Part II: Choose a multinational company on which to base your discussion. Reflect on the company, the concepts in the unit, and the current economic environment in which the company oper

FIN 6303, International Finance 1

Course Learning Outcomes for Unit VIII Upon completion of this unit, students should be able to:

6. Prescribe international short-term cash management investments that maximize firm value. 6.1 Examine methods for financing international trade. 6.2 Evaluate short-term financing options available to multinational companies.

Course/Unit

Learning Outcomes Learning Activity

6.1

Unit Lesson Chapter 19 Video: The Big Ideas of Trade Unit VIII Project

6.2

Unit Lesson Chapter 20 Article: "Corporate Financing and Macroeconomic Volatility in the European

Union" Unit VIII Project

Required Unit Resources Chapter 19: Financing International Trade Chapter 20: Short-Term Financing In order to access the following resources, click the links below. Marginal Revolution University. (2015, February 25). The big ideas of trade [Video]. Cielo24.

https://c24.page/p9szkkqcuaurgtm4rtrzavxqtr Mullineux, A., Murinde, V., & Sensarma, R. (2011). Corporate financing and macroeconomic volatility in the

European Union. International Economics and Economic Policy, 8(1), 79–92. https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc t=true&db=bsu&AN=59929554&site=ehost-live&scope=site

Unit Lesson

Methods of Payment Increased world economic globalization has also increased the importance of global trade activities. It is important that financial managers understand the methods available to ensure international trade product delivery and payment. This is because of the risk of nonpayment or lack of product shipment involved in transactions that involve importers and exporters. There are several payment methods available to help facilitate international trade. These include prepayment, letters of credit, drafts, consignment, and open accounts. Using the prepayment method, the exporter does not ship the product until payment is received. This is typically done using a wire transfer from bank to bank. Companies involved in international trade can use the international electronic payment system to make electronic payments using an intermediary bank. This method protects the exporter and is generally used for first-time transactions when trust is being established.

UNIT VIII STUDY GUIDE Short-Term Asset and Liability Management

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This is not ideal; however, for importers that may fear the exporter will not ship the product, this may be preferred. The letter of credit provides assurance that the importer will make payment once they have proof that the product has been shipped. The letter comes from the importer’s bank, which provides the exporter reassurance because they feel they can trust the bank. Shipping documents are sent from the exporter’s bank, which authenticates the product has been shipped. The importer pays the exporter once they know the products are en route. Like the exporter, the importer often feels they can trust the bank to confirm shipment. Despite the reputation of the bank, the exporter may still be concerned about foreign government interference and may request its own bank to assure the importer’s bank will meet their obligation. Letters of credit are also used as a source of financing. A bill of exchange or draft with or without a letter of credit is an order written and provided by the exporter that provides directions for the importer to pay the amount on the face of the order at a specified time. A draft without a letter of credit does not provide as much protection to the exporter because it means the bank is not obligated to make payment on the importer’s behalf. Draft based transactions use banks as intermediaries to process the shipping documents and collect payment. Once the products are shipped, the draft is given to the exporter for payment. This is called documents against payment (Madura, 2021). The exporter has some production under this method because the bank only releases shipping documents according to the instructions of the exporter. The shipping documents are required for the importer to pick up the product. Two other payment methods worth mentioning are consignment and open account. Consignment is a high- risk method where the exporter retains the title to the merchandise while the product is being shipped. There is trust between the exporter and importer that payment will be made when the products are sold. There is limited recourse for the exporter if the importer does not pay because there is no draft or letter of credit. Once the products have been sold to a third-party, the importer is required to make payment. Open account transactions require the exporter to rely completely on the importer’s financial solvency and honesty. In these transactions, the exporter ships the product, and the importer pays according to pre-specified terms.

Methods of Trade Finance International trade transactions are financed by either the exporter, importer, a financial institution, or some combination of these. If the exporter can finance the transaction completely, this is known as supplier credit. If the exporter cannot completely fund the lifecycle of the product, then some combination of finance methods will be used. Commonly used methods of international trade finance include accounts receivable financing, factoring, letters of credit, banker’s acceptances, medium-term capital goods financing, and counter trade (Madura, 2021). Accounts receivable financing is a method by which the bank loans the exporter the payment secured by accounts receivable. This type of loan relies on the creditworthiness of the exporter. If the importer does not pay, the exporter will still be required to repay the loan. There are other risks involved with international accounts receivable financing. There is a risk of government interference and exchange controls that may block payment from the importer. As a result of this added risk, the interest rate for international accounts receivable is often higher compared to domestic accounts receivable. These arrangements are typically short- term in nature. Export credit insurance is sometimes required by exporters and banks to mitigate the risk involved with international accounts receivable financing. Factoring occurs when an exporter sells the accounts receivable to a third-party. This third-party is referred to as a factor. They charge a fee and purchase the accounts receivable at a discount. It is the factor that takes on the credit risk and must collect payment. Factors work together across borders to assess credit risk and trustworthiness of both the exporter and importer. The exporter enjoys many benefits from using factoring as a finance method. They receive immediate payment without the hassle and expense of managing accounts receivable, and they do not have to worry about the solvency of the importer. In cases where long-term financing may be required, forfaiting is an option. With forfaiting, or medium-term capital goods financing, the importer provides a promissory note or bill of exchange to the exporter. The exporter sells the note without recourse to the forfaiting bank. Forfaiting is like factoring in that the forfaiter takes on the responsibility for payment collection and all risk involved.

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Letters of credit can be used both as a payment method and as a financing method. A time draft is a bill of exchange known as a banker’s acceptance. If held to maturity, the banker’s acceptance acts similarly to accounts receivable financing, in that it provides financing to the importer. The main difference is that the banker’s acceptance provides a guarantee of payment to the exporter from the importer’s bank. If the exporter does not want to hold the banker’s acceptance, they have the option to sell it at a discount reflective of the time value of money. This type of financing is advantageous to the exporter, importer, and the bank of the importer. Counter trade involves different types of foreign trade transactions where the sale of products in one country is tied to the purchase or exchange of goods from that same country. Most often, these types of transactions are barter, compensation, and counterpurchase. Barter occurs when two parties exchange products without the use of currency. Compensation or clearing account arrangements require the exporter to repurchase a specified amount of the product from the importer. This is also known as an industrial cooperation agreement and often involves the construction of large projects. For example, a country might help construct a power plant in one country and then buy back the power produced. A counterpurchase is represented by two separate contracts to purchase goods, which is expressed in monetary terms.

Facilitating Agencies The Export-Import Bank—also known as the Ex-Im Bank of the United States, the Private Export Funding Corporation (PEFCO), and the Overseas Private Investment Corporation (OPIC) are the main agencies that facilitate international trade using loan programs or export insurance. The Ex-Im Bank was originally established to help facilitate trade between the United States and the Soviet Union. Today, it assumes some of the credit risk and provides direct financing by providing guarantees, loans, bank insurance, and export credit insurance to encourage private sector financing of export trade. PEFCO works with the Ex-Im Bank to provide fixed-rate financing to importers. OPIC is a federal agency of the United States that insures against political risks such as inconvertibility issues with currency and expropriation.

Foreign Sources of Financing If a multinational corporation (MNC) needs short-term financing, they have the option to use internal fund sources such as subsidiaries with excess cash. They also use external sources like short-term notes, commercial paper, or bank loans. Internal sources of funds are the first place than the MNC should look when they need short-term financing. Short-term notes with a maturity of 1, 3, or 6 months with an interest rate based on the London Interbank Offer Rate (LIBOR) are often used for external financing. Commercial paper is also used in addition to short-term notes. These are issued without being backed by an underwriter, so they do not come with a guaranteed selling price, but maturities can be customized according to the issuer’s preference and are available for purchase in the secondary market. One final option is bank loans directly from banks.

Foreign and Portfolio Currency Financing Foreign currency financing is sometimes used by MNCs to keep financing costs low. They can use estimates of the effective financing rate of the foreign currency over the time period of the financing. This rate is dependent on the foreign currency interest rate and the forecast of the change in percentage of the currency’s value over the time period of the financing. This method is particularly attractive when interest rates of the foreign currency are low. The savings that can come from financing with a foreign currency motivates the MNC to evaluate different currencies to save money in interest payments. With varying degrees of interest rates and risks, the MNC must consider the potential cost savings weighed against the associated risks. The probability of relatively low financing rates can be achieved if the MNC borrows a portfolio of currencies with low interest rates if the values of the currencies are not tightly correlated. The portfolio method of financing can help to reduce risk.

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Reference Madura, J. (2021). International financial management (14th ed.). Cengage Learning.

https://bookshelf.vitalsource.com/#/books/9780357130667 Suggested Unit Resources In order to access the following resource, click the link below. This study examines the impact on financial dependence during the 2007–2009 financial credit on exports from the United Kingdom. Akram, M., & Rashid, A. (2018). Financial turmoil, external finance and UK exports. Journal of Economics and

Finance, 42(4), 651–681. https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc t=true&db=bsu&AN=131640412&site=ehost-live&scope=site