INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
19Chapter NineteenExports and Imports
Chapter Objective:
This chapter discusses the microstructure of
international trade.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-1
Chapter Outline
? A Typical Foreign Exchange Transaction
? Forfaiting
? Government Assistance in Exporting
? The Export-Import Bank and Affiliated Organizations
? Countertrade
? Forms of Countertrade
? Generalizations about Countertrade
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-2
A Typical Foreign Exchange
Transaction
? Over the years,(centuries,really) an elaborate
process has evolved for handling exports and
imports.
? Figure 19.1 illustrates this process
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-3
Process of a Typical
Foreign Trade Transaction
Importer’s Bank Exporter’s Bank
Importer Exporter
Purchase order
Shipment of goods
Letter of Credit
Shipping Documents and time draft accepted
Payment-discounted value of B/A
Money
Market
Investor
B/A
Face value of B/A
PV B/A
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-4
Forfaiting
? Forfaiting is a type of medium-term financing
used to finance the sale of capital goods.
? It involves the sale of promissory notes signed by
the importer in favor of the exporter.
? The forfait,usually a bank,buys the notes at a
discount from face value from the exporter.
? The exporter gets paid and does not have to carry
the financing.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-5
Government Assistance in Exporting
? For political reasons (having to do with
mercantilism),most developed countries offer
competitive assistance to domestic exporters.
? This assistance often takes the form of subsidized
credit that can be extended to exporters.
? Also credit insurance programs that guarantee
financing extended by private financial
institutions are common.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-6
The Export-Import Bank and
Affiliated Organizations
? In 1934 the Eximbank of the United States was founded
as an independent government agency to facilitate and
finance U.S,export trade.
? Eximbank’s purpose is to provide financing in situations
where private financial institutions are unable or
unwilling to because:
1,The loan maturity is too long.
2,The amount of the loan is too large.
3,The loan risk is too great.
4,The importing firm has difficulty in obtaining hard currency.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-7
Countertrade
? Countertrade is an umbrella term used to describe
many different types of transactions each in
“which the seller provides a buyer with goods or
services and promises in return to purchase goods
or services from the buyer”.
? Countertrade may or may not involve the use of
currency,as in barter.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-8
Forms of Countertrade
? Barter
? The direct exchange of goods between traders,Barter requires a
double coincidence of wants.
? A clearinghouse arrangement is a form of barter in which
the traders agree to buy a certain amount of goods from
each other.
? They set up accounts with each other that are debited and credited
as needed,At the maturity of the arrangement,the parties settle up
in cash or merchandise.
? A switch trade is the purchase by a third party of one
country’s clearing agreement balance for hard currency.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-9
Forms of Countertrade
? A buy-back transaction involves a technology transfer via
the sale of a manufacturing plant.
? The seller of the plant agrees to buy back some of the output of the
plant once it is constructed.
? A counterpurchase trade agreement is similar to a buy-
back transaction,but differs in that
? The output that the seller of the plant agrees to buy is unrelated to
the plant.
? An offset transaction can be viewed as a counterpurchase
trade agreement involving the aerospace/defense industry.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-10
Disadvantages of Countertrade
? It is inefficient.
? Some claim that such transactions tamper with the
fundamental operation of free markets,and
therefore resources will be used inefficiently.
? Transactions that do not make use of money
represent a huge step backwards in economic
development.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-11
Advantages of Countertrade
? Countertrade conserves cash and hard currency.
? Advantages also include the improvement of trade
imbalances,the maintenance of export prices,
enhanced economic development,increased
employment,technology transfer,market
expansion,increased profitability,less costly
sourcing of supply reduction of surplus goods
from inventory,and the development of marketing
expertise.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-12
Generalizations about Countertrade
? There are advantages and disadvantages
associated with countertrade.
? It can benefit both parties and in some
circumstances is the only trade possible.
? Whether countertrade transactions are good or bad
for the global economy,it appears certain that
they will increase in the near future as world trade
increases.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-13
End Chapter Nineteen
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
19Chapter NineteenExports and Imports
Chapter Objective:
This chapter discusses the microstructure of
international trade.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-1
Chapter Outline
? A Typical Foreign Exchange Transaction
? Forfaiting
? Government Assistance in Exporting
? The Export-Import Bank and Affiliated Organizations
? Countertrade
? Forms of Countertrade
? Generalizations about Countertrade
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-2
A Typical Foreign Exchange
Transaction
? Over the years,(centuries,really) an elaborate
process has evolved for handling exports and
imports.
? Figure 19.1 illustrates this process
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-3
Process of a Typical
Foreign Trade Transaction
Importer’s Bank Exporter’s Bank
Importer Exporter
Purchase order
Shipment of goods
Letter of Credit
Shipping Documents and time draft accepted
Payment-discounted value of B/A
Money
Market
Investor
B/A
Face value of B/A
PV B/A
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-4
Forfaiting
? Forfaiting is a type of medium-term financing
used to finance the sale of capital goods.
? It involves the sale of promissory notes signed by
the importer in favor of the exporter.
? The forfait,usually a bank,buys the notes at a
discount from face value from the exporter.
? The exporter gets paid and does not have to carry
the financing.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-5
Government Assistance in Exporting
? For political reasons (having to do with
mercantilism),most developed countries offer
competitive assistance to domestic exporters.
? This assistance often takes the form of subsidized
credit that can be extended to exporters.
? Also credit insurance programs that guarantee
financing extended by private financial
institutions are common.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-6
The Export-Import Bank and
Affiliated Organizations
? In 1934 the Eximbank of the United States was founded
as an independent government agency to facilitate and
finance U.S,export trade.
? Eximbank’s purpose is to provide financing in situations
where private financial institutions are unable or
unwilling to because:
1,The loan maturity is too long.
2,The amount of the loan is too large.
3,The loan risk is too great.
4,The importing firm has difficulty in obtaining hard currency.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-7
Countertrade
? Countertrade is an umbrella term used to describe
many different types of transactions each in
“which the seller provides a buyer with goods or
services and promises in return to purchase goods
or services from the buyer”.
? Countertrade may or may not involve the use of
currency,as in barter.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-8
Forms of Countertrade
? Barter
? The direct exchange of goods between traders,Barter requires a
double coincidence of wants.
? A clearinghouse arrangement is a form of barter in which
the traders agree to buy a certain amount of goods from
each other.
? They set up accounts with each other that are debited and credited
as needed,At the maturity of the arrangement,the parties settle up
in cash or merchandise.
? A switch trade is the purchase by a third party of one
country’s clearing agreement balance for hard currency.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-9
Forms of Countertrade
? A buy-back transaction involves a technology transfer via
the sale of a manufacturing plant.
? The seller of the plant agrees to buy back some of the output of the
plant once it is constructed.
? A counterpurchase trade agreement is similar to a buy-
back transaction,but differs in that
? The output that the seller of the plant agrees to buy is unrelated to
the plant.
? An offset transaction can be viewed as a counterpurchase
trade agreement involving the aerospace/defense industry.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-10
Disadvantages of Countertrade
? It is inefficient.
? Some claim that such transactions tamper with the
fundamental operation of free markets,and
therefore resources will be used inefficiently.
? Transactions that do not make use of money
represent a huge step backwards in economic
development.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-11
Advantages of Countertrade
? Countertrade conserves cash and hard currency.
? Advantages also include the improvement of trade
imbalances,the maintenance of export prices,
enhanced economic development,increased
employment,technology transfer,market
expansion,increased profitability,less costly
sourcing of supply reduction of surplus goods
from inventory,and the development of marketing
expertise.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-12
Generalizations about Countertrade
? There are advantages and disadvantages
associated with countertrade.
? It can benefit both parties and in some
circumstances is the only trade possible.
? Whether countertrade transactions are good or bad
for the global economy,it appears certain that
they will increase in the near future as world trade
increases.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
19-13
End Chapter Nineteen
