Letter of Credit (L/C) and a draft
A letter of credit is a written pledge by a buyer’s or importer’s bank to the exporter or seller’s bank. The letter of credit guarantees payment of a particular sum of money in a specified currency, as long as the seller meets the specified conditions and presents the set documents within the agreed timeframe. The prescribed documents include commercial invoice, airway bill and certificate of origin. To institute a letter of credit favoring the seller, the buyer either makes an upfront payment of the specified sum or negotiates with the issuing bank.
When the seller or agrees to use the letter of credit, the documents presented (airway bill, invoice and the certificate of origin) ought to be accompanied by a draft. A draft is an instrument used to demand payment. The draft is mainly a check representing the claim for payment, also known as the bill of exchange; it is drawn and signed by the seller (exporter).
What is the major difference between “currency risk” and “risk of non-completion?” How are these risks handled in a typical international trade transaction?"
Currency risk is the possibility that the currency chosen for payment of the import fluctuates in value relative to the exchange currency. Take a case where a British firm exporting to France wants payment in pounds while the Importer (French) wants to make the payment in Euros. If the export contract
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2.There are three different types of foreign exchange risk: transaction exposure, economic exposure, and translation exposure. Transaction exposure refers to the extent to which transactions are liable to be affected by the exchange rate at a given moment. Because of the constant fluctuations of the exchange rate, the profits garnered from a given transaction can be greatly affected. Economic exposure refers to the tendency that a change in exchange rate can have on a party's cash supply and earnings. This has similar consequences to those of transaction exposure, except that it is not directly related to a specific transaction. Translation exposure relates to the impact that changes in exchange rates can have on the financial statements of a country; they differ from the other types of foreign exchange risk in that they have less relation to transactions.
From class, translation risk comes from the translation of the value of the asset from the foreign currency to the domestic currency. When the Punt/US$ exchange rate changes, Universal Circuits’ assets, liabilities, revenues, and expenses have to be recalculated and restated.
Currency risk is the potential risk of loss from fluctuating foreign exchange rates when an investor has exposure to foreign currency or in foreign-currency traded investments.
• Securing low-cost financing can increase the overall profitability of a transaction for both buyer and seller TF Ch 1-15 Banks, ECAs and IFIs • Banks, financial institutions and other providers of trade finance • Export credit agencies (ECAs) • International Financial Institutions (IFIs) or multilateral programs that support confirmations of locally issued L/Cs through guarantee mechanisms The interrelationship of these organizations is key to sustaining trade TF Ch 1-16 Non-bank providers • Other trade service providers seeking to extend their value proposition • Focus on supply chain and Open Account • Couriers and shippers, such as UPS provide niche financing solutions; GE Capital is active in trade finance •
Foreign exchange risk consists of three main types of exposures. First, transaction exposure is when a firm has a contractual obligation under which it supposed to receive or pay a certain amount in a currency that is different than its home currency. Transaction exposure has an effect of the firm’s income statement because the accounts payables or receivables can be affected by currency exchange rates. Second foreign exchange exposure is the translation which impacts the balance sheet of the firm. It occurs when consolidating financial statements of foreign units into a company’s home currency. The third type of foreign exchange exposure is the economic which influences a firm’s cash flows when exchange rates change. This type of exposure can impact assets, liabilities, or any type of anticipated foreign currency cash exchange.
There is also risk of volatility with respect to exchange rates in the short and long term
Due to the geographic diversity of countries where BHP Billiton has extended to, the variation of foreign exchange rate obviously plays a crucial role on its financial performance. According to the annual report of BHP Billiton (2015), US dollar is not only the functional currency utilized in majority of sales and transaction, but also the presentation
Risk result from foreign exchange and politics, while opportunities arise from unexploited markets thereby more revenues. Foreign exchange risks occur due to fluctuations in the value of investment brought about by changes in the exchange rates. If the Euro appreciates against the dollar, the profits Tyson Foods would earn in Portugal will decrease when exchanged back to the dollar. Tyson Foods would thus be unable to protect itself against this kind of fluctuations which make the exchange rate volatile thereby harming revenues and sales.
Currency risks are majorly involved with expanding into foreign markets. Due to the fluctuations of exchange rates, apples profits can vary due to demand and supply. The value of a currency is varied due to currency depreciation and appreciation and this fluctuation and
c. Exchange rate risks: significant portion of revenue stream born currency exchange risk (peso vs. USD) regardless of geographical and product diversification. These risks were absolutely external and thus could have been hardly mitigated.
Economic exposure is the change in expected cash flows arising because of an unexpected change in exchange rates. Aside from existing obligations of the firm which will be settled in foreign currencies at