introduction to finance

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

Exporter sends goods to “official storage” owned by a third party in the county of the importer and sends documentary collection to the bank. The bank gives the documents to the importer, when the importer pays the money to the bank. With the document the Importer gets the goods from the storage.

--> bank service, bank has no comitment to pay

1.      Commisional contract that says we use a Letter of credit

2.      Please open a letter of credit (huge commitment for the bank. So, the bank may refuse) takes full responsibility for everything à she is giving a credit in certain conditions

3.      à if accepts they commit to pay the advising bank even if the customer doesn’t pay the bank

4.      The advising bank advises the exporter (no commitment) they would for example say that the offer is acceptable and the bank seems acceptable etc.

5.      Export company sends the goods

6.      Documents that reflect the number, quality shape to the bank. If something is not good with the goods everyone will argue with the documents (issuing bank will maybe control de documents)

7.        

8.      Do a checking on the documents and sends the issuing bank

9.      (Any small mistake in the documents would mean that we send bank the documents to the advising Bank and will not pay) / or they will send the money to advising bank

10.      or I ask the importer what they would like to do send the documents back or pay the goods

11.      the import company gets the goods

 When the documents are clean they pay the goods, they never ask the import company for advice (only if there are minor mistakes in the documents (typing mistake = no consequences they pay but ask the advising bank to correct documents) or there is a mistake in the documents the bank may ask the importer what they want to do

revocable

irrevocable

transferable/  non transferable

notified

irrevocable and not transferable

Irrevocable Letter of Credit (ILOC) is a letter of credit type which cannot be cancelled or amended by the issuing bank without the agreement of the parties of the letter of credit transaction. -->Much more payment commitment

UCP 500 assumed that a letter of credit is irrevocable in default of the indication whether it is revocable or irrevocable.

For example, issuing bank has no power to modify letter of credit terms if beneficiary does not find them acceptable. In other words, every amendment at least requires beneficiary’s acceptance in order to be effective

Revocable letter of credit can be modified or cancelled by the issuing bank after its issuance at any moment without seeking the beneficiary’s consent.

In a transferable letter of credit, the rights and obligations of the beneficiary are transferred to another party, usually a manufacturer or wholesaler

This will only occur if the applicant for the letter of credit (buyer) agrees.

Notifying and advising bank is the same

If bank is not notified, the advising bank can ask the importer to change the bank. So, the importer often chooses the advising bank to become the confirming bank. So, they will be responsible for payment and the documents. But they will ask for a higher “fee”

When the advising bank becomes the confirming bank, the exporter gets the super safe case…

How is a Letter of Credit Confirmed?

When negotiating the terms of sale, the seller would require a letter of credit requesting the advising bank to add its confirmation. The buyer includes this request when submitting the application for L/C issuance to his bank. In most instances the issued credit states: "Please advise beneficiary adding your confirmation" or words to similar effect. Note: This is a request, not a requirement. The advising bank for various reasons may decline to add its confirmation and simply advise the L/C without engagement on its part. When adding confirmation, typical language included in the cover letter would be, "We hereby confirm this credit and thereby undertake that all drafts drawn under, and in strict compliance with the terms stated therein (and any further terms stated herein) will be duly honored on presentation and delivery of documents as specified, if presented, at this office on or before the expiry date."

·       Invoice!

·       transport documents!

·       Custom certificates

·       Packing list (we have 10’000 boxes, size and weight and material of boxesànot what is in the box)

·       Insurance certificate

·       Inspection of …. quantity, color, size (maybe one document, but can also be each for every point)

·       Quality will be decently a lone document

·       Certificate of origin

·       Environmental Certification

·       Social Certification (are employers treated well?

àAs importer I want if possible all these documents but they will cost. Any missing document allows the exporting company to cheat!

Most used transportation are ships 80% of the volume and 70% of the value -à

50900 Ships but only 1% is for passenger the rest is transportation.

àChina and Singapore have the biggest ports in the world

It takes about 20 days to go around the world, 16000??? Container fit in the ship and there are only needed

A bill of lading (sometimes referred to as a BOL or B/L) is a document issued by a carrier to a shipper, acknowledging that specified goods have been received on board as cargo for conveyance to a named place for deliver to the consignee who is usually identified. A through bill of lading involves the use of at least two different modes of transport from road, air or sea.

 The term derives from verb “to lade” which means to load a cargo onto a ship or other form of transportation.

 A bill of lading can be used as a traded object. The standard short from bill of lading is evidence of the contract of carriage of goods and it serves a number of purposes.

·       It is evidence that a valid contract of carriage, or a chartering contract, exists, and is may incorporate the full term of the contract between the consignor and the carrier by reference (i.e. the short form simply refers to the main contract as an existing document, whereas the long form of a bill of lading issued by the carrier sets out all the terms of the contract of carriage):

·       It is a receipt signed by the carrier confirming whether goods matching the contract description have been received in good condition (a bill will be described as clean if the goods have been received on board in apparent good condition and stowed ready for transport: and

·       It is also a document of transfer, being freely transferable, it governs all the legal aspects of physical carriage, and, like a cheque or other negotiable instrument, it may be endorsed affection ownership of the goods actually being carried. It binds the carrier to its terms, irrespectively of who the actual holder of the B/L. and owner of the goods, may be at a specific moment.

Ownership certificate à can be sold, because it is transferable. (mostly with raw products.) ß trading companies do this!

We call this speculation, they buy and sell the stuff on the ship while it’s on the way to somewhere. It can be sold and bought a few times during his way.

ICC (International chamber of commerce) they rule. If you have a problem, they are in charge

e.g. when you have problems with bill of lading

Issuing Bank:

·       Issuing fee 1% on total amount of LC

·       Utilization fee 0.125 % on utilized amount

·       Risk fee 0.25% every 3 month until maturity

·       Maturity fee 0.08% per month until maturity

Notifying Bank:

·       Notifying fee 0.1% one time

·       Documentation fee 0.15% on documents of utilization

·       Payment fee 0.15% on payment amount

=0.40%

Confirming Bank:

·       Average of 0.2% every 3 months for “normal risk” much more in certain situation

àit’s not defined who has to pay which bank! It depends on who needs the deal more. If I really want to import the goods I may pay everything. The negotiate about it.

International commercial term, like a dixionary of all the international terms. à like AGB’s.  à is for every country the same

EXword -->I Take the goods out of the company and am responsible for the transportation

CFR – cost and freights are payed by the exporter

CIF – Cost Insurance and freights. Are included

FOB – Free on board à everything is included until the goods are on the boat

Application of UCP (uniform customs and practice) from ICC (International Chamber of commerce) publication

List of cases what you should and what you shouldn’t do. (List of problems and suggestions how to deal with theme in advance to never really have a problem.)

There are rating companies (moody’s, S&P, Fitch, DBRS) that rate other companies if they pay in time etc.

AAA, A, B, C; CC àAs better your rating, as lower you can borrow cheaper!

If you have e.g. a D you might pay 0.5% more

Maybe it’s a good company but a bad country. So, I Ask for 

financial statement (Balance Sheet àwhat they own and what they must pay. And Income statement ->Profit of the year

o   you need also information for the last few years to see if it’s safe

o   Check some ratios

·       Business plan

o   Are they good customers in the future? 

·       Shareholding

o   Who is the owner, is it a public company? Etc.?

o   If owned by two shareholders. Who are these shareholders?

·       Market share

o   Is it the king of the market? Is it a growing market?

o   Small market shares à you’re a follower

§  Sometimes they make money but then the big ones just buy them off/kill them

§  They are a danger

o   Market maker à you’re going ahead

overdraft

treasury facility

workin capital line of of credit

trade finance facility

import/export facility

receivables financing

Overdraft

o   Cost of running(Staff, electricity…)

o   Cash/Shot/no guarantee

o   Overdraft amount  can be negotiated with bank

Treasury facility

o   Adition to overdraft, when you need everyday a credi