Finance of International Trade

ThS. Phạm Hồ Hà Trâm - Khoa Kinh doanh quốc tế

tramphh@due.edu.vn
0942404455
COURSE OVERVIEW
• Introduction to the principles and practices of international trade payments and finance,
including exchange rate, the types of risks involved currency hedging and international
trade risk management.

• Understanding of international payment instruments; preparing and checking

documents in foreign trade.

• Understanding of the international legal and regulatory framework such as UCP 600,
URC 522, and ISBP 745 in international payment activities.
• Analyzing of terms of payments and methods of payment.

• Understanding of trade finance (i.e: pre-shipment financing, post-shipment financing).

READING MATERIALS
Textbook:

- Anders Grath (2016), The handbook of international trade and finance: the
complete guide to risk management, bonds and guarantees, credit insurance and
trade finance, Kogan Page Ltd, 4th edition.

- Tarsem Singh Bhogal and Arun Kumar Trivedi (2019), International Trade
Finance: A Pragmatic Approach, Palgrave Macmillan Ltd, 2nd edition.
READING MATERIALS
References:
- ICC (2007), “Uniform Customs and Practice for Documentary Credits - UCP 600”, ICC Publication
No. 600, 2007 Revision.
- ICC (2013), “International Standard Banking Practice – ISBP 745”, ICC Publication No. 745 , 2013
Revision.
- ICC (1995), “Uniform Rules for Collections - URC 522”, ICC Publication No. 522 , 1995 Revision.
- Technical Officers of Global International Trade & Business Finance, National Australia Bank Ltd.
(2000), “Finance of International Trade”, 9th Edition, National Australia Bank.
- Edward G. Hinkelman (2010), “A Short Course in International Payments”, 4th Edition, World Trade
Press.
ASSESSMENT

20% 20% 60%

Participation & Group Mid-term exam Final Exam
assignment
CONTENT
1 Introduction to International Trade Finance

2 Commercial and Financial documents

3 Foreign Exchange

4 Terms of Payment – Place, Time and Currency of payment

5 Terms of Payment – Methods of payment

6 Finance for Importers and Exporters

 CHAPTER 1

INTRODUCTION TO
FINANCE OF INTERNATIONAL TRADE
 Economic rationale of Trade

Country 2
Country 1

Country 2
Country 1
Country 3

Country 3
Country 4

Country 4
Without Trade With Trade
Small national markets. Increased competition.
Limited economies of scale. Economies of scale.
High prices and near Specialization.
monopoly. Lower prices.
Limited product diversity. Interdependencies
Different standards.
 The drivers of globalization

Integration Production Transportation Transactions

Regulatory chains. Supply chains. Transport chains. Information chains
Harmonization of Offshoring. Containerization. (ICT).
regulatory regimes. Global production Transborder Capital for
Trade agreements. networks. transportation. investments.
Credit for
transactions.
BACKGROUND OF
INTERNATIONAL TRADE FINANCE

The International Trade

International
interdependence Finance and
Economics Relations
between countries Payment
 INTERNATIONAL PAYMENT

- International payment is the payment of the monetary transactions related to the

economic relations, trade and other relations between the organizations, companies
and other entities across countries (Đinh Xuan Trinh, 1996).

- International payment refers to payment relationships (payments, receiving,

beneficiary) between the subjects of this country with the subjects of other
countries and with international organizations (Vo Thi Thuy Anh, 2011).
 INTERNATIONAL PAYMENT

* Some notes:
- Exporters want to be paid when their goods have been shipped or dispatched
- Importers want to be received goods that conform to what has been ordered
- Commercial banks play an important role in international trade – intermediaries
between importers and exporters
- Banks have correspondents in most countries, through whom they dealt with the
counter parties
CHARACTERISTICS OF INTERNATIONAL PAYMENT

• International payment occurs in global and serves trading transactions,

investments, international cooperation through a banking network.
• International payment is related to the currency exchange between
countries.
• Currencies in International payment are payment instruments: bill of
exchange, promissory note, check, telegraphic transfer, mail transfer…
• Payment between countries is carried out through banks and there is non-
cash transaction.
• Payment is based on laws and international customs and practices of
international trade.
RISKS IN INTERNATIONAL TRADE
Currency
Cross-cultural Risk Country Risk Commercial Risk
(Financial ) Risk

• Cultural differences • Government • Currency exposure • Weak partner

• Negotiation patterns intervention • Asset valuation • Operational
protectionism, barriers
• Decision-making to trade and investment • Foreign taxation problems
styles • Bureaucracy, red tape, • Inflationary and • Timing of entry
• Ethical practices administrative delays, transfer pricing • Competitive intensity
and corruption • Poor execution of
• Lack of legal safeguards strategy
for intellectual property
rights
• Legislation unfavorable
to foreign firms
• Economic failures and
mismanagement
• Social and political
unrest and instability
CROSS-CULTURAL RISK
• Differences in language, lifestyles, attitudes, customs and religion, where a
cultural miscommunication jeopardizes a culturally-valued mindset or
behavior.
• Cultural blunders-hinder the effectiveness of foreign managers.
• Language-critical dimension of culture-a window to people’s values.
• Language differences impede effective communication.
• Cultural differences may lead to suboptimal business strategies.
COUNTRY (POLITICAL) RISK
• Exposure to potential loss or adverse effects on company operations and
profitability caused by developments in a country’s political and/or legal
environments.
• Every country is characterized by diverse political and legal systems that
pose significant challenges for company strategy and performance, as
managers must adhere to business laws and regulations.
• Preferential subsidies, government incentives, and protection from
competition reduce business costs and influence strategic decision
making.
• Governments encourage domestic investment from foreign MNEs by
offering tax holidays and cash incentives to employ local workers.
CURRENCY RISK
• Currency risk-arises from changes in the price of one currency relative to
another → complicates cross-border transactions → impacts firms with
foreign currency obligations
• The risk contains financial loss to organizations, appearing as a result of
instability and losses in the financial market produced by changes in
interest rates, currencies, stock prices and much more
Ø If supplier’s currency appreciates; you may need to hand over a
larger amount of your currency to pay for your purchase.
Ø If buyer’s currency depreciates; you may receive a smaller
payment amount in your currency (sales price was expressed in
the customer’s currency).
CURRENCY RISK

• Risk of adverse exchange rate fluctuations, inflation and other harmful

economic conditions create uncertainty of returns.
• When currencies fluctuate significantly, the value of the firm’s assets,
liabilities and/or operating income may be substantially reduced.
• Traditionally, currencies are divided into 2 groups: “strong” currencies
and “weak” currencies. The abbreviations for some of the most common
trade currencies are as follows:
US dollar USD Japanese yen JPY
Euro EUR Chinese yuan CNY
Pound sterling GBP Swedish krona SEK
Swiss franc CHF HongKong dollar HKD
Canadian dollar CAD Franc FRF
COMMERCIAL RISK (PURCHASER RISK)
• Commercial risk refers to probable losses arising from the market or the
transaction partners.
• Less than optimal formulation and/or implementation of strategies,
tactics or procedures, e.g. partnering selections, market entry timing,
pricing, product features, and promotional, themes.
• Risk of the buyer going to bankruptcy or being in any other way incapable
of fulfilling the contractual obligations
• Absence of information about global market, cannot accurate the region
of sales -> failure in international business
• Failures in international markets are far more costly than domestic
business blunders.
 RISKS IN
INTERNATIONAL PAYMENT?
INTERNATIONAL PAYMENT
REGULATORY

To resolve the problem of legal conflicts

between countries in international relations,
it is necessary to build a unified international
legal system to regulate international
economic relations, including international
payment activities. This legal system includes
international and national documents;
international practices and customs.
INTERNATIONAL LEGAL DOCUMENTS

1 The Uniform Law for Bills of Exchange (ULB 1930)

an important international legal document regulating the operation of
negotiable instruments in international trade.

2 The Geneva Conventions for Cheques 1931

international legal document regulating the operation of cheques in
international trade.

3 UN convention 1980
The United Nations Convention on International Bills of Exchange and
International Promissory Note is the latest international legal document
regulating the operation of negotiable instruments in international trade.
NATIONAL LEGAL DOCUMENTS

Việt Nam Other countries

In Vietnam, the law on negotiable Other countries also have their own
instruments and negotiable instruments legal systems to regulate international
is regulated in documents such as the payments, such as the British Bill of
Civil Code, Commercial Law, Law on Exchange Act 1882 (BEA).
Negotiable Instruments and other legal
documents.
INTERNATIONAL CUSTOMS AND PRACTICES

1 The Uniform Customs and Practice For Documentary Credit (UCP)

issued by the International Chamber of Commerce (ICC), recognized and
applied by most countries in international payments.

2 The Uniform Rules for Bank-to-Bank Reimbursement under

Documentary Credit (URR 525)
issued by ICC, to unify the reimbursement process between banks.

3 Uniform Rules and Practice for Collection (URC 522)

to unify collection operations in international trade.
INCOTERMS

Incoterms
The International Commercial Terms (Incoterms)
are published by the ICC to explain common
trade terms used in international trade.

Avoid Disputes
Incoterms help businesses avoid, or at least
significantly reduce, the uncertainty caused by
differences in the interpretation of trade terms in
different countries.
ORDER OF LEGAL VALUES

International Treaty Multilateral and National law International practices

bilateral agreements and customs
The Legal Hierarchy in Decreasing Order:
1. International Conventions and Laws
2. Multi and bilateral agreements
3. National Laws
SOME NOTES:
4. International Customs and Practices
In the case of a conflict between these sources of law:
• National laws will have priority over international customs and practices in terms of legal authority.
• International conventions and laws will take precedence over national laws in terms of legal authority.
International Customs and Practices:
• These are discretionary legal documents. This is reflected in the following aspects:
• They only take effect when explicitly referenced in a contract. Once referenced in a contract, they
become legally binding.
• The parties involved in the contract can exclude, add, or modify the provisions of international customs
and practices. In such cases, the specific terms in the contract will take precedence over international
customs and practices in terms of legal authority.