bank draft, which is payable in 90 days.
11. The exporter sells the draft to his bank at a discount from its face value
and receives the discounted cash value of the draft in return.
12. The importer’s bank notifies the importer of the arrival of the
documents. He/She agrees to pay the in 90 days. The importer’s bank
releases the documents so the importer can take possession of the
shipment.
13. In 90 days, the importer’s bank receives the importer’s payment, so it
has funds to pay the maturing draft.
14. In 90 days, the holder of the matured acceptance presents it to the
importer’s bank for payment. The importer’s bank pays.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-04 Recognize the basic steps involved in export financing.
Topic: Export and Import Financing
91.
Discuss the importance of the Export-Import Bank, its goals, and its
operations.
The Export-Import Bank, often referred to as Ex–Im Bank, is an independent
agency of the U.S. government. Its mission is to provide financing aid that
will facilitate exports, imports, and the exchange of commodities between
the United States and other countries. The bank pursues its mission
through various loan and loan-guarantee programs. The agency guarantees
repayment of medium and long-term loans U.S. commercial banks make to
foreign borrowers for purchasing U.S. exports. It also guarantees to make
the commercial banks more willing to lend cash to foreign enterprises.
Ex-Im bank also has a direct lending operation under which it lends dollars
to foreign borrowers for use in purchasing U.S. exports. It grants loans, that
commercial banks would not, if it sees a potential benefit to the U.S. in
doing so. The foreign borrowers use the loans to pay U.S. suppliers and
repay the loan to Ex-Im bank with interest.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Identify information sources and government programs that exist to help exporters.
Topic: Export Assistance
92.
What is the Foreign Credit Insurance Association?
The Foreign Credit Insurance Association (FCIA) is an association of private
commercial institutions operating under the guidance of the Export-Import
Bank to provide export credit insurance. The FCIA provides coverage
against commercial risks and political risks. Losses due to commercial risk
result from the buyer’s insolvency or payment default. Political losses arise
from actions of governments that are beyond the control of either buyer or
seller.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Identify information sources and government programs that exist to help exporters.
Topic: Export Assistance
93.
Explain countertrade and its purpose.
When conventional means of payment are difficult, costly, or nonexistent,
firms may turn to countertrade as an alternative means of structuring an
international sale. Countertrade denotes a whole range of barter-like
agreements; its principle is to trade goods and services for other goods and
services when they cannot be traded for money. Countertrade can be used
when a government restricts the convertibility of its currency to preserve its
foreign exchange reserves so they can be used to service international debt
commitments and purchase crucial imports.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Describe how countertrade can be used to facilitate exporting.
Topic: Countertrade
94.
Explain why barter is viewed as the most restrictive counter-trade
arrangement.
The simplest form of countertrade is barter. Barter is the direct exchange of
goods and/or services between two parties without a cash transition. First,
if goods are not exchanged simultaneously, one party ends up financing the
other for a period. Second, firms engaged in barter run the risk of having to
accept goods they do not want, cannot use, or have difficulty reselling at a
reasonable price. For these reasons, barter is viewed as the most restrictive
countertrade arrangement. It is primarily used for one-time-only deals in
transactions with trading partners who are not creditworthy or trustworthy.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Describe how countertrade can be used to facilitate exporting.
Topic: Countertrade
95.
Compare and contrast counterpurchase agreements and offset
arrangements. Why might an exporter prefer an offset to a counterpurchase
deal?
A counterpurchase agreement is a reciprocal buying agreement that occurs
when a firm agrees to purchase a certain amount of materials back from a
country to which a sale is made. An offset is similar to a counterpurchase
insofar as one party agrees to purchase goods and services with a specified
percentage of the proceeds from the original sale. The difference is that this
party can fulfill the obligation with any firm in the county to which as sale is
being made. This type of arrangement gives an exporter greater flexibility to
choose the goods it wishes to purchase.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 16-05 Describe how countertrade can be used to facilitate exporting.
Topic: Countertrade
96.
Explain how switch trading works.
Switch trading refers to the use of a specialized third-party trading house in
a countertrade arrangement. When a firm enters a counterpurchase or
offset agreement with a country, it may receive counterpurchase credits
that can be used for purchasing goods from that country. Switch trading
occurs when a third-party trading house buys the firm’s counterpurchase
credits and sells them to another firm that can better use them.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Describe how countertrade can be used to facilitate exporting.
Topic: Countertrade
97.
Discuss the idea of compensation or buybacks as they relate to
countertrade. Provide an example of a buyback arrangement.
A buyback occurs when a firm builds a plant in another country – or supplies
technology, equipment, training, or other services to the country – and
agrees to take a certain percentage of the plant’s output as partial payment
for the contract. Buyback agreements are a form of countertrade. For
example, Occidental Petroleum negotiated a deal with Russia under which
Occidental would build several ammonia plants in Russia and, as partial
payment for their work, would receive ammonia from the plant over a 20–
year period.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Describe how countertrade can be used to facilitate exporting.
Topic: Countertrade
98.
What is the main attraction of countertrade?
The main attraction of countertrade is that it can give a firm a way to
finance an export deal when other means are not available. Many
developing nations have problems raising the foreign exchange necessary to
pay for imports. Countertrade may be the only option available when doing
business in these countries. Even when other options exist, many countries
prefer countertrade to cash deals.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-05 Describe how countertrade can be used to facilitate exporting.
Topic: Countertrade
99.
Discuss the disadvantages of countertrade.
There are several reasons why a firm might avoid countertrade.
Countertrade contracts may involve the exchange of unusable or poor-
quality goods that the firm cannot dispose of profitably. In addition, even if
the goods it receives are of high quality, the firm still needs to dispose of
them profitably. Countertrade requires the firm to invest in an in-house
trading department dedicated to arranging and managing countertrade
deals in order to maintain a profit. These new departments can be
expensive and time-consuming.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Describe how countertrade can be used to facilitate exporting.
Topic: Countertrade
100.
What type of firms are most likely to engage in countertrade? Why?
Countertrade is most attractive to large, diverse multinational enterprises
that can use their worldwide network of contacts to dispose of goods
acquired in countertrading. Unless there is no alternative, small and
medium-sized companies should probably avoid countertrade deals
because they lack the worldwide network of operations that may be
required to profitably utilize or dispose of goods acquired through them.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Describe how countertrade can be used to facilitate exporting.
Topic: Countertrade