International Marketing
Chapter 5
The Financial Environment
Credit Policy
Credit availability determines sales and the size of sales abroad
is determined by:
-firm-specific factors such as size,experience in
international trade,capacity for financing
transactions
-degree of economic development
-factors related to particular transaction
The Credit Policy Allows
the Exporter To:
Determine the extent of risk they are
willing to absorb.
Explore new ways of financing exports.
Prepare for a changing environment.
Types of Financial Risk
Commercial risk
Political risk
Foreign exchange risk
Commercial Risk
Reasons of Commercial Risk:
Internal changes in the firm
Loss of a key customer
Cash flow problems
Natural disasters
Slow payment by government buyers
Political Risk
Foreign Exchange Risk
Sources of Financing
– Commercial Banks
– Forfeiting and factoring
– Official trade finance
– Private sector export trade insurance
Sources:
Commercial Banks
Sources:
Forfaiting,
– exporter receives cash at the time of
shipment via third party,The exporter
receives promissory notes and receives
cash from a third party which buys them at
a discount,
Factoring:
– purchase of exporter’s receivables at a discount
Official Trade Finance-takes place either
as a loan or a guarantee provided by govt.
– Pre-Export Support
– Export Credit Insurance
Official Trade Finance
The Export-Import Bank (Ex-Im Bank)
–,to aid in financing and facilitating exports”
Official Trade Finance
Pre-export Support
– the Working Capital Guarantee Program
(WCG)
– guarantees the lender against default by
exporter
Official Trade Finance
Export Credit Insurance
– meets the exporter’s need to offer credit
terms to foreign customers
Export Credit Insurance
Multi-buyer Policies
– may cover short- or medium-term sales or
a combination of both
Single-buyer Policies
– exporters select the sales they desire to
insure
Guarantees
Medium Term Guarantees
– transactions up to $10 million
– repayment term not to exceed 7 years
– foreign buyer makes a 15% cash down
payment
Guarantees
Long-Term Guarantees
– for transactions in excess of $10 million
– repayment period of 8 or more years
– commercial and political risk coverage is
100%
Other Public Sector
Financing Sources
Overseas Private Investment
Organization (OPIC)
Agency for International Development
(AID)
U.S,Trade Development Program
(TDP)
World Bank Group
Regional development banks - Asian
Development Bank
Multilateral Investment Guaranty
Agency
Private Sector Export
Credit Insurance
Private Export Funding Corporation
(PEFCO)
Financial Risk
Management
Problems in assessing a
foreign buyers
creditworthiness:
Credit reports may not be reliable.
Audited reports may not be available.
Financial reports may be in a different
format.
Many governments require that assets
be reevaluated upward.
Statements are in local currency.
Exchange controls may stop
conversion of local currency into dollars.
Other Financial Controls:
Countertrade
Debt/equity swap
Debt/product swap
Foreign Exchange Risk
Exchange Rate Fluctuation
The Foreign Exchange
Market
Exchange rate
Spot market
Forward market
Hedge
Exchange rate
The price of one currency in terms of
another.
1 U.S,dollar is equal to 1.6757 Pound Sterling on
12/27/98.
Spot market
The market for buying and selling
currency on a given day.
To buy 100 Pound Sterling on 12/27/98 would cost
$167.57.
Forward market
The currency market on closing
contracts for 30,60,or 90 days.
Hedge
Protection against exchange risks.
The Management of
Foreign Exchange Risk
Transaction exposure
Translation exposure
Economic exposure
Options
Gives the holder the right to buy or sell
foreign currency at:
– a pre-specified price
– on a pre-specified day
Futures
An obligation:
– to buy a pre-specified currency
– at some point in the future
– at a pre-specified price