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MGST 391 (29)

Chapter 29.docx

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University of Calgary
Management Studies
MGST 391
Ahmad Ali Sohrabi

Chapter 29:MOFs: Multiple Options Facilities (MOF) comprise variety of instruments through which company can raise funds and include:  Note Issuance Facilities (NIF)  Revolving Underwriting Facilities (RUF) Counter Trade Counter trade is a trade of goods and services for other goods and services. Types/arrangements of Counter Trade:  Barter (direct exchange of goods/services between two parties without a cash transaction)  Counter purchase (A reciprocal buying agreement between two parties whereby seller also undertakes to purchase a certain amount of merchandize from other country)  Offset (like counter purchase but party can purchase from any firm in the country)  Switch Trading (A third party trading house buys the firm’s counter purchase credits and sells them to another firm that can better use them)  Buyback (One country supplies capital goods and receives its output as partial/full payment) Advantages of Counter Trade: 1. A mode to finance exports when other modes are not available. 2. Competitive advantage over parties preferring cash transactions. Disadvantages of Counter Trade: 1. Goods received may be unusable, poor quality, or unprofitable. 2. Expensive and time consuming to develop a separate in-house trading department to dispose those goods 3. Unrealistically high value may be impose on goods. 4. Cost may exceed expectation. (Cost includes Consultancy fee, Discount, Bank fee, Insurance, Any fee paid to third party) Why Countries do Counter trade:  Countries lack commercial credit or convertible FCY.  Countries use it as an instrument of political, economical policies (e.g. Balance of Trade, relationships)  To boost developing manufacturing industries  To obtain more trade or new technology Which Countries do Counter trade:  Oil exporting companies.  Less developed and developing countries.  Unusual in industrial countries with exception of defense, aviation and big advanced technology. Financial problems in Foreign Trade Foreign Trade raises special financial problems i.e.  Bad debts’ risk is greater  Large investment appears in receivable and stocks Reducing bad debts’ risk: 1. Export factoring 2. Forfeiting 3. Documentary Credit (L/C) 4. International Credit Unions 5. Export Credit Guarantee Schemes Export factoring: Factoring company provides administration of:  Client invoicing  Sales accounting  Debt collection  Credit protection Forfeiting: (providing medium term export finance)  Exporter sends Capital goods to overseas buyer who wants medium term loan.  Buyer makes down payment and issues notes/ accepts draft.  Notes/drafts are guaranteed by Availising bank.  Exporter discounts them from Forfeiting bank. Documentary Credit (L/C): 1. Importer orders. 2. Exporter accepts. 3. Importer’s bank issues L/C to exporter’s bank. 4. Exporter’s bank authorizes exporter to ship merchandize. 5. Exporter ships and gives documents and draft to own bank. 6. Exporter’s bank sends documents to importer’s bank and gets the draft accepted. 7. Importer’s bank informs importer about arrival of documents and merchandize. 8. Importer pays (or not pays) his bank. 9. On maturity, importer’s bank pays to exporter’s bank who pays to exporter. International Credit Unions: These are organizations/associations of finance houses/banks in different countries having reciprocal arrangements for providing installment credit finance. Export Credit Guarantee Scheme: (where L/C is not acceptable by strong importer) Preshipment Facility:  Guarantee is issued to banks to indemnify them against losses on finance given to exporters to manufacture and process goods for export.  Risks covered are: o Insolvency of exporter o Inability to repay or deliver on due date Postshipment Facility:  Exporter submits application with require
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