Flashcards
Trade Finance
Cards in this deck (79)
- 1What are the different types of foreign exchange risk?1. Translation exposure
2. Transaction exposure
3. Economic exposure - 2When do translation exposure arise?When a company has longer term structural liabilities or assets that are denominated in a foreign currency
- 3When do economic exposure arise?May arise when exchange rate movement cause long-term competitive costs or benefits
- 4What are the buyer risks that firms engaged in exports to international markets may face?1. Insolvency of the importer
2. Failure by the importer to pay for goods within the agreed credit period
3. Non-acceptance/failure by the importer to take delivery of goods - 5What is a bill of exchange?An unconditional order to pay a stated sum of money by a specified date
- 6What is the difference between a drawer and drawee in a bill of exchange?1. Drawer - the party who creates the bill of exchange (usually the seller, who is the payee)
2. Drawee - the party to whom the bill of exchange is addressed - 7Is it more risky for a seller to hand over the documents against a bill of exchange instead of receiving payment? Why?Seller's risk increases. This is because receipt of payment will depend on the buyer's ability to pay the bill at a later stage, and the seller also lost the advange of having control of the documents related to the goods.
- 8The four common methods are open account, letter of credit, documentary collections, and payment in advance. Rank these methods in terms of risk to the exporter.Most Risky to Least Risky
1. Open Account
2. Documentary Collections
3. Letter of Credit
4. Payment in Advance - 9What is a standby letter of credit?Used to support a trading arrangement whereby the beneficiary can claim payment from the issuing bank if an invoice is not paid by the applicant within a specified period of time
- 10What are two main differences between a standby L/C and a documentary L/C?1. Unlike documentary L/C, standby L/C does not give the exporter a guarantee of payment on presentation of documents
2. Standby L/C does not usually require the involvement of a correspondent bank (advising/confirming) - 11What are revolving L/Cs?Credits that may be renewed or reinstated automatically with respect to amount or time
- 12What are the buyer's objectives in international trade?1. Goods - Right time, place, quality and amount
2.. Certainty of quality before paying or committed to pay
3. Pay as late as possible - 13What are the seller's objectives in international trade?1. Certainty of receiving payment
2. Receive funds as soon as possible - 14What are the risks of advance payment to the buyer and seller?No risks to seller. No assurance of quality and delivery to buyer. Purchase financing may be needed by the buyer for advance payment.
- 15What is a documentary letter of credit?Undertaking by a bank to pay stated amount to the seller if the documents by presented by the seller are in accordance with the terms of the L/C. These documents confirm strictly to specified T&Cs of the L/C itself, the UCP600 and international standard banking practice.
- 16What is documentary collections?The documents representing the goods are controlled by a bank and the buyer obtains access to the documents only when DP bill has been paid or DA bill has been accepted. Once the buyer has the documents, it can obtain possession of the goods and clear them through customs.
- 17What is a supplier credit?An exporter extends credit to the buyer to finance the buyer's purchases - grace period that suppliers afford to importers before calling for payment. Exporter finance/refinance the supplier credit by existing bank credit limits, bank loans, invoice financing, export factoring, forfaiting.
- 18What is a seller's interest contingency insurance?Covers a situation where the goods arrive at their destination in a damaged condition and the buyer refuses to accept them (or is unable to accept them for commerical or political reasons). Covers the physical loss or damage while the goods are in transit, but does not protect against buyer's credit risk.
- 19What are some examples of clean payments and when are they usually used?Bank transfers and bank/company checks. Primarily used when buyers and sellers have agreed to trade on 'open account' terms.
- 20Why are drafts often issued as a set of two?To ensure that at least one draft reaches the buyer when the drafts are dispatched.
- 21What does it mean by 'open account' trading?Seller ships the goods to the buyer without receiving cash or any other legally binding undertaking at the time of delivery. Buyer expected to pay the seller according to the agreed terms of the sales contract and on receipt of the seller's invoice.
- 22What is the difference between documents against payment and documents against acceptance?D/P: payment is made immediately (at sight)
D/A: buyer gives an undertaking to make payment in the future - 23When might payment in advance be used?1. Unacceptable buyer or country risk
2. Seller's market exists
3. Goods are specially manufactured
4. Projects require staged payments in advance
5. E-commerce transactions are involved
6. Buyer negotiates cash discount for taking on trade risk - 24The four common methods are open account, letter of credit, documentary collections, and payment in advance. Rank these methods in terms of risk to the importer.From most risky to least risky
1. Payment in advance
2. Letter of credit
3. Documentary collections
4. Open account - 25What is a countertrade?A contract to purchase goods or services subject to an undertaking by the exporter to take on a compensating obligation
- 26What are some examples of countertrade?1. Barter trade
2. Compensation Trade
3. Offset countertrades
4. Buy-backs - 27What are some documents required for international trade?1. Commercial invoice
2. Packing List
3. Certificate of Origin/Inspection
4. Customs invoice
5. Consular invoice
6. Insurance documents - 28What are some transport documents that may be issued by the carrier of the goods?1. Bill of Lading
2. Air Waybill
3. Rail Waybill
4. Forward Agent's Certificate of Receipt - 29What is a bill of lading?A document acknowledging receipt of goods as cargo by a shipping company. Serves as a document of title, a contract of carriage, and a recipt of shipment. May be consigned to a designated party (straight bill) or to the order of named party (order bill)
- 30What is a Forward Agent's Certificate of Receipt?Document certifying recipt of the goods by the forward agent (from the seller) adn arrangement of transportation to the designated recipient.
- 31What is a correspondent bank?A bank that performs services, when requested, for a bank based in another country.
- 32What is the difference between a Nostro account and a Vostro account?Nostro account - an account maintained by a bank with its correspondent
Vostro account - an account held on behalf of its correspondent
(to enable them to make payments locally and to facilitate international payments) - 33What payment service was implement to facilitate the increased used of open account trading?SWIFT - a centralised matching and workflow engine for open account transaction data
- 34What is a bank draft?A type of check where the payment is guaranteed by the issuing bank
- 35What is pre-shipping finance?A form of temporary working capital arrangement that allows sellers that would otherwise lack sufficient funds to meet the cost of an export transaction.
- 36What is export factoring?Exporter ' sells' its outstnading invoices at a discount to a factor. Factor then responsible for collecting payments due on the invoices from the exporter's customers.. Generally used for short-term financing of consumer goods (credit term up to 180 days)
- 37What is forfaiting?Involves the purchase of an exporter's receivables at a discount on a 'non-recourse' basis. Typically associated with the financing the export of capital goods (credit terms out to several years)
- 38What is post-shipping finance?Financing arrangement intended to bridge the exporter's working capital requirements from the date of shipment of goods to the date of realization of the export proceeds.
- 39What are some ancillary services that banks may offer in regards to international trade?1. Trade enquiries
2. Credit information
3. Economic and political reports
4. Travel services - 40What does a complying presentation consist of under UCP600?A presentation that is in accordance with the T&Cs of the L/C, UCP 600 and international standard banking practice
- 41What does honor mean under UCP600, where buyer's bank are required to undertake to "honor a complying presentation"?1. To pay at sight if credit is available by sight payment
2. To incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment
3. To accept a bill of exchange drawn by the beneficiary and pay at maturity if the credit is available by acceptance - 42What is the difference between an advising bank and a nominated bank in the L/C process?Advising bank - responsible for checking the authenticity of a L/C and advising the seller in relation to the L/C's instructions
Nominated bank - pay, accepts, and negotiates the term draft and/or documents presented by the beneficiary and claims for reimbursement from the issuing bank. - 43What is the role of the confirming bank in an L/C?If payment complications arise from the issuing bank, the confirming bank will make a payment to the seller, provided the specified terms and conditions have been met.
- 44How will a confirming bank try to minimise its risk exposure?By investigating
1. the financial standing and reputation of the issuing bank
2. terms and conditions of the L/C
3. political and economic climate in the issuing bank's country - 45What are some benefits of the L/C to the seller (exporter)?1. Safe method of obtaining payment
2. Advice and assistance can be received from any major bank as the rules for issuing a L/C are internationally accepted under UCP600
3. An irrevocable L/C cannot be amended without the seller's permission - 46What are some drawbacks of the L/C to the seller (exporter)?1. Never as safe as cash payment in advance
2. Slightest discrepancies in documentation can result in delays in receiving payment
3. Seller may not receive payment if the economic/political climate in the buyer's country is unstable
4. Sellers may have to extend short-term credit if the stipulated method of payment involves deferred payment or a term bill of exchange - 47What is the difference in focus between lenders in traditional trade finance and those in structured trade finance?1. Lenders in traditional trade finance focus on the financial soundness of the parties to a transaction
2. Structured trade finance: designed to address risks related to the performance or completion of a transaction ("performance risk") - 48What does lenders typically look to in structured trade finance?1. Value of an asset - determine whether borrower has the capacity, track record and experience to perform all of the necessary functions to create the end-product or outcome
2. Structure of financing - so that they maintain value in the asset while the transaction proceeds to completion - at which point they will seek to be repaid from the proceeds - 49What does structured trade finance involve?It involves tailoring financing arrangements to a project where the lender does not rely on the balance sheet of the borrower. The deal is 'structured' to give the lender comfort that the project will generate sufficient value to repay the debt, while seeking valuable and safe collateral to cover the lender's exposure in the interim.
- 50Who are the lenders in structured trade finance projects?1. Commercial banks, and commercial banking syndicaes (most common)
2. Export credit agencies
3. Development banks (seek to encourage trade in support of international development) - 51What is the mechanism used by lenders to repayment in structured trade finance?'Ring-fencing' - the isolation of future cash flows in the lender's favour
- 52What is the difference in risk focus between structured trade finance and traditional trade finance?1. Traditional trade finance: focus on payment risks
2. Structured trade fiannce: focus more on performance and other structural risks inherent to the transaction (focus on the borrower's ability to perform everything it requires to create value from the transaction with due regard to uncertainties in the political and economic environment) - 53What industries is structured trade finance typically used for?1. higher risk industries and markets (i.e. oil, biotechnology, emerging markets)
2. suitable for businesses seeking off-balance sheet financing to control levels of leverage within their business (security structure for STF transactions is unique to every project) - 54What is the difference in repayment sources between structured trade finance solutions and traditional trade finance solutions?1. STF: when a particular transaction is complete, project cash flows and even invested capital are often cycled back into the STF instruments overseen or held by the lenders
2. Traditional trade finance: typically involve cash deposits or pledges on the borrower's fixed assets as collateral - 55What are some risks in international trade that affect structured trade finance?1. Performance risk
2. Payment risk
3. Political risk
4. Legal risk
5. Market risk - 56What type of risks are included in performance risk and how it can it be mitigated?RIsks here include production and delivery risks that might threaten the generation of cash if teh supplier does not produce the goods or deliver them as required. Can typically me mitigated by proper assessment of the borrower in the form of due diligence checks.
- 57What is payment risk and how is it mitigated?Risk that the importer or buyer in a transaction does not pay for the delivered goods. Payment risk is mitigated through traditional trade finance instruments..
- 58What are the two types of off-balance sheet lending used in structured trade finance?1. Asset-based lending
2. Cash flow lending - 59What does off-balance sheet financing allow the borrower to do?It allows the borrower to avoid liabilities on the balance sheet, and thereby enhance its overall creditworthiness.
- 60What is asset-based lending?The borrower uses the current assets traded as collateral for loans granted by lending institutions. The lender retains the title to the assets until the borrower has repaid all debt, or keeps the title if the borrower defaults.
- 61What is cash flow lending?Uses expected cash flows that are generated throughout a project as collateral for the funds provided by a lending institution. The lender also obtains a pledge in the assets traded, and can oblige the borrower to maintain key financial ratios. Suitable for short-term and bridging loans, and essential for seasonal businesses.
- 62What are some credit enhancement features commonly used in STF?1. Collateral management
2. Hedging - against prices/interest rate fluctuations
3. Insurance - to cover political and commercial risks
4. Guarantees - to minimise payment and performance risk of a trading party - 63What is collateral management?Collateral managers are third party institutions that assess the risk of borrower default and help to determine an appropriate value for the collateral. They enter the contractual agreements between the borrower and the lender and supervise the collateralization process in order to help the parties agree on a fair value for the collateral.
- 64What are the benefits of structured trade finance?1. flexible financing solutions
2. risk reallocation
3. avoidance of restrictive convenants
4.. use of future cash flows to raise export financing
5. entry into emerging markets
6. lower funding costs - 65What are the drawbacks of structured trade finance?1. Performance risk
2. Complexity
3. Up-front costs
4. Price volatility
5. Reliability of collateral managers
6. Political risk - 66What is pre-export financing?It involves the assignment of export contracts to a lender as security for a pre-export loan. It typically provides short-term working capital to ensure exporter has the means to purchase and prepare the goods for shipment to the buyer.
- 67What type of security does a lender usually obtain for pre-export financing?1.. security interest in the goods or commodities traded
2. assignment of receivables under any export contracts
3. an 'escrow' account into which payments by the importer are deposited - often located offshore to mitigate credit, legal, and political risk
4. over-collateralisation of account common - 68What is the purpose of a special purpose entity in pre-export finance?A legal entity with the sole purpose of assisting the performance of the underlying project. Allows the lender to ensure its preferred contractual and payment arrangements are in place.
- 69What is tolling and processing (STF)?A structured trade finance method that involves financing the conversion process of raw materials into semi-finished or finished products.
- 70What are the main risks for tolling and processing to the lending institution?1. The exporter's payment risk
2. Processor's performance risk - 71What is warehouse financing (STF)?Securely stored goods are used by borrower as loan security. Typically used to finance storage during the transfer of goods from the exporter to the importer, or from an importer to final customers. Schedule for loan repayment can be established according to the scheduled usage of the stored goods.
- 72What is borrowing base financing (STF)?It is a structured working capital facility which uses current assets as collateral. It is used by exporters or producers that receive financing based on the current value of the assets they hold and trade based on a 'marked to market' valuation. Inventory and A/R are main assets used as security with overcollateralisation.
- 73What is syndicated lending?A structure of financing involving a group of lenders rather than a single lender. It spread the risk across lender. One lending institution is usually the arranger or lead manager and commits to providing the main part of the loan and may on take on the administrative tasks associated with the loan.
- 74What does it mean to underwrite a syndicated loan on a 'best efforts' basis?The arranger and the borrower agree to a particular size of the loan. Arranger is then obliged to recruit enough lenders for the syndicate to secure that amount. If the syndicate fails, the arranger agrees to cover the shortfall or the borrower receives a smaller amount, depending on the contractual agreements.
- 75How are development banks funded?1. Through bond issuance
2. Government contributions
3. Contributions of other development banks - 76What are the main financing products provided by development banks?1. Standard loans
2. Local currency financing
3. Guarantees and pre-export facilities
4. Equity (up to 25%) - 77What are collateral requirements for development banks?It varies, dependin g on the bank's capabilities and location. Given the complex nature of structured finance, development banks get involved at an early stage and are often included in detailed negotiations with other lenders or syndicates.
- 78What are export credit agencies?They are public, quasi-public, or private entities that augment exporting between countries through the provision of export financing, credit insurance, and guarantees. Similar products to development banks but focus more limited to the promotion of local exports.
- 79What projects do development banks typically fund and assist on?1. promote long-term economic developments
2. promote exports
3. finance large-scale projects
4. facilitate trade
5. ensure environmental sustainability etc.
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- 1 IBF Level 1 Flashcards on Trade Finance, created by Mel Ng on 28/02/2016.
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- Mel Ng
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