Topics to Stimulate Class Discussion
1. Assume that you receive a call from an old friend who has set up a computer parts store. He says that
he plans to begin exporting these parts soon. What potential complications should he consider?
2. Why do exporters sometimes sell off their banker’s acceptances? Would they be better off obtaining a
short-term loan instead? What information is necessary to answer this question?
3. What is the common role of a banking institution in international trade besides financing?
POINT/COUNTER-POINT:
Do Agencies that Facilitate International Trade Prevent Free Trade?
POINT: Yes. The Export-Import Bank of the U.S. provides many programs to help U.S. exporters conduct
international trade. The government is essentially subsidizing the exports. Governments in other countries
have various programs as well. Thus, some countries may have a trade advantage because their exporters
are subsidized in various ways. These subsidies distort the notion of free trade.
COUNTER-POINT: No. It is natural for any government to facilitate exporting for relatively inexperienced
exporting firms. All governments provide a variety of services for their firms, including public services, and
tax breaks for producing products that are ultimately exported. There is a difference between facilitating the
exporting process and versus protecting an industry from foreign competition. The protection of an industry
violates the notion of free trade, but facilitating the exporting process does not.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
ANSWER: This issue will lead to many conflicting answers. Students will vary in what they perceive as
Answers to End of Chapter Questions
1. Banker’s Acceptances.
a. Describe how foreign trade would be affected if banks did not provide trade-related services.
b. How can a banker’s acceptance be beneficial to an exporter, an importer, and a bank?
ANSWER: Foreign trade would be reduced without the trade-related services by banks, because some
2. Export Financing.
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Financing International Trade 2
a. Why would an exporter provide financing for an importer?
b. Is there much risk in this activity? Explain.
ANSWER: An exporter could increase sales by allowing the importer to pay at a future date. There
3. Role of Factors. What is the role of a factor in international trade transactions?
ANSWER: A factor can relieve the exporter of the worry about the credit risk of the importer. In
return, the factor is rewarded by being able to purchase the accounts receivables at a lower price than
4. Export-Import Bank. a) What is the role today of the Export-Import Bank of the U.S.? b) Describe
the Direct Loan Program administered by the Export-Import Bank.
5. Bills of Lading. What are bills of lading, and how do they facilitate international trade transactions?
6. Forfaiting. What is forfaiting? Specify the type of traded goods for which forfaiting is applied.
ANSWER: A forfaiting transaction involves an importer that issues a promissory note to pay for the
7. PEFCO. Briefly describe the role of the Private Export Funding Corporation (PEFCO).
8. Government Programs. This chapter described many forms of government insurance and guarantee
programs. What motivates a government to establish such programs?
10. Impact of Foreign Exchange Controls. Every quarter, Bronx Co. ships computer chips to a firm in
central Asia. It had not used any trade financing because the importing firm always pays its bill in a
timely manner upon receipt of the computer chips. However, Bronx Co. was concerned that the foreign
government may impose foreign exchange controls. Bronx Co. reconsidered whether it should use some
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Financing International Trade 3
form of trade financing that would ensure that it would be paid for its exports upon delivery. Offer a
suggestion to Bronx Co. on how it could achieve its goal.
11. Working Capital Guarantee Program. Briefly describe the Working Capital Guarantee Program
administered by the Export-Import Bank.
12. Small Business Policy. Describe the Small Business Policy.
13. OPIC. Describe the role of the Overseas Private Investment Corporation (OPIC).
Advanced Questions
14. Letters of Credit. Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in
seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a
problem, however. Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would
receive payment upon shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its
obligation, however, stating that it was not authorized to guarantee commercial transactions.
a. Explain how an irrevocable L/C would normally facilitate the business transaction between the
Russian importer and Ocean Traders of North America (the U.S. exporter).
b. Explain how the cancellation of the L/C could create a trade crisis between the U.S. and Russian
firms.
c. Why do you think situations like this (the cancellation of the L/C) are rare in industrialized
countries?
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Financing International Trade 4
d. Can you think of any alternative strategy that the U.S. exporter could have used to protect itself
better when dealing with a Russian importer?
CRITICAL THINKING
Limitations of Payment Methods for International Trade. Write a short essay to provide your opinion
about whether the traditional payment methods for international trade insulate an MNC’s business when
there are strained relations between two countries.
Solution to Continuing Case Problem: Blades, Inc.
1. Assuming that banks in Thailand issue a time draft on behalf of Sports Equipment Inc. and Major
Leagues Inc., would Blades receive payment for its roller blades before it delivers them? Do the banks
issuing the time drafts guarantee payment on behalf of the Thai retailers if they default on the payment?
2. What payment method should Blades suggest to Sports Gear Inc.? Substantiate your answer.
3. What organization could Blades contact in order to insure its sales to the Thai retailers? What type of
insurance do these organizations provide?
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Financing International Trade 5
4. How could Blades use accounts receivable financing or factoring, considering that it does not currently
have accounts receivable in Thailand? If Blades uses a Thai bank to obtain this financing, how do you
think the fact that Blades does not have receivables in Thailand would affect the terms of the financing?
Thai banks may consider the assignment of foreign receivables less attractive than the assignment of
domestic receivables and may require high interest rates (accounts receivable financing) or discount the
receivables heavily (factoring).
5. Assuming that Blades is unable to locate a Thai bank that is willing to issue an L/C on Blades behalf,
can you think of a way Blades could utilize its bank in the U.S. to effectively obtain an L/C from a
Thai bank?
6. What organizations could Blades contact to obtain working capital financing? If Blades is unable to
obtain working capital financing from these organizations, what are its other options to finance its
working capital needs in Thailand?
Solution to Supplemental Case: Ryco Chemical Company
a. Ryco could attempt to work out a countertrade agreement. Ryco could provide chemicals that
Concellos needs in exchange for the chemicals that Ryco normally purchases from Concellos. Ryco
could benefit because its cost of importing some chemicals would no longer be tied to Brazilian
inflation. Instead its cost would be tied to its own cost of producing the chemicals it must exchange for
the imports. If Concellos would agree to the countertrade agreement, Ryco may be able to stabilize its
cost of imports, which could reduce the uncertainty surrounding cash flows and profitability.
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Financing International Trade 6
b. Concellos is exposed to the weak currency (called the real). If it purchases the chemicals used in
production from Ryco, its cost will not be affected by the real’s exchange rate (as it could purchase the
U.S. goods through a countertrade agreement). Thus, it may be able to stabilize its cost of imports in
this matter.
c. Concellos’ cost of obtaining imports is the cost of producing the chemicals it uses for exchange (based
on the countertrade agreement). Given high inflation in Brazil, these production costs will rise.
However, it may be able to raise its prices on its final products by the inflation rate to cover its higher
costs of production. Overall, it will be able to offset these higher costs easier than offsetting the higher
costs that would result from exchange rate effects. Since its competitors base their prices on local cost
of production (as they are not exposed to a weak exchange rate risk), Concellos would now incur costs
that are more similar to those of its competitors.
Small Business Dilemma
Ensuring Payment for Products Exported by the Sports Exports Company
1. How could Jim use a letter of credit to ensure that he will be paid for the products he exports?
2. Jim has discussed the possibility of expanding his export business through a second sporting goods
distributor in the United Kingdom; this second distributor would cover a different territory than the first
distributor. This second distributor is only willing to engage in a consignment arrangement when
selling footballs to retail stores. Explain the risk to Jim beyond the typical types of risk he incurs when
dealing with the first distributor. Should Jim pursue this type of business?
Jim should probably avoid the consignment arrangement because of the risk involved.
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