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International Trade Operations

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Operations in the international market are not the same as selling in the local market. From a logistics
viewpoint, there are two unique aspects in the transaction channel: choosing the terms of sale and
handling the payment. Choosing the terms of sale involves looking at the distribution channel and
determining when and/or where to transfer the following between buyer and seller.

The physical goods

Payment for the goods
Legal title to the goods
Responsibility for,
Insuring the goods
Paying for transporting the goods
Controlling or caring for the goods(e.g. in the case of livestock)

Transfer of these can be expressed in terms of calendar time or geographic location or upon completion of
some actions. So, when developing the agreement to sell, one must consider both time and location. From
a seller’s point of view, a list of different locations or stages for quoting a price to an overseas buyer is as
follows.

At seller’s dock
At seller’s dock, packaged for export
Loaded aboard surface carrier which will take it to port of export
Delivered next to the ship, ready for loading
Loaded aboard ship
Crossed ocean
Unloaded at port of import
Passed through Customs and other inspections
Loaded aboard surface carrier that will take it to the importer
Delivered to importer’s receiving dock

The significance in above is that it also determines to or from which point each party has responsibility.
Many terms of payments can be used but the seller must take extra precautions to ensure that the
payment is received. There are 3 standard ways of payment methods in the export import trade
international trade market, which are clean payment, collection of bills and letters of credit or L/C. These
are discussed below.

Clean Payments

In clean payment method, all shipping documents, including title documents are handled directly between
the trading partners. The role of banks is limited to clearing amounts as required. Clean payment method
offers a relatively cheap and uncomplicated method of payment for both importers and exporters.

There are basically two types of clean payments:

 Advance Payment: In advance payment method the exporter is trusted to ship the goods after
receiving payment from the importer.
Open Account: In open account method the importer is trusted to pay the exporter after receipt of
goods. The main drawback of open account method is that exporter assumes all the risks while the
importer get the advantage over the delay use of company’s cash resources and is also not
responsible for the risk associated with goods.

Payment Collection of Bills in International Trade

The Payment Collection of Bills also called “Uniform Rules for Collections” is followed by more than 90% of
the world’s banks.

In this method of payment in international trade the exporter entrusts the handling of commercial and
often financial documents to banks and gives the banks necessary instructions concerning the release of
these documents to the Importer. It is considered to be one of the cost effective methods of evidencing a
transaction for buyers, where documents are manipulated via the banking system.

There are two methods of collections of bill.

Documents against Payment D/P: In this case documents are released to the importer only when
the payment has been done.
Documents against Acceptance D/A: In this case documents are released to the importer only
against acceptance of a draft.

Letter of Credit L/C

Letter of Credit also known as Documentary Credit is a written undertaking by the importers bank known
as the issuing bank on behalf of its customer, the importer (applicant), promising to effect payment in
favour of the exporter (beneficiary) up to a stated sum of money, within a prescribed time limit and
against stipulated documents.

Various types of L/Cs are:

Revocable & Irrevocable Letter of Credit (L/C): A Revocable Letter of Credit can be cancelled
without the consent of the exporter. An Irrevocable Letter of Credit cannot be cancelled or
amended without the consent of all parties including the exporter.
Sight & Time Letter of Credit: If payment is to be made at the time of presenting the document
then it is referred as the Sight Letter of Credit. In this case banks are allowed to take the necessary
time required to check the documents. If payment is to be made after the lapse of a particular time
period as stated in the draft then it is referred as the Term Letter of Credit.
Confirmed Letter of Credit (L/C): Under a Confirmed Letter of Credit, a bank, called the Confirming
Bank, adds its commitment to that of the issuing bank. By adding its commitment, the Confirming
Bank takes the responsibility of claim under the letter of credit, assuming all terms and conditions
of the letter of credit are met.

The most common financial device used is the irrevocable letter of credit as it is found to be most secured
in realizing payments. Currency risk is a type of risk in international trade that arises from the fluctuation in
price of one currency against another. This is a permanent risk that will remain as long as currencies
remain the medium of exchange for commercial transactions. Market fluctuations of relative currency
values will continue to attract the attention of the exporter, the manufacturer, the investor, the banker, the
speculator, and the policy maker alike.

While doing business in foreign currency, a contract is signed and the company quotes a price for the
goods using a reasonable exchange rate. However, economic events may upset even the best laid plans.
Therefore, the company would ideally wish to have a strategy for dealing with exchange rate risk.
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