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ITA403 - Ch.1 the payment decision Advising Bank Issuing...

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Exporter (Beneficiary) Importer (Applicant) Advising Bank Issuing Bank Ch.1 –the payment decision 1. Risk Type: 1) Credit Risk : The buyer may not pay, or fail to pay under agreed terms 2) Exchange Risk: The buyer’s currency may devalue/depreciate in terms of the seller’s currency before the seller’s currency is delivered for payment.(Hedging to be used as a tool to control) 3) Political Risk: it is usually as post shipment risks, Country risk (War, rebellion, revolution, buyer or seller being blacklisted, import license-quota issues, confiscation of buyers business by Govt., trade embargoes, anti-dumping measures.) 1. Cancellation of import license or authorities 2. The imposition of a law or regulation preventing the import by the buyer, or export by the seller 3. War, rebellion, or revolution in the buyer’s country 4. Expropriation or confiscation of the buyer’s business 5. Increase in transport or other charges, due to political causes that may not be recoverable from buyer Political or governmental policies have a negative impact on trade transaction includes: 1. Tariff and quota restrictions, and the likelihood of change 2. The potential for expropriation of the buyers business or products 3. Trade embargoes 4. Antidumping legislation 5. Health regulation 6. Resale price regulations 7. Restrictive government policies 8. Arbitrary or unique standards for productions 4) Transfer risk: payment may not be made due to the buyer’s inability to obtain and transfer U.S dollars to the seller. A post- shipment risk is the imposition of a law or regulation prohibiting the transfer of USD.(Country risk) 5) County Risk is that bundle of risks associate with transactions to or from or with a buyer or seller in a particular country. It also usually includes socio-political considerations. Examine the advantages of documentary collection over L/C as payment method. (T1) 1) Less expensive for both exporter and importer than L/C transaction. 2) Increase in the amount of trade between affiliated companies, which reduces the credit risk inherent in an int’l trade transaction. 3) Improve the quality and quantity of credit info. With improved info, exporters are able to make better decisions about the creditworthiness of their clients. 4) Competition for market—share demands more flexibility on the part of exporters. 5) A documentary collection is administratively simple. 2. Decision marking and payment methods: Analytical Process 1) Corporate marketing and sales objectives for the market 2) What is the credit standing of the buyer? 3) What risk does the country impose? 4) What is our corporate tolerance for risk? 5) What are the traditional payment terms for our products? 6) What is the cost structure of the company (seller)? Main factors influencing the payment decision (T1) 1) The credit standing of the buyer 2) The amount involved 3) Availability of foreign exchange in the buyer’s country.
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