Forfaiting is a specialized form of trade finance that allows the exporter to offer extended credit to the importer. Under forfaiting , the importer gives the exporter a bundle of bills of exchange or promissory notes covering the principal amount as well as the interest. Each tranche of the notes fall due at different points of time in the future, e.g. every six months, extending up to several years. The notes are backed by an aval or guarantee provided by a reputed bank in the importer’s country. The exporter can then discount these notes without recourse with banks who specialize in the forfaiting business to generate an immediate cash flow. This means that if either the importer or the guaranteeing bank fails to pay when notes fall due, the forfaiter cannot ask the exporter for reimbursement. The credit risk is assumed entirely by the forfaiter. The forfaiter in turn, may Continue reading
International Finance
International finance is the branch of economics that studies the dynamics of foreign exchange,foreign direct investment and how these affect international trade. Also studies the international projects, international investment and the international capital flow .International Finance can be broadly defined, as the study of the financial decisions taken by a multinational corporation in the area of international business i.e. global corporate finance. International finance draws much of its background from the preliminary studies in the topics of corporate finance such as capital budgeting, portfolio theory and cost of capital but now viewed in the international dimension.
Managing Foreign Exchange Risk with Money Market Hedge
Firms, which have access to international money markets for short-term borrowing as well as investment, can use the money market for hedging Forex transactions exposure. Important money market hedging tools used for managing Forex risk are : 1. Discounting Foreign Currency Denominated Bills Receivable: Discounting is used in cases where the export receivables are settled through bills of exchange. The system enables the recipient to receive cash prior to the settlement date itself. The discount represents the cost for the facility extended by the bank discounting the bill. It enables the exporter to guard himself from -losses arising out of an adverse change in-the foreign exchange rate. There are two options before the exporter while considering bill discounting. The first, is to get the bill discounted through a bank in the importer’s country. The foreign currency so obtained can be repatriated at the spot rate prevailing then. The second option Continue reading
International Commercial Payments
International commercial payments may be broadly grouped into the following categories: (1) cash, (2) open accounts, (3) bills of exchange, and (4) letters of credit. 1. Cash Cash is both a method of payment and a term of payment, but as a method of payment it is rarely used in international marketing. As a method of payment, the international marketing firm may use cheques like domestic trade. If accounts are maintained in banks in various countries, cheques may be drawn and paid in a variety of currencies or cash may be remitted by means of an international money order for small amounts. Banks in India have deposit accounts abroad, and foreign banks have deposit accounts in Indian banks. Funds may be paid from any of these accounts for purposes of financing trade, yet an exporter in India receives rupees for the merchandise that is sold, regardless of whether the price Continue reading
History of Exchange Rate System
The world exchange rate systems of the world have it own history shows that the world community has in fact change from the fixed exchange rates system to floating exchange rate system. There are different combinations of fixed exchange rate systems as well as floating exchange rates exist currently, the created for exchange rate regulating together with specific some economical instruments also. Commodity money is a system that the most early existing in this world. This system happened when the development of production as well as a number of labor divisions. When appeared coins having an intrinsic value but not linked with commodity, until the 17th century there was no other monetary system exist. The value of the coin usually associated and combined with the gold in the coin with its content. The content of gold that in the coin can be found their exchange rate between different currencies and Continue reading
Fiat Money – Meaning, Characteristics and Working
The term fiat money is used to define as any money declared by a government to be legal tender with no commodity backing. Legal tender simply means that there is a law requiring everyone to accept the currency in commerce. Besides, fiat money was state-issued money which is neither fixed in value in terms of any objective standard, nor legally convertible to any other thing that was demanded by someone else. In other word, fiat money is money without intrinsic value. In ancient times when money was not invented trade as a whole was on barter system. “Barter” basically means to pay for something you want with products or services instead of paying for what you want with money. Under this system, exchange only can take place between two persons only if each possesses the goods which the other wants. As an example, imagine you grow tomatoes and your neighbor Continue reading
Export Bills of Exchange
Export Bills of Exchange are the drafts or bills of exchange, drawn by the shipper of goods or the provider of services in one country, on people in another country who are buying the goods or using the services, that constitute the chief supply of international currency. A draft or a bill of exchange performs two or three functions. A draft payable at first sight is a demand for payment due and a receipt for payment made. A draft payable at some future period after sight becomes a demand for payment by the seller, a promise of payment by the buyer on the agreed date, and a receipt for payment after such payment has been made. The person who makes out the draft (i.e., the person who receives the money) is said to draw the draft and is called the drawer. The person to whom the draft is addressed and Continue reading