A us based company that exports goods and has

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Unformatted text preview: reign currency. Not only must a U.S. company pay the costs of doing business in the foreign exchange market, but it also is exposed to exchange rate risk. A U.S.-based company that exports goods and has accounts receivable denominated in a foreign currency faces the risk that the U.S. dollar will appreciate in value relative to the foreign currency. The risk to a U.S. importer with foreign-currency-denominated accounts payable is that the dollar will depreciate. Although exchange rate risk can often be hedged by using currency forward, futures, or options markets, doing so is costly and is not possible for all foreign currencies. Typical international transactions are large in size and have long maturity dates. Therefore, companies that are involved in international trade generally have to finance larger dollar amounts for longer time periods than companies that operate domestically. Furthermore, because foreign companies are rarely 9. Commercial banks are legally prohibited from lending amounts in excess of 15% (plus an additional 10% for loans secured by readily marketable collateral) of the bank’s unimpaired capital and surplus to any one borrower. This restriction is intended to protect depositors by forcing the commercial bank to spread its risk across a number of borrowers. In addition, smaller commercial banks do not have many opportunities to lend to large, high-quality business borrowers. CHAPTER 15 Current Liabilities Management 649 well known in the United States, some financial institutions are reluctant to lend to U.S. exporters or importers, particularly smaller firms. Financing International Trade letter of credit A letter written by a company’s bank to the company’s foreign supplier, stating that the bank guarantees payment of an invoiced amount if all the underlying agreements are met. Several specialized techniques have evolved for financing international trade. Perhaps the most important financing vehicle is the letter of credit, a letter written b...
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This document was uploaded on 01/19/2014.

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