3/10/2019

INTERNATIONAL TRADE FINANCE

NGUYỄN THỊ QUỲNH NGA

Course description

 Provides students with understanding of the

principles and practices in Int. Trade Finance

 Focuses on the risks that need to be taken into

consideration by enterprises/financial institutions

 Provides with forms of Int. Trade Finance

 Solutions for enterprises when trading globally

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Course objectives

- Identify and analyse risks involved in Int. trade and

finance and how to mitigate them;
- Understand the types of docs used; legal and regulation
framework and conventions;
- Explain the advantages, disadvantages of solutions in
Int. trade finance;
- Discuss method of trading and finance alternatives;
- Explain financial crime, the regulatory environment and
the need for ethical behavior.

What is meant by the name?

The purpose of this module is:

- to explain how international trade (i.e. export and import)
is financed,
- more particularly how international trade financing
decisions are formed
- how international trade financing is related to other
aspects of financial management

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References

1. Slides of Int. Trade Finance (pdf)

2. Anders Grath, 2008, The handbook of International
trade and finance, Kogan page limited
3. Bhogal, Tarsem and Trivedi, Arun Kumar, 2008,
International Trade Finance: A pragmatic approach,
Palgrave Macmillan
4. Eric Bishop, 2003, Essential Capital Market: Finance of
International Trade, Chương 5, 7
5. Eiteman, Stonehill, Moffett, 2013, Multinational business
finance, 3nd, Pearson, Chương 20
6. Các tập quán quốc tế áp dụng trong tài trợ thương mại:
Incoterms, URC 522 ICC, UCP600, ISP 98, URDG…

References

 Hinkelman, Edward G. (2008), A Short Course in

International Payments, World Trade Press.
 An Introduction to International Commercial Transactions
– Nguyen Tien Hoang (2012), VNU-HCM Publishing
 Nguyễn Thị Quy, Giáo trình tài trợ thương mại quốc tế,
ĐH Ngoại thương
 Đinh Xuân Trình & PGS., TS Đặng Thị Nhàn, Giáo trình
thanh toán quốc tế, ĐH Ngoại thương
 Đặng Thị Nhàn, Cẩm nang bao thanh toán quốc tế, NXB
Lao động

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References

Grath Anders.
The handbook of
International Trade and
Finance.
Kogan Page, 2008

References

Bishop, Eric.
Finance of international
trade. Butterworth-
Heinemann, 2004.

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References

Bhogal, Tarsem and Trivedi,

Arun Kumar.
International Trade
Finance: A pragmatic
approach.
Palgrave Macmillan, 2008

Chapter 1, 2, 3, 5,6,7, 8,9,

13, 17, 20

Assessments

 10% attendance
 30% mid-term assignment
 60% final exam

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Content

Chapter 1: Introduction to Int. Trade and Finance

Chapter 2: International Sale contracts and

commonly docs used in international trade
Chapter 3: Methods of payment

Chapter 4: Bonds and guarantees

Chapter 5: Factoring and Forfeiting

Chapter 6: Financing alternatives

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Chapter 1:
INTRODUCTION TO INTERNATIONAL
TRADE AND FINANCE

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Chapter 1:Introduction to
International Trade and Finance

 Objectives:
 Concept and Features of International Trade
 Risk in International Trade
 Concept and Features of International Trade Finance
 The roles of International Trade Finance
 Forms of International Trade Finance

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Outline of Chapter 1:

I. Background of International Trade

1. Concept
2. Risks

II. Overview of International Trade Finance

III. Roles of International Trade Finance
IV. Forms of International Trade Finance

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I. Backgrounds of International Trade

1. Concept
 Classic:
 Exchange of goods, services
 Between nations
 Through monetary
 Principle of parity
 For the benefits of all.
 WTO: includes all transactions in trading nature such as:
goods, services of transportation, investment, banking,
franchising, promotion, communication…

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Business and Cash cycles

Input
sourcing
period Order shipped
Payment
Order Input received
placed received

Inventory cycle
Account receivable period

Account payable period

Time
Invoice received Cash payment for inputs
Operating cycle
Cash
Cash conversion
received
cycle 16

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Business and Cash cycles

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Business and Cash cycles

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2. Risks in International Trade

 Risks Of Int. Trade

 Common risks in Int. Trade
 Process of risk management (through Identification,
measurement, evaluation and decision)
 The measures of risk management.

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2. Risks in International Trade

2.1. Foundations of Risk In Int. Trade

 International Trade: Return & Risk
 Risk is instability?
 Risk in Economy? Level (amplitude/range) & Frequency
 Normal Risk & Speculated Risk

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2.2 Types of risk in Int. Trade

Commerce
(method of
payment)

Production Exchange
Transport Rate

Country Business
(politics & (ethics of
society) each party)

Finance
(financial
obligation to
all parties
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(1). Production & Transport Risk

- Risk results from Production/ manufacture, transport

and delivery
- Risks due to operating conditions, maintenance
(commodity risk)
- Risks due to lack or carelessness of cargo
insurance
-  Mostly suffered due to exporters

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(2). Commerce Risk

Occurs when the importer loses the ability to

perform the contract or disputes  Mostly
suffered due to importers
Types of commercial risks:
• Bankruptcy or insolvency by the buyer
• Force majeure (unexpected circumstances: strike,
fire,...)
• Protracted default (time delaying)
• Problems with payment arrangements
• Problems with the merchandise
• Contract disputes (Is contract true and valid?)
• Additional costs for financing, insurance, and shipping

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(3) Exchange Rate Risk

Named foreign exchange risk or Currency Risk

Due to the fluctuation of exchange rate.
3 main types of exchange rate risk
 Transaction Exposure : Firm has contractual cash
flows (receivables and payables) influenced by
exchange rate
 Economic Exposure (operating exposure) firm’s market
value is influenced by exchange rate
 Translation Exposure: A firm's financial reporting is
affected by exchange rate movements.

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(3) Exchange rate risk

 Transaction Exposure directly affect cash flows,

revenues, costs and profits of the business 
the most important risk
Translation and economic Exposures often
reflect on records (accounting) may not actually
incurred losses  need cash flow
management.

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(4). Finance Risk

 Finance risks contains in all commercial activities

including the attached financial obligations.
 Financial risk is the default inherent in the loan, the
financing that exporters receive.
Example: Risk due to not repay on time, risk of losing
collateral, risk of fines for overdue ...

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(5) Country Risk

 Nation / Country risk or politics risk may due to :

 Political conditions / government’s instability
 Social instability
 Economic instability
 Political risk associated with the country's macro-
economic factors (quota, license…)
 Country risk and commerce risk?
In country A, due to some issues of national security, the
government declares a quota level for the product Q:
import company Z have received the import quota at the
beginning of each year  affect the signed contract of Z

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(5) Country Risk

 Politics Risk related to relationship to other nations,

the possibility of terrorism, war, civil war ...
 Economy risk : Regarding economic policy or the
openness of economy  direct influences
confidence index of the economy.
 Society risk: can affect international trade in the
long-term operation (affecting production,
consumption habits ...)

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(5) Country Risk

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(6) Business Risk

 Business risk includes active bribery, money laundering,

risk of liquidity (cash transition) ... is the common risk
which affects the business contract as well as the
financial credibility of the seller.
 Bribery risks
 Risk of money laundering
 Risk of cash/payment transition

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2.3. Risk Management

Identify risks in each Contract, recommend how

risk assessment and risk prevention measures.

Assessment of risk prevention measures. What

type of Risks can be prevented through
management measures inside and outside the
enterprise?

Are risks acceptable In terms of contract?

Yes: Preparation No: cancel or

change the terms of
contract
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II. International Trade Finance

 What is trade finance?

 Credit, Sponsor?
 International Trade Finance or Sponsorship

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1. Concept of Int. Trade Finance

"International trade finance is (1) an objective economic

phenomenon, (2) including the overall set of policies,
measures and forms of financial assistance (3) directly or
indirectly (4) for entrepreneurs joining Int. Trade, (5) in one
or several or all stages of the production process from: re-
investment, production and sale of products or provision of
services (6) going to the international market (7) for the
benefits of all participants. “

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Concept of Int. Trade Finance

1. Objectively Economic phenomenon (meaning)

2. Including the set of policies, methods and measures of
assistance in finance (objects)
3. Direct and indirect (methods)
4. For entrepreneurs joining Int. Trade (subjects)
5. in one or several or all stages of the production process
(ranges)
6. To International market (ranges)
7. For the benefits of all participants (purpose)

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Concept of Int. Trade Finance

Visible: Loan, financing, credit

Invisible: policies, regulations, measures
Financing for benefit # non-benefit
 Benefits > Profits

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III. Roles of International Trade Finance

1. The catalyst of development

• Economic zones between economies
• Cash-flow investment from rich countries to poor
countries
• Finance of developed countries

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III. Roles of Int. Trade Finance

2. Leverage of production and consumption

M- G  Production  M’ – G’
Allocation of Capital, distribution of wealth
Increase competitiveness

3. Connect national and international markets.

 Promote International Trade, Co-operation among
nations.
 The borderless of economy

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IV. Forms of International Trade Finance

1. Based on providers:

Organization

Government Bank

Inter-
Firms

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IV. Forms of International Trade Finance

2. Based on methods:
Direct Finance: direct support to production and
trading of ex-im companies
Indirect Finance: provides positive environment
and facilities for ex-im companies

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IV. Forms of International Trade Finance

3. Based on Finance means

Capital
Services
Creditability / Credibility
Modern Banking Operations and enquiries.

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