (maximum security for the seller)
• Risk to importer : Relies completely on exporter to ship goods as
ordered
• Used for: small amounts, new customers, one-time sales
Exporter
Goods
Lecture 6: International FX Markets 6
II. Consignment
• The exporter retains actual title to the goods that are shipped to the
importer.• Time of payment : At time of sale to third party• Goods available to buyers : Before payment• Risk to exporter : Allows importer to sell inventory before paying exporter• Risk to importer : None
Exporter (consigner)
Importer (consignee)
Delivering of goods (1)
Clients (third part)
Selling of goods (2)Payment in the local currency (3)
Payment of Import at a
specific date (4)
Lecture 6: International FX Markets 7
III. Open Account Payments
1. In an open account trade arrangement, the goods are shipped to a buyer without
guarantee of payment.
2. The credit terms are arranged between the importer and the exporter.
3. These are usually afforded to longstanding partners, or to foreign affiliates
where payment is reasonably assumed
4. Quite often, the buyer does not pay on the agreed time.
3. Unless the buyer's integrity is unquestionable, this trade arrangement is risky to
the seller.
4. Time of payment : As agreed upon
5. Goods available to buyers : Before payment
6. Risk to exporter : Relies completely on buyer to pay account as agreed upon
7. Risk to importer : None
Exporter Importer
Payment on the agreed time (2)
Delivery of goods (1)
Lecture 6: International FX Markets 8
IV. Bank Drafts: Check
Check = an order given to a bank in order to pay a specific amount to a person from the company current account.
Exporter
Exporter bank Importer bank
Importer
Cash deposit (1)Cheque remittance (2)
Delivery (3)
Payment (4)
Presenting the cheque for
payment (5)
Money transfer (6)
Payment (7)
Risk vs Simplicity
Lecture 6: International FX Markets 9
Problems with the payments by checks
Risk of non-payment for lack of funds (the cheque is uncovered);
Banks usually place a hold on funds for 3-4 weeks from deposit date
May be post-dated Must ensure cheque is properly filled out Used for: small payments or well-known clients.
Lecture 6: International FX Markets 10
Check - example
Check Issuing Date at Issuing Place
This check is to be
Paid to the Order of Exporter € Value
Value Euros
by the:
Importer Bank
Importer Bank Address
____Importer Signature____
Lecture 6: International FX Markets 11
Bank Drafts: Money Orders
beneficiary stipulates the account to which funds will be paid cannot place conditions on payment, so cannot require proof of
delivery of goods therefore, must exist high level of trust between the parties to
use this method
Delivery (1)Importer
Importer Bank
Exporter)
Exporter Bank
Presenting the documents (4)
Payment (5)
Money transfer (3)
Money Order = is an order given by a person to its bank in order to pay a specific amount directly in the beneficiary’s account.
Lecture 6: International FX Markets 12
Bank Drafts: Bill of Exchange Bill of Exchange = unconditional order in writing to pay a specified amount of money to a specified person or to the bearer, upon presentation of the bill or at a specified future date
BE Bearer
Beneficiary
Debtor
BE Remittance (1)
BE Acceptance (2)
BE Remittance (3)
Presenting BE for payment
(4)
Payment at the BE’s maturity (5)
may be endorsed and passed on to another, or just passed on if to the bearer
Lecture 6: International FX Markets 13
Bill of Exchange - sight drafts (documents against payment)
Time of payment : On presentation of draft Goods available to buyers : After payment Risk to exporter : Disposal of unpaid goods Risk to importer : Relies on exporter to ship goods as described in
documents
Sight drafts (documents against payment) : When the shipment has been made, the draft is presented to the buyer for payment. (THE DRAFT ACCEPTANCE IS BEFORE THE DELIVERY OF GOODS)
BE Bearer (Exporter)
Beneficiary (Exporter)
Importer
BE Remittance (1)
BE Acceptance (2)
BE Remittance (3)
Presenting BE for payment
when exporter delivers the
goods (4)
Payment at the BE’s maturity (5)
Lecture 6: International FX Markets 14
Bill of Exchange - time drafts (documents against acceptance)
BE Bearer (Exporter)
Beneficiary (Exporter)
ImporterBE Acceptance (2)
BE Remittance (3)
Presenting BE for payment at a
specified maturity (4)
Payment at the BE’s maturity (5)
Time of payment : On maturity of draft Goods available to buyers : Before payment Risk to exporter : Relies on buyer to pay Risk to importer : Relies on exporter to ship goods as described in
documents
Time drafts (documents against acceptance) : When the shipment has been made, the buyer accepts (signs) the presented draft. (THE DRAFT ACCEPTANCE IS IN THE MOMENT OF THE DELIVERY OF GOODS.)
BE Remittance (1)
Lecture 6: International FX Markets 15
Bill of Exchange - example
BILL OF EXCHANGE
Issuing Data US$: BE Value On Payment Data, for value received, pay against this only set of bill of exchange to the order of Exporter the sum of BE Value Dollars of the United States of America and BE Value cents, effective payment to be made in Dollars of United States of America only, without deduction for and free of any taxes, impost, levies or duties present or future of any nature under the laws of Importer’s Country or any political subdivision thereof or therein. This bill of exchange is payable at Importer’s Place Drawn on: Exporter: Importer’s Name Exporter’s Name
Accepted: Importer’s Signature
Per aval for account of Importer’s Name Aval Bank (Full name and Address
Lecture 6: International FX Markets 16
Bank Drafts: Promissory Notes Promissory note is a written promise to pay a determinate sum of money made between two parties.
• Maker: The issuer of a promissory note (the importer)• Payee: The person to whom the note is to be paid (the exporter)• Difference Between a Promissory Note and a Bill of Exchange: The maker of a note promises to personally pay the payee rather than ordering a third party to do so
Lecture 6: International FX Markets 17
Promissory Notes - Example
Nov. 2, 2004 $ 10,000
New York, New York
Ninety days after the above date for value received, the under-
signed jointly and severally promise(s) to pay to the order of: BANK OF THE RIVER, at
100 Hudson Ave., New York, New York 02167
Ten Thousand and oo/100 DOLLARS
With interest from the date above at the rate of -11- percent per annum (computed on
the basis of actual days and a year of 360 days) payable at maturity
Officer: Jones
No: 990-11-9999 Importer’s Signature
Lecture 6: International FX Markets 18
V. Letter of Credit - definition
A letter addressed to a beneficiary (exporter) by a bank (issuing bank)
• wherein the bank undertakes, on behalf of an applicant (importer)
• to effect payment to the beneficiary for merchandise shipped or services performed
• provided that the beneficiary presents the required documents in compliance with the terms of the letter of credit
- Letters of Credit (l/c) are the means by which the majority of international transactions occur.
- This is a letter written to the seller, signed by the buyer’s bank.
Lecture 6: International FX Markets 20
Letter of Credit - Terminology
Documentary Requirement – L/C is required for most import/export
transactions and is based on documents being independent from de
import / export contract
Clean L/C – presented without other documents, it is useful for
overseas bank guarantees or security purchases
Irrevocable L/C – cannot be revoked without the specific permission
of all parties involved, including the exporter
Confirmed L/C – is issued by on bank and confirmed by another,
obligating both banks to honor drafts drawn in compliance
Validity Period: maximum 21 working days from the opening
moment (can be extended with an additional cost)
Domiciliation of L / C: the place where the payment is realized
(exporter country, importer country, other country)
Lecture 6: International FX Markets 21
Documents Common to an Export L/C
Commercial Invoice Packing List Bills of Lading Certificate of Origin Other Certificates: Quality, Inspection Beneficiary Statements
A. Commercial documents
B. Transport documents
C. Insurance documents
D. Other documents
Lecture 6: International FX Markets 22
Benefits of Letters of Credit
To the Exporter: Payment protection Reliance on issuing bank’s
credit rather than buyer’s Rapid, local source of
repayment, if payable at a local bank
To the Importer: Documentary evidence that
the ordered goods have been shipped on time
Assurance that necessary clearance documents will be provided
Payment deferred until goods are shipped and documents presented (use of funds)
Lecture 6: International FX Markets 23
Problems of L/C
Shipping schedule is not met Stipulations concerning freight cost are
unacceptable Price is insufficient due to FX rate changes Unexpected quantity of product Description of product insufficient or too
detailed Documents are impossible to obtain specified
in L/C
Special Letters of CreditThe Transferable L/C – is where a beneficiary has the right to instruct the paying bank to make credit available to one or more secondary beneficiaries The Back to Back L/C – exists where the exporter, as beneficiary, offers its credit as security in order to finance the opening of a second creditThe Revolving L/C – exists where the tenor or amount of the L/C is automatically renewed pursuant to terms and conditions. These can be cumulative or non-cumulativeThe Red-Clause L/C – used in case of an advance payment in favor for an exporter (a method of finance for the exporter).Banker’s Acceptance – On a time draft, the bank on whom the draft is drawn commits to pay the face amount at maturity by stamping “Accepted” across the draft . Stand-by L/C - are an irrevocable commitment issued by a bank for a stated time period to pay a beneficiary a stated amount of money upon presentation of specified documents stating that the applicant did not fulfill their contractual obligations.
Banker’s Acceptance
8. Pay Discounted Value of BA
1 - 7 : Prior to BA
1. Purchase OrderImporter Exporter
5. Ship Goods
Importer’sBank
2. Applyfor L/C
11.Shipping
Documents
14. PayFace Value
of BA
10. SignPromissoryNote to Pay
6.Shipping
Documents& TimeDraft
4. L/CNotification
9. PayDiscounted
Value ofBA
7. Shipping Documents &Time Draft
Exporter’sBank
3. L/C
12. BA
Money Market Investor
13. Pay Discounted Value of BA
16. Pay Face Value of BA
15. Present BA at Maturity
14 - 16 : When BAmatures
8 - 13 : When BAis created
Lecture 6: International FX Markets 26
Standby Letter of Credit
Exporter ImporterExport contract (1)
Delivery of goods (2)
Importer’s Bank
Importer’s Bank
3. Apply for Standby L/C
4. Standby L/C remittance
5. Standby L/C remittance
It is used if Importer didn’t fulfill it’s obligations
Lecture 6: International FX Markets 27
Transferable Letter of Credit
Exporter
Exporter’sBank
Importer’sBank
Importer
Order to open the L of C (1)
Beneficiary
Open L of C (2)
Advising the transfer (3)
Delivery (4)
Presenting the documents (5)
Transfer L of C (6)
Payment (7)
Documents and payment (9)
Documents and payment (8)
Lecture 6: International FX Markets 28
“Back-to-back” Letter of Credit
Documents shipment (8)
Importer
Importer’s Bank
Exporter’s Bank
Exporter
ImporterBeneficiary (real exporter)
Beneficiary’s Bank
Delivery of goods (1)
Delivery of goods (2)
Apply for L/C 1 (3)
L/C 2 delivery (7)
L/C1 delivery (5)
Apply for L/C 2 (6)
L/C1 delivery (8)
Documents shipment (9)
Documents shipment (10)
L/C1 delivery (4)
Funds (11)Funds (12)
Lecture 6: International FX Markets 30
Documentary Collection
Documents against Payment (D/P)
the buyer may only receives the title and other documents
after paying for the goods
Documents against Acceptance (D/A)
the buyer may receive the title and other documents after
signing a time draft promising to pay at a later date.
Acceptance Documents against Payment
(Acceptance D/P)
the buyer signs a time draft for payment at a later date.
Goods remain in escrow until payment is made
Lecture 6: International FX Markets 35
International Methods of Payment: Advantages and Disadvantages
Method Risk Chief Advantage Chief Disadvantagecash in advance L No credit extension required Can limit sales potential, disturb
some potential customers.Sight draft M/L Retains control and title; If customer does not or cannot
ensures payment before accept goods, goods remaingoods are delivered at port of entry and no payment is due
Letters of credit Banks accept responsibility If revocable, terms can change Irrevocable M pay; payment upon during contract work. Revocable M/H presentation of paper; costs
go to buyerTime draft M/H Lowers customer resistance Same as sight dragt, plus goods by allowing extanded paymentdelivered before payment is due after receipt of goods or receivedConsignment sales M/H Facilitates delevery; lowers Capital tied up until sales; must
customer resistance establish distributor's creditworthinessneed political rish insurance in somecountries; increased risk from currency controls
Open account H Simplified procefure; no High risk; seller must finance customer resistance production; increased risk from
currency controls
Lecture 6: International FX Markets 36
Buyer Max
Min
Min
Max
Con-firmed
Uncon-firmed
SightDraft
TimeDraft
Cash in Advance
Letter ofCredit
DocumentaryCollection
OpenAccount
Seller
Risk protection in case of international payments
Lecture 6: International FX Markets 37
Society for Worldwide Interbank FinancialTelecommunications (SWIFT)
Additional Topic
Lecture 6: International FX Markets 38
Society for Worldwide Interbank FinancialTelecommunications (SWIFT)
•Secure, inexpensive international messaging system that exchanges financial data.
•More than 7,500 financial institutions in 199 countries.
•Helps members, sub-members, and participants reduce costs, improve automation, and manage risk.
Lecture 6: International FX Markets 39
Society for Worldwide Interbank FinancialTelecommunications (SWIFT)
SWIFT can only be used between member banks for administrative messages such as:
payment instructions; funds transfers for customers; funds transfers for the bank’s account; advices and foreign exchange transactions; confirmations and advices concerning loans and deposits; collection advices and payment acknowledgments; letters of credit; balance reports; and advices and confirmations of securities transactions.
Lecture 6: International FX Markets 40
SWIFT - US DollarsUS Importer
New York Bank
Exporter’s Foreign Bank
SWIFTNetwork
Exporter
Payment instructions
Funds USDO Bank in US
US$US$
US$
US$
(U.S. Disbursing Officers)
Lecture 6: International FX Markets 41
SWIFT - Foreign CurrencyUS Importer
New York Bank
Exporter’s Foreign Bank
SWIFTNetwork
Exporter
USDO Bank overseasUSDO Bank
in US
Bank (or foreign exchange house)
US$
US$
US$
Lecture 6: International FX Markets 42
Society for Worldwide Interbank FinancialTelecommunications (SWIFT)
SWIFT BENEFITS Companies
• Eliminates bank and check cashing fees.• Eliminates lost or delayed mail• Assures receipt of payment on payment due date
Agency/Government• Facilitates the elimination of imprest funds.• Maintains funds in the Treasury Account until
withdrawn.• Eliminates costs of processing checks