introduction to finance

Bank says I will pay instead of my customer. It is not a money Credit, but it can become one. (The bank pays only when the customer really need it.)

Credit by signature 1% (commitment)à can be transfer in credit in cash 5%

-->helps to finance production or the sale of product.

·                Guarantees

·                Bonds

·                (Import) letter of credit

·                Bank acceptance (e.g. promissory note, letter of exchange)

·                SBLC

Financial guarantee

• Guarantee against documents
• First demand guarantee
• SBLC

Contract Bonds

• bid bond
• performance bond
• advance payment bond/down payment
• maintenance bond
• Retention Guarantee

A bank guarantee is a written contract stating that in the event the primary pay, the buyer, is unable or unwilling to pay it’s due to the supplier, the bank as guarantor to the transaction payment would pay its clients ‘debt to the supplier.

o   In a bank guarantee the initial claim is till settled primarily against the bank’s client and not the bank itself. Should the client default, only then, the bank would agree to pay for its client’s debts on behalf of its client

o   The bank generally requires documentary evidence such as a statement detailing the basis for and amount to support the claim for payment.

o   With a first demand guarantee the issuing bank has to pay the claims based on a written demand for payment only.

o   The beneficiary need not present any other evidence but a formally correct claim for payment mentioning the guarantor’s obligation of payment.

Stand by letter of Credit

In case of a default, it is defined as an assurance or a type of guarantee that the seller will receive his correct payments by the bank --> secondary payment mechanism

(LC ist assurance for payment by the client --> primary payment mechanism)

file!!!!

Risk capital

countertrade

• Barter
• counter purchase
• offset

Project financing

commodity finance

Risk capital (5-6 years). The bank becomes the shareholder and takes the largest part of the company and also the bigger part of risk. After the 5 years you get your company back.

à when everything works out I will have the money to buy back my company. The conditions of buy-back must be negotiated while making the contract before the project. (you lose 5 years of profit but work for the future.

In trade finance, forfaiting is a financial transaction involving the purchase of receivables from exporters by a forfaiter.^[1] The forfaiter takes on all the risks associated with the receivables but earns a margin

trade in which goods or services are exchanged for other goods or services, rather than for hard currency. International trade conducted in this matter is more common in lesser-developed countries with limited foreign exchange or credit facilities. Countertrade can be classified into three board categories:

• Barter
• Counter purchase
• offset

Services and goods

between two ministries of countries. We give rice and you give meat in exchange

we buy service/product and they also buy service/product in the same amount. (difference to barter: we can mix different countries/goods but in the end of the contract (1 year) I have to use the whole amount.

I sell you the shoe-factory and I buy your product or I help you selling your product ????

e.g. Let us take an example that an aircraft manufacturer sells a passenger plane to a buyer in another country and agrees with the buyer that some of the spare parts of the plane will be ordered and purchased in buyer’s country and attach to the plane

You have different sponsors which provide 20% of the whole amount.

80% can be finances by syndicates of banks

The syndicate will be replayed by the profit of the project. à and the sponsors don’t receive any money till the whole syndicate will be totally repaid. But afterwards the full profit goes to the first investors (the sponsors) à the sponsors must wait very long till they get something out of the project

àLike the train around London

Raw material become commodity, because of international market. (The quality, the price, and the stock place are all over the world the same and accepted.) àe.g. oil

Great field for the bank (boat of oil) has to be financed à the bank knows the quality of the oil and likes to give money for it. Big benefits.

• Order checks, • Pay off a loan, • Pay your bills online, • Review your bank statement, • Cash a check • Exchange money/currency • facility (withdraw everywhere) • Organize means of money

(you don’t know in advance how much it will cost), Latin creditum, meaning: “That which is entrusted or loaned (Trust or entrust)

A lender/creditor makes money available to you to borrow with a deferred repayment. In exchange for the credit, the lender gets back the money, plus interest.  The debtor gets the money to pay for and take possession for goods and services immediately.

Time for money – money for time

Most important: “financial trustworthy” à The bank must believe that you will pay back!

major risk: NO repayment!

 Fixed assets or immobilization risk,

Rate of exchange risk à Bank doesn’t have every currency, they will borrow the e.g. Real (brazil) from a bank in brazil, 

Treasury risk (case of late payment) à some customers pay back a few days later --> over night adjustment

Political risk (iran, cuba)

Risk of losing a chance (by taking the wrong customer)

Fix and flexible interes

Deviding risk, 

short-/long-term, different countries, types of industries, public/corporate, Property

Cost of funds: deposits structure (duration, remuneration (=Vergütung) …)

Or

Monetary market (can’t be changed)

+

Internal banking cost: network charges, staff…

+

Risk cost: type of borrower, credit duration, type of credit, market situation

=cost of credit

+

Net margin in the bank would like to earn

= price of credit

à This price will not be accepted by everybody, you need to cut down your costs

You need money either from deposit (free*) or you borrow it (not free = interest**)

*it’s not really free, because you must make advertisement, reputation, attraction to customers, be develop, huge network, brunches, computer system, staff

**Interest is low because of offer and demand (There is so much money in the world)

We suppose a bank extending 10M USD credit to a large international company. The bank utilizes resources from monetary market.

Let’s imagine a monetary market price at 5%.

A large intern. Cy means a credit spread at 1%

àThe borrower will pay 6% interest, but spread remains at 1% (in fact the earning is less as there are costs)

1% means the annual interest paid by borrower to bank will be 100.000 USD

Total default on this credit would be equivalent of 100 years of interest…

Bank transfer

swift

ckeck

Bill of exchange

Promissory note

Documentary collection

Letter of credit

Is good for trustworthy customers (it’s risky)

Society for Worldwide Interbank Financial Telecommunication

·       It’s quick

·       Instant: you send a receive at the same time the message (The money will be transferred within a few days

·       Commitment (de deal can’t be broken) à security of receiving money

·      Save for export but not import (money is guaranteed but not the goods

·       24 Mio Messages per day in 2015 à it’s common

è See pics in file…

·       Simple

·       Certified (5-8 days) Bank ensures payment

·      Cashier’s check/bank check (1 year) à full security! Bank issuing the check and not me

Bills of exchange are used for long time in international trade.

Prior to the advent of paper currency, bills of exchange were a common means of exchange.

It is an unconditional order in writing addressed by one person to another. Today a bank, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer…

A bill of exchange requires three parties – the drawer, the drawee and the payee.

The person who draws the bill called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay he becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or payable is called the payee.

A negotiable promissory note is unconditional promise in writing made by one person to another, singed by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time, sum certain in money to order or to bearer (überbringen/ausstellen).

Bill of exchange and Promissory note 

means: Bank acceptance at sight or maturity date à bank signs that they guaranteed the payment. ß it’s even more secure for the producer of goods

--> full commitment to pay!

bill of exchange and promissory note

Negotiable (paper has value and can be used in different ways):

·       Wait 3 month

·       Use it as means of payment

·       Sell it

·       Try to get a better credit

·       Use as a guarantee