Transcript International Marketing

INTERNATIONAL MARKETING 6e
Chapter 5
The Financial Environment
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Credit Policy
 The
extent of credit offered is determined by
• Firm-specific factors
– firm size, international trade experience, and capacity for
financing transactions
• Market characteristics
– economic development and means of payment
• Factors particular to the transaction
– payment amount, terms, type of goods, trading partner
 Credit
policy allows exporters to:
• Determine the risk they are willing to absorb.
• Explore new ways of financing exports.
• Prepare for a changing environment.
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Types of Financial Risk
Commercial
Risk
Other Risks
(e.g., inflation)
The Financial
Environment
Political
Risk
Foreign Exchange
Risk
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Commercial Risk
 refers
primarily to the insolvency of, or
protracted payment, or default by an
overseas buyer.
 Reasons for commercial defaults
• Internal (personnel) changes in the foreign firm
• Loss of a key customer by the overseas buyer
• Cash flow problems related to the buyer’s
operating expenses
• Natural disasters and industrial accidents
• Slow payment by foreign government buyers
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Political Risk
 is
the risk of an exchange transfer delay
caused by the actions of a third party and
beyond the control of the buyer or the seller.
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Foreign Exchange Risk
 refers
to the effects of
fluctuating exchange rates
on sellers and buyers who
must protect themselves
from unfavorable changes
in the value of the currency
used in transactions.
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Sources of Financing
 Commercial
banks
• have strong collateral requirements for lending
• may lack the experience and connections to
conduct international transactions
 Forfaiting
by banks
• exporter receives immediate cash by selling
importer’s guaranteed bank note for a discounted
amount to a bank which assumes the risk of
collecting the note.
 Factoring
houses
• The purchase of an exporter’s receivables for a
discounted price. Factoring terms may include
recourse if the buyer defaults on payment.
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Official Trade Finance
 The
Export-Import Bank (Ex-Im Bank)
• “to aid in financing and facilitating exports”
 Pre-export
Support
• the Working Capital Guarantee Program (WCG)
– guarantees the lender against default by exporter
 Export
Credit Insurance
• meets the exporter’s need to offer
credit terms to foreign customers
– Multi-buyer policies cover
short- or medium-term sales or
a combination of both
– Single-buyer policies exporters
select the sales they desire to insure
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Loan Guarantees by the Ex-Im Bank
 Medium-term
Guarantees
• transactions up to $10 million
• repayment term not to exceed 7 years
• foreign buyer makes a 15% cash down payment
 Long-term
Guarantees
• for transactions in excess of $10 million
• repayment period of 8 or more years
• commercial and political risk coverage is 100%
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Financial Risk Management
 Problems
in assessing a foreign buyer’s
creditworthiness
•
•
•
•
•
•
Credit reports may not be reliable.
Audited reports may not be available.
Financial reports may be in a different format.
Asset valuation may be distorted.
Statements are in local currency.
Buyer may not be able to
covert local currency
to dollars due to
exchange controls.
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Other Financial Controls:
 Countertrade
• is the practice of accepting or including the
purchase of locally produced goods by a foreign
seller as part of financing arrangements with a
local buyer.
 Debt/equity
swap
• A firm purchases part of the national debt of a
country and uses the converted debt as equity to
invest in a local firm in that country.
 Debt/product
swap
• Countries repay creditors at a ratio tied to the
amount of local goods purchased by the creditors.
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Foreign Exchange Risk
 Exchange
Rate Fluctuation
• In a transaction in which payment to the seller is
to be made in a currency foreign to the seller,
there is a risk that the currency used for payment
will decline in value (relative to the seller’s
currency) before payment is received by the
seller.
=
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The Foreign Exchange Market
 Exchange
rate
• The price of one currency in terms of another.
 Spot
market
• The exchange of currencies priced for immediate
delivery (the same day).
 Forward
market
• The exchange of currencies with future delivery
dates (30, 60, 90 days)
 Hedge
• a currency purchase contract that provides
protection against currency fluctuations by
guaranteeing the forward exchange rate.
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Direct and Indirect Quotations
 Direct
Quotation
• “a foreign quotation that specifies the units of
home country currency needed to purchase one
unit of a foreign currency”
 Indirect
Quote
• “a foreign exchange quotation that specifies the
units of foreign currency needed to purchase one
unit of home currency”
DEM 1.7755/USD
Direct Quote
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Indirect Quote
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Currency Exchange Examples
 Exchange
rate
• The price of one currency in terms of another.
• $1.6170 U.S. Dollars were equal to one Pound
Sterling on 2/09/2000.
 Spot
market
• Buying or selling currency on a given day.
• To buy 100 Pounds Sterling on 2/09/2000 would
cost $161.70 US Dollars.
 Forward
market
• The market for future currency purchases
• 100 Pounds Sterling to be delivered in 6 months
(8/09/2000) would have cost $ 161.72 US Dollars.
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The Management of Foreign Exchange Risk
 Transaction
exposure
• The risk is that the exchange rate
may change between the present
date and the settlement date.
 Translation
exposure
• Translation of foreign currencydominated financial statements
of subsidiaries into the home
currency of the parent firm
 Economic
=
exposure
• The change in the value of the
firm arising from unexpected
changes in exchange rates.
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Options and Futures Currency Markets
 This
market allows firms engaged in
international trade to lock in exchange rates
and lower their risks.
 Options
• give the holder the right (not the obligation) to buy
or sell foreign currency at either a pre-specified
price or on a pre-specified day.
 Futures
• impose an obligation to buy a pre-specified
amount of currency at some point in the future at
a pre-specified price
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