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Alpha:Sources of Credit Reports/Assessment

2007-09-26T13:21:33Z

35.10.173.40:

{{TF3.1}}

==Assessment==
1. Which of the following is a definition of a credit report?
::a. An instrument that will provide ease in obtaining bank financing
::b. A required report by most government agencies
::c. A tool to assist a seller in assessing payment potential of a customer
::d. A report that is the best source to view financial information of a potential customer

2. The concept of a credit report includes
::a. meeting legal requirements of a business license.
::b. providing a way in which a business can solidify a bank line of credit.
::c. providing a debtor the means to outline his/her business principles.
::d. offering an opportunity for a creditor to review key information to make an informed decision.

3. The main purpose of a credit report is to
::a. establish a method for customers to obtain favorable payment terms.
::b. clarify the credit rating of a potential customer.
::c. allow a business to select qualified vendors.
::d. clarify financial rumors about a company.

4. Which of the following is an example of a direct method of credit investigation?
::a. National Association of Credit Manager (NACM)
::b. Customer financial reports
::c. Experian credit report
::d. Industry trade groups

5. Which of the following is an example of an indirect method of credit investigation?
::a. Wall Street Journal
::b. International bank records
::c. Dun & Bradstreet credit report
::d. customer financial reports

('''Correct answers''': 1=c, 2=d, 3=a, 4=b, 5=c.)

<div style="float:right;">[[Sources of Credit Reports/Activities|Prev]]

[[Category:International Business]]

Alpha:Sources of Credit Reports/Resources

2007-09-26T13:20:41Z

35.10.173.40:

{{TF3.1}}

==Resources==
Coface North America - www.coface-usa.com<br>
Credit Management Information & Support - www.creditworthy.com

===Web Resources===
Credit Reports Worldwide - www.creditreportsworld.com<br>
Dun & Bradstreet – www.dnb.com<br>
Experian – www.experian.com<br>
FCIB - www.fcibglobal.com<br>
Graydon America - www.graydonamerica.com<br>
Hoovers – www.hoovers.com<br>
SJ Rundt & Associates - www.rundtsintelligence.com<br>
OECD – www.oecd.org <br>
US Dept of Commerce – International Company Profile – www.export.gov <br>

===Attachments===
These attachments illustrate the type of information that needs to be gathered from new customers. In addition scenarios can be created by completing the forms for a customer and asking the students to approve payment terms based on the information provided.
*Credit Application – used to request information from new customers
*Vendor Ref Form – used to request information from vendor references provided by customers
*Bank Ref Form – used to request information from bank reference provided by customers

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[[Category:International Business]]

Sources of Credit Reports/Indirect Sources of Credit Information

2007-09-26T13:17:56Z

35.10.173.40:

{{TF3.1}}

==Indirect Sources of Credit Information==
Every experienced credit manager can recount instances when “going direct” in an investigation or a personal visit revealed pertinent information about a credit applicant that was otherwise unavailable. However, as mentioned before, the truth is that many international credit managers today have neither the staff nor the time needed to conduct thorough direct credit investigations, especially when dealing with overseas markets. Instead, they turn to a third party.

In order to appreciate the list of indirect sources of credit information provided below, you need to understand how the data which is provided from these credit agencies (through credit reports purchased by a seller or exporter) is created. For starters, all information today is automated and is usually obtained via CD-ROM or down loaded directly from a mainframe computer. Automation and technology have made credit reports more attractive to credit executives for several reasons.

Combined with vast databases, computers can provide information about companies nationwide. Large companies today deal with tens of thousands of customers who are more and more often not geographically local to them. The level of effort required for direct investigations on large numbers of customers is beyond the means of most companies and would take far too much time.
Reports can be generated instantly and sent electronically or faxed for same-day responses. Decisions about credit applications are time-sensitive. There is usually urgency for a fast decision in order to make a sale. The ability to obtain a credit report on a same day or one-day basis can affect a company’s revenues.

The cost benefit of using credit reports, or reports purchased externally by a seller or exporter, is high. The salary of a credit investigator can pay for more credit reports in one year than an investigator could produce in one year. There are also additional savings in telephone, postage, supplies, storage, and overhead costs.

Credit reports can provide additional marketing data for the company. Examples are checking a customer’s trade lines for growth and, therefore, the possibility of additional sales or reviewing trade terms for customers according to their credit risk. Some credit reporting companies also provide relational information reports.

A number of agencies provide business information reports on companies located inside as well as outside the United States. Some of these also provide domestic credit reports, while others focus primarily on non-US companies. FCIB, Dun & Bradstreet, Experian, SJ Rundt, OECD, Graydon America are some of the groups that report on non-US companies. In general, reports on foreign companies are similar in content and format to domestic reports. They may be purchased individually or contracted for in advance.

===U.S. DoC Commercial Service International Company Profile===
The International Company Profile (ICP) is a service provided by the US Department of Commerce Commercial Service. ICP’s are available on companies located in over 80 countries. The exporter is charged a small fee for each ICP, and the information is provided within 10 days or less. The ICP includes the following:
*a detailed credit report on prospective sales representatives
*a listing of the company’s key offices and senior management
*banking and other financial information about the company
*market information, including sales and profit figures as well as potential liabilities
*an opinion by the overseas US Commercial Staff as to the viability and reliability of the overseas company or individual as well as an opinion on the relative strength of the company’s industry sector in the target market.

===FCIB ===
FCIB-NACM, an association of executives in Finance, Credit and International Business, is a wholly-owned subsidiary of NACM which serves professionals involved in worldwide export financing, credit, treasury and international subsidiary management. The purpose of the association is to raise the level of expertise and professionalism of members and to provide enhanced job enrichment through relevant discussion and exchanges of experiences. Among the services FCIB provides are the following:
*Conferences. FCIB holds regional US meetings, three international conferences, and an annual Global Conference, all of which focus on current worldwide credit, collection and exchange problems as well as in-depth country discussions.
*Industry Export Credit Groups. FCIB operates eight export credit groups in the US and Europe. The groups meet to discuss past experiences of individual mutual accounts as well as general country problems specific to the industry.
*International Bulletins and Newsletters. Current changes affecting credit, collection and exchange conditions throughout the world are reported in the FCIB international bulletin which is distributed to all members. The bulletin, which presents a “reader’s digest” for members, is an invaluable aid to keep them abreast of ever-changing conditions in world markets normally not discussed at meetings.
*Country Reports. These reports summarize current experience of international finance and credit managers, capturing timely, in-depth information on the credit risks of export sales in 16 countries. FCIB’s country reports assist international credit professionals to forecast foreign exchange availability, transfer risks and prospective currency changes.
*International Credit Reports. FCIB, because of its large volume, is about to offer its members access to the major international credit reporting agencies at attractive prices.

===Dun & Bradstreet ===
The largest general reporting agency is Dun & Bradstreet (D&B). It has information on more than 92 million firms world-wide, although not all of it is complete. While firms have to voluntarily give trade data, D&B is the one of the few agencies that uses reporters to gather information about companies.

====Business Information Report====
A basic credit report developed by D&B reporters provides information obtained from direct interview with a business owner, partner, or corporate officer. It is then confirmed and expanded through investigations with the business accountant, banks, and supply sources (for payment experiences); by checking public records at federal, state, and county levels; and from a review of D&B’s own internal files. After all the information is analyzed to determine the strength and desirability of the account as a credit risk, a D&B rating is assigned and the data compiled into the written ''Business Information Report''.

While reports are normally scheduled for updating every six months, revisions are made whenever circumstances warrant. Other information, when uncovered, is issued in a report form called the ''Special Notice''. These flyers contain data on such items as fires, floods, deaths, tax liens, suits, judgments, new products, and branch openings. When the information is of such nature as to affect the credit rating, either upward or downward, the entire report is revised and a new rating is assigned.

====D&B Rating====
Each full rating involves two factors: first, a double-letter or number-and-letter combination identifying financial strength; second, a single-digit number on a scale of one to four, indicating the composite credit appraisal as high, good, fair, or limited. Ratings are a convenient method of measuring accounts in addition to serving as a broad basis for credit insurance classifications.

====D&B Reference Book====
Key information extracted from the ''Business Information Report'' forms the basis for listing in the <u>D&B Reference Book</u>. A “P” at the end of the listing indicates that a Payment Analysis Report is available on a particular business. Some listings are prefixed by the letters “A” or “C.” The “A” identifies a business listed for the first time. A “C” prefix signals a change in rating since the prior edition. <u>The Reference Book</u> contains nearly three million listings of commercial enterprises in the United States, Puerto Rico, and the Virgin Islands, arranged alphabetically by cities within states. <u>The Reference Book</u> is updated and republished every 60 days.

===Payment Analysis Report===
A PAR features the PAYDEX numerical scoring system. It gives an instant overview of a firm’s payment habits. Seasonal variations, payment performance trend, and the historical payment pattern are graphically illustrated.

===Experian===
Experian is the credit reporting business that was formerly TRW. It differs from the other reporting services by including very small businesses and sole proprietorships as well as larger companies in its data base. Experian has an easy-to-follow menu on its website that allows a credit manager to obtain either of the two reports below via the Internet using a credit card to pay the fee.

====Experian Intelliscore====
Experian uses statistical methodology to give each business in its data base a composite credit risk ranking between 1 (worst) and 100 (best). It is designed for credit managers processing large volumes of credit applications or transactions. Companies using this service can establish multiple scoring ranges with assigned actions, so accounts that need further investigating are clearly indicated.

====Relationals Information====
Experian also offers companies relational credit information that they can use with electronic filters to enhance their credit decisions, set benchmarks, and fine-tune sales tactics.

===Standard & Poor's Business Profile===
Companies can obtain a business profile of a customer that includes financial information from Standard & Poor’s, the average number of days late (DBT) a company pays its bills past the invoice due date and a predicted DBT 60 days in the future, payment trends for the company and its industry, and UCC filing data.

===SJ Rundt & Associates===
As a reporting agency, this firm provides two reports: first, the <u>World Business Intelligence</u>, a weekly briefing dealing with 14 to 16 countries each, assessing the latest economic and political developments, focusing on those that are important, explaining what they portend for the future in international trade, investment and finance, interest rate and exchange rate tables and forecasts. The second report is the <u>Financial Executive Country Risk Alert</u>, issued three times per year, which is a combination of forecasts and survey results assessing export credit and short-term financial risk for over 100 countries. Risk ratings on a scale from 1 (best) to 10 (worst). Between full updates, countries are subject to weekly reviews and are updated individually (and re-rated, if necessary).

===Organization for Economic Cooperation and Development (OECD)===
The OECD is a Paris-based intergovernmental organization, established under a 1960 convention, whose purpose is to provide its 29 member countries with a forum in which governments can compare their experiences, discuss problems they share and seek solutions which can be applied within their own national contexts. The fundamental task of the OECD is to enable its members to consult and cooperate with each other in order to achieve the highest sustainable economic growth in their countries and to improve the economic and social well-being of their populations. The original members of the OECD were Europe and North America, followed by Japan, Australia, New Zealand and Finland. Just recently, Mexico, the Czech Republic, Hungary, Poland and Korea have joined.

The OECD publishes various booklets which assess economic trends and prospects. Many statistics are available through its on-line bookstore.

===Other Private Credit Companies===
Graydon America, Hoovers and Coface North America are providers of online and offline business credit reports from around the world via the Internet. They have nearly 100 countries online, including Europe and the US. With more than 200 countries offline, sample reports can be accessed through the website.

<div style="float:right;">[[Sources of Credit Reports/Other Sources of Direct Investigation|Prev]] | [[Sources of Credit Reports/Summary|Next]]

[[Category:International Business]]

Sources of Credit Reports/Direct Sources of Credit Information

2007-09-26T13:14:20Z

35.10.173.40:

{{TF3.1}}

==Direct Sources of Credit Information==
Which type of investigation is the best depends, as you may have already guessed, on the situation. So, if a seller’s international credit managers choose to use a direct investigation as the approach, or even just some aspects elements of a direct investigation, they are going to need to know a little about the sources of credit information they can use and how they may go about collecting it.

===The Buyer===
To initiate a credit investigation, always begin with the buyer. A tactful way of soliciting this information is for the seller’s business to initiate an exchange of antecedent and financial information between the seller and the buyer. At best, the buyer may volunteer valuable data, including financial reports, a detailed biography of the principals, and a history of the business going back over several generations. At worst, the buyer will provide no information at all, feeling that such a request reflects upon the integrity of the principals.

As a result of differences in accounting methods, international financial statements cannot generally be analyzed in the same way as domestic statements and often are not as easy to obtain as in domestic situations. They are also difficult to evaluate because accounting practices and tax regulations differ widely from country to country. The time required to gather information is greater than in domestic operations, so many international credit managers build a comprehensive file of information on prospective foreign buyers so they may make quick decisions when necessary. Credit information sources range from the buyer to the comprehensive economic and business data compiled by U.S. government agencies, by the international departments of banks, by private trade promotion organizations, and by publishers and organizations that foster foreign commerce.

===Direct Correspondence===
Direct correspondence is the most common basis for contact with all buyers. Opening accounts presents an excellent opportunity to set a tone that will keep a buyer providing credit information. Today correspondence can be conducted by telephone, facsimile (fax), and e-mail, as well as through the US Postal Service. However, an international credit manager must use discretion and match the medium with the nature of the communication.

===Request for Financial Statements===
The best place to put a request for financial statements is in the credit application. The application should have a requirement for a customer to provide regularly audited financial statements or to provide them on request. Enclosing a blank financial statement form with the application serves several purposes. It reveals to a buyer that supplying financial information is indeed a common practice; it makes it easier to comply with the request; and it helps ensure that all information desired by the credit department will be submitted. The use of a standardized form also makes analysis of information easier. It is particularly advisable to send a standard checklist of questions rather than an individual request when a follow-up is necessary to amplify items on a statement already submitted.

===Telephone Contacts===
Telephone contacts can be used to supplement financial information on statements submitted to the company or to a credit agency, to obtain references, to bring financial information up to date, and to verify reported contracts. Often the next best thing besides a personal visit is using the telephone, which has the added advantage of being less costly and time-consuming.
Before making telephone contact, it is wise to prepare a form noting the points to be covered and the information needed. Doing such is very helpful, particularly for the inexperienced, or when a large number of points are to be discussed. E-mailing an agenda and time that the telephone call will be placed is a smart approach by an evaluator, especially if international time zones are involved.

As in the case of the personal interview, a memorandum of the telephone conversation should be written promptly and placed in the credit file.

===Bank Information===
An excellent source of credit information is a seller’s bank. An inquiry directed through this source stands a better chance of obtaining useful information than one directed to a foreign buyer’s bank. Bank information generally includes a history of a foreign buyer, antecedents of the principals, and some financial data. A fairly complete picture of a firm’s credit standing often may be obtained; but, depending on a seller’s risk, bank reports should be supplemented by information from other sources.

===Overseas Banks===
Overseas banks vary widely in their co-operation with requests for information; and, like information received from a buyer, the credit information secured directly from a foreign bank varies in value. It may include business history, business background of the principals, financial data, or merely comments that this foreign buyer is a respected member of the community.

===Bank-to-Bank===
It is possible for a seller’s bank to check with a buyer’s bank when an international credit manager’s efforts are unsuccessful or when special information is needed. Normally an international credit manager will employ this technique when a large value order is pending or initial appearances indicate some higher level of payment risk potential than normal for a seller. Often this technique is successful since banks might disclose more information to other banks than they do to sellers or trade creditors who are not their depositors. Sometimes a fee is charged for this service. When considering the circumstances, this fee might be very well worth the investment.

====Information Sought in a Bank Inquiry====
An international credit manager should explain the scope, nature, and reason for the inquiry. The depth of response rests on several basic factors. First is the amount of money involved. Then the credit manager must be certain that the proper person is contacted at the bank; be well prepared with precise questions before calling or writing; and be careful not to violate the following caveats. Banks will not usually volunteer unsolicited information. They will, however, answer specific legitimate questions that do not violate confidentiality. An inquiry that involves a large value and includes specific data, such as terms of sale and a request for financial details, may well receive a more detailed reply than one that refers to a small value with vague reference to the terms of sale and other factors. Banks will generally decline comment about a company’s ability to pay a specified amount.

===Seller’s Foreign Sales Representative===
A seller’s sales representative or company agent abroad can also be a valuable source of information. Local, in-country representatives should know much about their customers--not only purchasing patterns, but the company’s reputation, competitive environment, employee satisfaction and the like. An agent is known in the customer’s trade circle and has access to credit information from local banks and commercial sources. A representative can therefore offer a fair picture of a customer’s financial condition, as well as confidential data which would be difficult to obtain from any other source. Of course, if a local sales representative is native to the country, he/she will have a better understanding of business and cultural issues that impact the local customers. An international credit manager must also take into consideration the cultural ties and business relationship between the parties involved.

===Trade References===
Trade information consists of facts obtained from merchandise suppliers of the customer, including the following:<br>
:1. Recent high credit, amount owing, amount past due<br>
:2. Whether customer payments are discounted, prompt or slow and, if slow, how many days<br>
:3. Whether a supplier has referred the account to a collection agency <br>
:4. Other facts about the buying and paying record of the customer <br>

This vital information describes how the customer actually pays bills, regardless of other financial facts.

The payment record should be examined for specifics as well as for the trend of payments, and be reconciled with the condition indicated by a buyer’s financial statements. Though slow trade payments are often a sign of trouble, they may also characterize a business that is having growing pains but is substantially healthy; its slowness may be seasonal or a result of expansion.

====Sources of Trade Information====
Depending upon a buyer, the industry, location, size of order, and other factors, an international credit manager has several places to get this information. Those most commonly used include credit reporting agencies that report on all industries, industry credit groups, direct interchange with other suppliers, and agency trade checks.

Direct exchange of information with other suppliers is costly and time-consuming but can be very useful when there is substantial credit exposure, when agency and bureau reports are inadequate, or when industry group interchange is not practicable. Personal acquaintance, proper identification, and mutual trust and confidence play a key part in these direct exchanges. International credit managers should also bear in mind the legal limitations to such an exchange, as noted earlier.

<div style="float:right;">[[Sources of Credit Reports/Purpose of a Credit Report|Prev]] | [[Sources of Credit Reports/Other Sources of Direct Investigation|Next]]

[[Category:International Business]]

Sources of Credit Reports/Direct Sources of Credit Information

2007-09-26T13:13:41Z

35.10.173.40:

{{TF3.1}}

==Direct Sources of Credit Information==
Which type of investigation is the best depends, as you may have already guessed, on the situation. So, if a seller’s international credit managers choose to use a direct investigation as the approach, or even just some aspects elements of a direct investigation, they are going to need to know a little about the sources of credit information they can use and how they may go about collecting it.

===The Buyer===
To initiate a credit investigation, always begin with the buyer. A tactful way of soliciting this information is for the seller’s business to initiate an exchange of antecedent and financial information between the seller and the buyer. At best, the buyer may volunteer valuable data, including financial reports, a detailed biography of the principals, and a history of the business going back over several generations. At worst, the buyer will provide no information at all, feeling that such a request reflects upon the integrity of the principals.

As a result of differences in accounting methods, international financial statements cannot generally be analyzed in the same way as domestic statements and often are not as easy to obtain as in domestic situations. They are also difficult to evaluate because accounting practices and tax regulations differ widely from country to country. The time required to gather information is greater than in domestic operations, so many international credit managers build a comprehensive file of information on prospective foreign buyers so they may make quick decisions when necessary. Credit information sources range from the buyer to the comprehensive economic and business data compiled by U.S. government agencies, by the international departments of banks, by private trade promotion organizations, and by publishers and organizations that foster foreign commerce.

===Direct Correspondence===
Direct correspondence is the most common basis for contact with all buyers. Opening accounts presents an excellent opportunity to set a tone that will keep a buyer providing credit information. Today correspondence can be conducted by telephone, facsimile (fax), and e-mail, as well as through the US Postal Service. However, an international credit manager must use discretion and match the medium with the nature of the communication.

===Request for Financial Statements===
The best place to put a request for financial statements is in the credit application. The application should have a requirement for a customer to provide regularly audited financial statements or to provide them on request. Enclosing a blank financial statement form with the application serves several purposes. It reveals to a buyer that supplying financial information is indeed a common practice; it makes it easier to comply with the request; and it helps ensure that all information desired by the credit department will be submitted. The use of a standardized form also makes analysis of information easier. It is particularly advisable to send a standard checklist of questions rather than an individual request when a follow-up is necessary to amplify items on a statement already submitted.

===Telephone Contacts===
Telephone contacts can be used to supplement financial information on statements submitted to the company or to a credit agency, to obtain references, to bring financial information up to date, and to verify reported contracts. Often the next best thing besides a personal visit is using the telephone, which has the added advantage of being less costly and time-consuming.
Before making telephone contact, it is wise to prepare a form noting the points to be covered and the information needed. Doing such is very helpful, particularly for the inexperienced, or when a large number of points are to be discussed. E-mailing an agenda and time that the telephone call will be placed is a smart approach by an evaluator, especially if international time zones are involved.

As in the case of the personal interview, a memorandum of the telephone conversation should be written promptly and placed in the credit file.

===Bank Information===
An excellent source of credit information is a seller’s bank. An inquiry directed through this source stands a better chance of obtaining useful information than one directed to a foreign buyer’s bank. Bank information generally includes a history of a foreign buyer, antecedents of the principals, and some financial data. A fairly complete picture of a firm’s credit standing often may be obtained; but, depending on a seller’s risk, bank reports should be supplemented by information from other sources.

===Overseas Banks===
Overseas banks vary widely in their co-operation with requests for information; and, like information received from a buyer, the credit information secured directly from a foreign bank varies in value. It may include business history, business background of the principals, financial data, or merely comments that this foreign buyer is a respected member of the community.

===Bank-to-Bank===
It is possible for a seller’s bank to check with a buyer’s bank when an international credit manager’s efforts are unsuccessful or when special information is needed. Normally an international credit manager will employ this technique when a large value order is pending or initial appearances indicate some higher level of payment risk potential than normal for a seller. Often this technique is successful since banks might disclose more information to other banks than they do to sellers or trade creditors who are not their depositors. Sometimes a fee is charged for this service. When considering the circumstances, this fee might be very well worth the investment.

====Information Sought in a Bank Inquiry====
An international credit manager should explain the scope, nature, and reason for the inquiry. The depth of response rests on several basic factors. First is the amount of money involved. Then the credit manager must be certain that the proper person is contacted at the bank; be well prepared with precise questions before calling or writing; and be careful not to violate the following caveats. Banks will not usually volunteer unsolicited information. They will, however, answer specific legitimate questions that do not violate confidentiality. An inquiry that involves a large value and includes specific data, such as terms of sale and a request for financial details, may well receive a more detailed reply than one that refers to a small value with vague reference to the terms of sale and other factors. Banks will generally decline comment about a company’s ability to pay a specified amount.

===Seller’s Foreign Sales Representative===
A seller’s sales representative or company agent abroad can also be a valuable source of information. Local, in-country representatives should know much about their customers--not only purchasing patterns, but the company’s reputation, competitive environment, employee satisfaction and the like. An agent is known in the customer’s trade circle and has access to credit information from local banks and commercial sources. A representative can therefore offer a fair picture of a customer’s financial condition, as well as confidential data which would be difficult to obtain from any other source. Of course, if a local sales representative is native to the country, he/she will have a better understanding of business and cultural issues that impact the local customers. An international credit manager must also take into consideration the cultural ties and business relationship between the parties involved.

===Trade References===
Trade information consists of facts obtained from merchandise suppliers of the customer, including the following:<br>
:1. Recent high credit, amount owing, amount past due<br>
:2. Whether customer payments are discounted, prompt or slow and, if slow, how many days<br>
:3. Whether a supplier has referred the account to a collection agency <br>
:4. Other facts about the buying and paying record of the customer <br>

This vital information describes how the customer actually pays bills, regardless of other financial facts.

The payment record should be examined for specifics as well as for the trend of payments, and be reconciled with the condition indicated by a buyer’s financial statements. Though slow trade payments are often a sign of trouble, they may also characterize a business that is having growing pains but is substantially healthy; its slowness may be seasonal or a result of expansion.

====Sources of Trade Information====
Depending upon a buyer, the industry, location, size of order, and other factors, an international credit manager has several places to get this information. Those most commonly used include credit reporting agencies that report on all industries, industry credit groups, direct interchange with other suppliers, and agency trade checks.

Direct exchange of information with other suppliers is costly and time-consuming but can be very useful when there is substantial credit exposure, when agency and bureau reports are inadequate, or when industry group interchange is not practicable. Personal acquaintance, proper identification, and mutual trust and confidence play a key part in these direct exchanges. International credit managers should also bear in mind the legal limitations to such an exchange, as noted earlier.

<div style="float:right;">[[Sources of Credit Reports/Purpose of a Credit Report|Prev]] | [[Sources of Credit Reports/Other Sources of Credit Information|Next]]

[[Category:International Business]]

Alpha:Sources of Credit Reports/Purpose of a Credit Report

2007-09-26T13:12:33Z

35.10.173.40:

{{TF3.1}}

==The Purpose of a Credit Report==
The credit report has become an important economic tool in the process of a credit investigation and subsequent analysis. Without this instrument, many sellers would not be in a position to evaluate the ability of a company to pay in accordance with the contracted terms.

Without a credit report, sellers would either sell on a type of secured transaction (usually requiring a letter of credit, or prepayment, including wiring funds in advance of the sale of the goods or services to the buyer versus allowing the buyer 30 to 60 days or longer to pay. Many people believe the economic growth of any country is dependent on the ability of businesses to buy goods or services on a basis of “pay later.” Without the availability of credit reports, sellers should be concerned if they will be paid and when they will be paid.

There is an old maxim: “The sale is not complete until it is paid for.” Without credit reports, a seller could record revenue (sales), but unless there is a tool to evaluate a buyer’s history and ability to pay at a future time, the recorded sale could become a bad debt for the buyer without the sale ever actually being realized.

The ability to provide credit to buyers plays an integral part in the world economy. If business on a worldwide scale was on a cash-and-carry basis, business as we know it would not exist. Those sellers who wanted to “grow their businesses” recognized early in history that a “promise to pay” was one way to allow buyers to take more goods or services than immediate cash might permit, re-employ the goods or services in their own business, generate funds, make a profit, and pay the seller according to agreed upon payment terms. ("Improving Credit Practice,” Miller and Relkin, AMA, 1991.)

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[[Category:International Business]]

Sources of Credit Reports/Credit Report Components

2007-09-26T13:11:32Z

35.10.173.40:

{{TF3.1}}

==A Credit Report and Its Components==
Commercial credit is an arrangement by which a buyer can take possession of something now and pay for it later or over time. A credit report is a tool used to convey whether an individual or company has any outstanding credit obligations and whether the payments for those lines of credit are current. Typically, credit reports are created by credit reporting agencies, like Dun & Bradstreet, for example. From a seller’s perspective, this is an external credit report. However, there are some instances when sellers or bankers need to create their own “credit reports.” Depending on the industry or the company, these internal credit reports may go by several different names or be considered part of the credit investigation and not called out specifically. For purposes of this module, “credit report” is used to describe a report created (either internally or externally) to convey outstanding credit obligations and payments made.

With this information, a seller can decide whether to grant credit to the buyer or not. A decision to grant commercial credit to a buyer means that a new or existing buyer has the opportunity to purchase goods or services on credit, or on a “buy now, pay later” basis.

But just knowing such doesn’t really paint a complete picture. So, you need to know what information is included in the credit report as another way of defining a credit report.

The components of credit reports include a '''history of the business; payment trends''' provided by other vendors (but reported anonymously); general '''bank information'''; '''public records''' of law suits; and, '''financial statement''' information on public companies or private companies when volunteered by the buyer.

====History====
The history of the business includes how long it has been in business, the form of the business (corporation, proprietorship, and partnership), background of the owners, and the number of employees. Some credit evaluators say that the longer a business has existed, the better likelihood it will survive. This is not necessarily true, but an important part of the history of the business is past (antecedent) information about the current management in terms of experience, education and the like.

====Payment Trends====
Payment trends are gathered by credit reporting agencies, mostly when companies agree to submit payment history. The reporting agency assembles this data and reports, anonymously, the high credit extended, amount owing, amount past due, days taken to pay. This information is valuable to an international credit manager because if a report on a potential buyer indicates prompt payment trends to other vendors, it is likely (but never a sure conclusion) that a seller making the credit inquiry could be paid promptly.

====Bank Information====
Bank information as part of a credit report is important to a seller. Often if a buyer has a record of paying the bank its obligations (loans) on a timely basis, an international credit manager can see that the buyer may have the ability to pay trade or supplier obligations. The credit report will indicate, in many cases, the highest credit provided by the bank to the buyer, how much is currently outstanding in loans, if the loans are secured by assets, and the way the buyer has paid. An international credit manager should be careful, for example, if he/she learns that a sizeable checking account balance exists the day of the credit inquiry, It is quite possible that that balance could be gone the next day. The average balance in the checking account of the buyer gives a seller a sense of the cash available in a buyer’s account. Sellers should always be concerned with a buyer’s cash flow since it determines the ability to pay obligations as they mature.

====Public Records====
Public records, including suits, judgments, bankruptcies, business acquisitions/changes that are recorded in state or federal agencies, give a seller an indication as to problems that a buyer made have had in the past. Often government agencies, both in the US and abroad, will provide information on the company being researched, with material provided according to the law of that country.

====Financial Information====
Financial information, such as the balance sheet, operating statements, and cash flow reports, are often provided on public companies; in many countries (like the US), this information is on record with the government. Private companies may elect to submit financial information but are not required to do so. It is important to remember that the financial records of international companies may look different, use different terminology and contain calculations that are all different from the standard accounting practices used in the US. These differences must be taken into consideration when analyzing foreign financial records.

Some reports are oriented towards specific industries and will provide '''specialized industry information''' that covers the specific product or service. For example, industry credit groups for giftware, forest products, and chemicals have their own members who submit information into an organization that compiles the data and provides payment histories, although not naming the members who submit the payment history to mutual buyers.

<div style="float:right;">[[Sources of Credit Reports|Prev]] | [[Sources of Credit Reports/Purpose of a Credit Report|Next]]

[[Category:International Business]]

Sources of Credit Reports

2007-09-26T13:10:22Z

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==Unit 3.1- Sources of Credit Reports==

This unit describes the purpose and components of credit reports. There are different perspectives when it comes to credit reports: from an individual, from a seller--business/ commercial-- or from a financial institution such as a bank.

The focus here is on the seller’s perspective. Assume that a person or persons within a business are responsible for assessing whether a buyer ( an individual, another business) has a credit history that demonstrates whether this party or parties can and will make payments accordingly . The credit report is obtained from a source outside the seller’s business. This type of information is contained in external credit reports.

The persons who request credit reports and analyze them have many titles--for example, analyst, credit manager, international credit manager. To keep things simple, assume that this person is an international credit manager (ICM).

In order to convey the purpose of a credit report, the following topics are presented:
*the definition of a credit report and its components
*purposes of a credit report
*influences on a credit report.

===Unit Objective===
The goal of this material is to introduce you to credit reports, their purpose, uses, and components. This information will also identify reliable sources for credit report information for international transactions. By the end of this unit you will be able to
*define a credit report and its purpose.
*recognize components of credit reports.
*identify reliable sources of credit information.
===Unit Outline===
*[[Sources of Credit Reports|Introduction]]
*[[Sources of Credit Reports/Credit Report Components|Credit Report Components]]
*[[Sources of Credit Reports/Purpose of a Credit Report|Purpose of a Credit Report]]
*[[Sources of Credit Reports/Direct Sources of Credit Information|Direct Sources of Credit Information]]
*[[Sources of Credit Reports/Other Sources of Direct Investigation|Other Sources of Direct Investigation]]
*[[Sources of Credit Reports/Indirect Sources of Credit Information|Indirect Sources of Credit Information]]
*[[Sources of Credit Reports/Summary|Summary]]
*[[Sources of Credit Reports/Resources|Resources]]
*[[Sources of Credit Reports/Activities|Activities]]
*[[Sources of Credit Reports/Assessment|Assessment]]

'''Correlation''': Materials from this unit correlate with [http://www.nasbitecgbp.org NASBITE CGCP]'s Knowledge Statement 04/03/01: Knowldege of sources of credit reports (e.g. credit bureau, D&B, Hoovers, US Department of Commerce, International Company Profile)

<div style="float:right;">[[Sources of Credit Reports/Credit Report Components|Next]]

[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Assessment

2007-09-26T13:08:15Z

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==Assessment==

1. When purchasing or selling foreign currency at a spot rate, what best describes your adverse (negative) foreign exchange risk?
::a. the loss related to a change in foreign exchange regulations in the country
::b. the loss due to an unexpected change in the country’s quoted FX rate
::c. the loss due to the country’s inability to service its foreign debt
::d. the loss due to the translation of your foreign assets held in that country

2. The current market conditions indicate that in the next 90 days the US dollar is expected to decline in value. The company is currently going through a very tight cash flow period and must monitor cash closely. The company has an outstanding foreign currency payable that is due for payment in the next 60 days. The current spot rate is favorable to cover the payable due in 60 days. Which of the following would you recommend based on the current condition of the company?
::a. spot contract
::b. foreign currency bank loan
::c. forward contract
::d. purchase the needed currency at the spot rate and place on deposit at a foreign bank until the payable is due

3. Which of the following best defines the balance of payments?
::a. the sum of the current account, the capital account and the change in official reserves
::b. the sum of all exports and imports of goods services and financial capital
::c. the sum of the countries’ inflation rate and all net payments between the two countries
::d. the sum of Gross Domestic Product (GDP) and the current country deficit

4. Which of the following is defined as allowing open market conditions to determine the value of the currency in relationship to others?
::a. fixed rate of exchange
::b. closed border convertibility
::c. managed rate of exchange
::d. floating rate of exchange

5. Companies that have operations overseas use transfer pricing to revalue their balance sheet creating a “paper” gain or loss. Which best describes this type of exposure?
::a. translation exposure
::b. political exposure
::c. economic exposure
::d. transaction exposure

6. Which of the following best describes a forward contract?
::a. the purchase of a foreign currency on a future date with immediate delivery on that future date
::b. the purchase of a foreign currency today with immediate payment and delivery
::c. the purchase of a foreign currency today for a fixed price for delivery at a specific future date
::d.the purchase of a foreign currency today for a variable price for delivery at a specific future date

7. Is it important to monitor foreign exchange positions on a continual basis?
::a. No, because market rates do not change except in your favor.
::b. Yes, because foreign exchange rates are constantly changing.
::c. No, because all foreign exposure is automatically hedged by the free markets.
::d. Yes, because the dollar is always weakening.

('''Correct answers''': 1=b, 2=c, 3=a, 4=d, 5=a, 6=c, 7=b.)

<div style="float:right;">[[Foreign Exchange Risk Mitigation Techniques/Activities|Prev]]

[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Activities

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==Activities==

Trade Negotiation Exercise
The purpose of the exercise is to provide an opportunity to use exchange rates and barter for a product.

===Task 1===
Divide the students into groups. If possible each group should consist of 3-5 members (preferably 5 and no fewer than 3). Each group is given USD500,000.00. With this money they will buy from the list of products that are provided. Each product will be sold in a different currency. Once they have made their selections, they are provided with exchange rates to purchase their products. The exercise can be done in one session or over several sessions, but each task should be separated by one-week intervals to accommodate the use of forward rates. The students are also given one-week forward rates. They can choose to purchase at the spot rate or the forward rate. This exercise will provide them with the experience of doing conversions with actual market rates and evaluating various alternatives.

====Rates and Products====
{| class="wikitable"
|-
!
! Spot Rate
! 1 Week Forward Points
! 1 Week Forward Rate
!
|-
| GBP
| 1.747
| + .0002
| 1.7472
| MULTIPLY
|-
| JPY
| 118.40
| - .10
| 118.30
| DIVIDE
|-
| EUR
| 1.214
| + .005
| 1.219
| MULTIPLY
|-
| AUD
| .7340
| - .0001
| .7339
| MULTIPLY
|-
| MXP
| 11.058
| + .0025
| 11.0605
| DIVIDE
|-
| CAD
| 1.1440
| - .0003
| 1.1437
| DIVIDE
|}

Mexican peso (MXP)<br>
Oil: 1 barrel = MXP60.00<br>
Must buy in lots of 100 barrels (MXP6,000.00 = 100 barrels)

Japanese yen (JPY)<br>
Electronic component parts: 1 part = JPY200<br>
Must buy in lots of 1,000 (JPY200,000 = 1,000 parts)

Canadian dollar (CAD)<br>
Honey : 1 barrel = CAD470.00<br>
Must buy in lots of 60 (CAD28,200.00 = 60 barrels)

Australian dollar (AUD)<br>
Diamonds: 1 carat = AUD150.00<br>
Must buy in lots of 100 (AUD15,000.00 = 100 carats)

European currency (EUR)<br>
Men’s shirts: 1 shirt = EUR15.00<br>
Must buy in lots of 200 (EUR3,000.00 = 200 men’s shirts)

British pound (GBP)<br>
Leather belts: 1 belt = GBP5.00<br>
Must buy in lots of 1,000 (GBP5,000.00 = 1,000 leather belts)

===Task 2===
Inform the students that they must swap out their currency for one more week because they are allowed to defer payment. Each group will be assigned a group number and asked to put on the board the products that they purchased so that the entire class knows what they own. Each group is given an advantage exclusive to their group only and instructed to barter from the other groups for the advantage product that they want to own. The students should be instructed not to share their advantage with any other group. This exercise will help them understand the use of swaps and bartering for goods.

====Swap Rates====
{| class="wikitable"
|-
!
! Spot Rate
! 1 Week Swap Points
! 1 Week Swap Rate
!
|-
| GBP (PREMIUM)
| 1.7840
| + .0002
| 1.7842
| MULTIPLY
|-
| JPY (PREMIUM)
| 116.80
| - .11
| 116.69
| DIVIDE
|-
| EUR (PREMIUM)
| 1.2370
| + .0005
| 1.2375
| MULTIPLY
|-
| AUD (DISCOUNT)
| .7420
| - .0001
| .7419
| MULTIPLY
|-
| MXP (DISCOUNT)
| 10.90
| + .01
| 10.91
| DIVIDE
|-
| CAD (PREMIUM)
| 1.1400
| - .0002
| 1.1398
| DIVIDE
|}

'''GROUP 1 - ADVANTAGE'''
Your group will be able to sell all of the oil that you can acquire for 4 times the purchase price from week 1 (MXP6,000.00 = 100 barrels). No other group has this advantage! All other products that you own will produce only double the original purchase price.

'''GROUP 2 - ADVANTAGE'''
Your group will be able to sell all of the electronic component parts that you can acquire for 4 times the purchase price from week 1 (JPY200,000 = 1,000 component parts). No other group has this advantage! All other products that you own will produce only double the original purchase price.

'''GROUP 3 - ADVANTAGE'''
Your group will be able to sell all of the honey that you can acquire for 4 times the purchase price from week 1 (CAD28,200.00 = 60 barrels). No other group has this advantage! All other products that you own will produce only double the original purchase price.

'''GROUP 4 - ADVANTAGE'''
Your group will be able to sell all of the diamonds that you can acquire for 4 times the purchase price from week 1 (AUD15,000.00 = 100 carats). No other group has this advantage! All other products that you own will produce only double the original purchase price.

'''GROUP 5 - ADVANTAGE'''
Your group will be able to sell all of the men’s shirts that you can acquire for 4 times the purchase price from week 1 (EUR3,000.00 = 200 men’s shirts). No other group has this advantage! All other products that you own will produce only double the original purchase price.

'''GROUP 6 - ADVANTAGE'''
Your group will be able to sell all of the leather belts that you can acquire for 4 times the purchase price from week 1 (GBP5,000.00 = 1,000 leather belts). No other group has this advantage! All other products that you own will produce only double the original purchase price.

===Task 3===
Have the groups complete their swaps and pay for their goods. The students will be instructed to sell all of their products as listed in their group advantage sheets from week 2. They must sell their goods in the currency in which they purchased the goods. Once they have completed this process, they will convert the foreign currency back to the US dollars and close their books to determine any profit or loss from the original $500,000.00.

====Sell Exchange Rates====

{| class="wikitable"
|-
| GBP
| 1.7871
| MULTIPLY
|-
| JPY
| 114.99
| DIVIDE
|-
| EUR
| 1.2422
| MULTIPLY
|-
| AUD
| .7446
| MULTIPLY
|-
| MXP
| 11.15
| DIVIDE
|-
| CAD
| 1.1321
| DIVIDE
|}

<div style="float:right;">[[Foreign Exchange Risk Mitigation Techniques/Resources|Prev]] | [[Foreign Exchange Risk Mitigation Techniques/Assessment|Next]]

[[Category:International Business]]

Foreign Exchange Risk Mitigation Techniques/Resources

2007-09-26T13:07:14Z

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==Resources==
*''The Global Entrepreneur'', James Foley, 2nd Edition, Jamric Press, 2004.
*''International Trade Finance V4'', Forum for International Trade Training (FITT), Ottawa, Canada, 2005.
*''International Business, 10th Edition'', Ball-McCulloch-Frantz-Geringer-Minor, McGraw-Hill 2005.

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[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Summary

2007-09-26T13:06:19Z

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==Summary==
The fear of encountering foreign exchange fluctuations and exposing a company to risk is often the deciding factor for a company to stay out of the global market. When international managers understand the risk and the tools available to manage any potential risk, greater opportunities become available for the company. Entering the global market and being willing to deal in foreign currencies may lead to increased business opportunities.

<div style="float:right;">[[Foreign Exchange Risk Mitigation Techniques/Common Instruments to Offset Risk|Prev]] | [[Foreign Exchange Risk Mitigation Techniques/Resources|Next]]

[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Common Instruments to Offset Risk

2007-09-26T13:05:49Z

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==Common Instruments to Offset Risk==
===Spot===
Spot trades are priced and executed on the spot based on the current market rate and are paid for immediately. Spot contracts are generally done verbally and considered binding. When executing a trade, an offer price is provided; if accepted, the contract is considered done. Delivery of the currency is generally two days forward; the two-day’s time is used for the bank to receive the currency it purchased and deliver the currency to the beneficiary as provided by the buyer.

===Forwards===
Forward contracts are priced by combining the current spot price with the forward points. Forward points are based on the differential in interest rates of the two countries. The discount or premium points, once determined, are combined with the spot rate to create the forward rate. Some currencies are not traded openly, but there is a non-deliverable currency market. By hedging with a non-deliverable forward, a purchaser can protect against rate fluctuations rather than settling a transaction at maturity using the exchange rate that is posted on that date. Settlement would be in the local currency to provide additional local funds to settle the transaction.

===Swaps===
Spot contracts are settled immediately while a forward contract has a fixed maturity and must be settled at maturity. Capital can be tied up when the need to deliver the currency has been delayed. Swaps provide an opportunity to exchange the foreign currency for the local currency for a fixed period of time and “swap” it back when it is needed.

===Options===
Options provide protection for large denominations by taking advantage of rate improvements while protecting against the negative impact of a rate change.
Alternatives
Countertrade forms can and are often used when a currency cannot be traded. Bartering is most commonly used, but other forms are counter purchase, advance purchase, buy backs and bilateral arrangements.

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[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Foreign Exchange Trading

2007-09-26T13:04:46Z

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==Foreign Exchange Trading==
The exchange of one currency for another currency, dollars (USD) for Japanese yen (JPY), is the basic definition of foreign exchange. There are two different types of quotations:

*Indirect quotation - The price of a national currency expressed in terms of one unit of a foreign currency
*Quoting Japanese yen at a rate of 110
*1 USD = 110.00 JPY
*Direct quotation - The value of one unit of national currency in terms of the foreign currency
*Quoting USD at a rate of .009091
*1 JPY = .009091 USD.

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[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Business Needs for Foreign Currency

2007-09-26T13:02:47Z

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==Business Needs for Foreign Currency==
===Accounts Payable and Accounts Receivable===
Companies purchase raw materials or component parts for the manufacturing of goods. When the transaction is conducted in a currency other than the local currency, risk increases. In order to control the cost of goods sold and reduce the risk, using some form of hedge is necessary.

Companies that buy and sell in a foreign currency will often use a netting effect. The company will maintain a foreign currency account to deposit funds from sales and to withdraw funds to pay for purchases. The repatriation of funds generally results in the form of profits which are converted and transferred to the home office periodically, thus taking advantage of favorable market conditions.

Interest rates vary widely from country to country. It often makes sense, depending on the cash position of the company, to take an equal and opposite foreign exchange exposure position to complete a transaction at maturity. The company could take out a loan in the amount of a receivable in the foreign currency, convert it to their local currency and use the proceeds from their receivable to pay off their loan. The company may also buy the foreign currency and place it on deposit with a bank to earn interest and use it to pay off the payable at maturity. This action will enable the company to fix the exchange rate and take advantage of favorable investment opportunities.

A buyer and seller may agree contractually to share the exposure risk. They can establish different parameters based on market conditions to control the risk. Parameters can include payment of goods in the local currency, the splitting of the payment in both the buyer’s and seller’s currency, or the inclusion of a price adjustment clause if the exchange rate changes substantially.

The most common means to control exposure risk is to engage in a forward contract either in the form of a purchase or sale of a currency. The forward contract establishes a fixed price to be paid at maturity on the date the contract is executed. The general requirement is a small security deposit to secure the completion of the trade at maturity. Thus the company fixes the price without using capital until the maturity of the contract. The fixing of the price of the foreign exchange contract also allows the company to make a decision today whether to proceed or not based on current rates. The company can then price the product for sale based on the actual cost of the components.

===Balance Sheet Hedging===
Foreign currency options protect against adverse foreign exchange fluctuations while benefiting from a positive movement in the exchange rate. The trader is provided with the right but not the obligation to buy (call option) or sell (put option) a specific amount of foreign currency at a fixed price within a set period. Protection is provided. If the rates are unfavorable to the trader, he will just exercise the option; should the rates be favorable to the trader, then there is no need to exercise the option. Because of its advantages, this process for a right to buy or sell can be expensive. It is generally used for large denominations. Contingent obligations resulting from long contract negotiations could make this an attractive means of controlling exposure risk.

===Acquisition Activity===
Acquisitions take time to conclude and are often in large denominations. The evaluation of an acquisition is difficult enough without the worry of foreign exchange rate fluctuations. Options provide a good hedge against rate fluctuations during the negotiation process.

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[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Measuring Foreign Exchange Exposure

2007-09-26T13:02:06Z

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==Measuring Foreign Exchange Exposure==
===Transaction Exposure===
Transactions in the form of purchase contracts or agreements denominated in a foreign currency but not yet settled create transaction exposure. The fluctuation of the currency will have an impact on the value until the transaction is completed. The value of an unsettled export receivable or an import payable is just one example. There are multiple hedging techniques to help the investor minimize his risk, including:
*forward contracts
*futures contracts
*use of a money market hedge
*contractual risk sharing
*pricing adjustments based on forward rates
*foreign currency accounts
*foreign currency options

===Translation Exposure===
The revaluation of all foreign-denominated assets and liabilities often referred to as transfer pricing is usually considered “paper” gains or losses. The conversion of an asset by selling it and converting the proceeds to the local currency would create a realized gain or loss. This form of exposure is created when financial statements are prepared and converted to the local currency of the owner or investor. This form of exposure is considered an indication of potential gains or losses.

===Economic Exposure===
The evaluation of foreign governments from an economic standpoint determines whether a translation exposure could be realized. The projected stability of a country, both politically and economically, impacts future cash flows and can adversely impact the profitability of an organization. Strategic planning for operations must include economic exposure.

<div style="float:right;">[[Foreign Exchange Risk Mitigation Techniques/Market Drivers|Prev]] | [[Foreign Exchange Risk Mitigation Techniques/Business Needs for Foreign Currency|Next]]

[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Market Drivers

2007-09-26T13:00:46Z

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==Market Drivers==
===Speculative Trading===
Political, economic and technical events are the drivers of change in the foreign exchange markets. Having a broad understanding of these factors provides a practical means of forecasting foreign exchange rates. A forecast is static and not constant and therefore must be monitored and adjusted based on market conditions. Some key factors to consider are balance of payment, inflation rates, investor confidence and intervention in the foreign exchange market.
Historically businesses purchased foreign currencies to settle trade-related transactions. Today there are many reasons to purchase foreign currencies. Investing in stock markets, the purchase of manufacturing facilities, holding the currency for interest income or speculation and the purchase of bonds are some of the ways investors utilize foreign currency. Markets are now impacted by market makers as they assume a high level of risk by buying and selling in sufficient quantities to affect market prices.

====Balance of Payments====
Payments that flow between one country and all other countries determine its balance of payments. It is defined as the sum of the current account, the capital account and the change in official reserves. A current account is considered more short-term in nature while the other two are more long-term.

Balance of Payments = Current Account + Capital Account + Change in Official Reserves

*The current account is the net of all goods and services between the United States and all other countries. The current account is generally the most volatile. The balance of trade between the United States and all other countries determines whether we are a net exporter or importer. Our need for inexpensive goods over what we could buy locally has caused us to become a net importer with a growing trade deficit. The deficit could be a severe problem if dollars were sold in mass quantities to the extent of lowering the value of the dollar itself.
*The capital account is the purchase of our currency or the repatriation of our currency for direct foreign investment in stocks, capital goods, land, etc. Capital goods are holdings other than cash and have to be converted back to cash in order to remove them from the country. This conversion process takes more time and is less volatile than having a current account.
*Official reserves are the holdings by foreign governments in the US dollar. These reserves can be used to stabilize their currency by selling off the dollars and purchasing their local currency, creating an artificial demand and driving the price of their currency up. The impact of this type of selling, which is generally short-term in nature, is done to prevent wide swings in the value of the local currency.

The balance of payments has a significant impact on the value of a currency. While movements in a current account have the biggest impact, they are often balanced by the other two. The United States tries to entice foreign investors to invest in capital goods; in doing so we repatriate some of the dollars back into our country. We also encourage governments to increase their reserves in the United States. The impact of making similar investments in dollars can offset the fluctuations in the current account. It is only when confidence in all three areas is lacking that the United States dollar will decline significantly.

====Inflation Rates====
Inflation causes the value of local goods to become more expensive, impacting the ability of other countries to buy local goods and services. It makes products less competitive in a free-market economy. Time combined with market conditions will cause the re-establishment of purchasing power parity between two countries.

Purchasing power parity (PPP), as defined by the Swedish economist G. Cassel in 1918, is that natural market conditions will adjust the exchange rates between the domestic currency and any foreign currency to reflect differences in the inflation rates between them, which means there is a direct correlation between the movement of inflation rates between two counties and their respective foreign exchange rates.

====Investor Confidence====
The typical foreign business model starts with the export of goods. The eventual success will lead to the establishment of a manufacturing plant with local production. Eventually competition, if unchecked, will force the manufacturing costs to go down so that the once- exporter starts importing goods he exported. The ability to follow this model is heavily dependent upon investor confidence. Foreign direct investment is dependent upon political stability, GDP (economic performance) and government deficits. Investors’ expectations are for higher returns with managed risk.
Political stability is a key determinant of investor confidence. Civil strife in the form of strikes, riots or civil commotion and expropriations by governments discourage investor confidence and lower the value of a currency. High tax rates, high deficits and poor overall economic performance by a country contribute to poor investor confidence. Investment will return should investors believe that the country is in a recovery mode and these factors will change to their benefit.

====Intervention====
Trading in foreign exchange can be very risky. There are arbitrageurs that benefit from price differences based on time and place. Their ability to enter and exit the market quickly can create a temporary price differential. Their objective is to make quick profits; this form of derivative trading is considered the most risky.
Governments use their ability to intervene in the market to prevent wide swings in their currency. Their ability to utilize their reserves to buy and sell their currency can stabilize the market temporarily providing time to adjust any other market conditions that impact the value of their currency. Governments also determine interest rates, thus creating an investment option that entices capital into the country. These tools are temporary in nature: in order to keep long-term capital in a country, there must be stability without political turmoil.

<div style="float:right;">[[Foreign Exchange Risk Mitigation Techniques/Types of Rates of Exchange|Prev]] | [[Foreign Exchange Risk Mitigation Techniques/Measuring Foreign Exchange Exposure|Next]]

[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Types of Rates of Exchange

2007-09-26T12:59:27Z

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==Types of Rates of Exchange==

===Fixed rate of exchange===
A fixed rate of exchange is a ratio established by the government at which foreign currencies can be exchanged. The value of the national currency is based on parity with other currencies. Sustaining the parity is the question: if other factors force a market change to a floating rate, the impact could negatively impact the country.

===Floating rate of exchange===
A floating rate of exchange allows open market conditions to determine the value of the currency in relationship to other currencies. Open market exchange rates are highly volatile and change every 5 seconds or 18,000 times per day. Any given currency typically fluctuates 1% during a 24- hour period. The volatility of the market is influenced by political, economic and technical conditions that come into play and cause fluctuations that may exceed the typical movement. This volatility translates into the need to manage the risk of rising or falling exchange rates.

===Managed rate of exchange===
A managed rate of exchange allows a central bank to intervene to adjust for market conditions. It controls wide valuation swings that may occur due to adverse market conditions.

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[[Category:International Business]]

Archive:Foreign Exchange Risk Mitigation Techniques/Types of Rates of Exchange

2007-09-26T12:59:10Z

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Archive:Foreign Exchange Risk Mitigation Techniques/Types of Rates of Exchange

2007-09-26T12:58:58Z

35.10.173.40:

Archive:Foreign Exchange Risk Mitigation Techniques

2007-09-26T12:58:16Z

35.10.173.40:

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==Unit 2.1- Foreign Exchange Risk Mitigation Techniques==

The globalization of business generates foreign currency risks. This process is irreversible and critical to the survival of most industries and businesses. The “globalization process” affords enormous opportunities to diversify business risk, generate economies of scale and capture additional market share.

Companies can no longer state “Our company deals only in US dollars” since this approach is not sustainable in global trade. It is estimated that 40% of all international trade is denominated in foreign currency. Trillions per day move through the foreign exchange markets. Political factors determine that not all currencies are convertible. Commercial trade is full of challenges, many of which may be overcome by utilizing the options available in this section.

===Unit Objective===
The goal of this material is to introduce you to mitigation techniques and their required documentation related to foreign exchange (FX) risk. By the end of this unit your will be able to:
*identify foreign currency risk.
*identify the different instruments available in the FX market to hedge FX risk.
*identify the features of a FX spot transaction and the documentation required for a spot transaction.
*describe transfer pricing and its use as a FX risk mitigation tool.}}
===Unit Outline===
*[[Foreign Exchange Risk Mitigation Techniques|Introduction]]
*[[Foreign Exchange Risk Mitigation Techniques/Types of Rates of Exchange|Rates of Exchange]]
*[[Foreign Exchange Risk Mitigation Techniques/Market Drivers|Market Drivers]]
*[[Foreign Exchange Risk Mitigation Techniques/Measuring Foreign Exchange Exposure|Measuring FX Exposure]]
*[[Foreign Exchange Risk Mitigation Techniques/Business Needs for Foreign Currency|Business Needs for Foreign Currency]]
*[[Foreign Exchange Risk Mitigation Techniques/Foreign Exchange Trading|Foreign Exchange Trading]]
*[[Foreign Exchange Risk Mitigation Techniques/Common Instruments to Offset Risk|Common Instruments to Offset Risk]]
*[[Foreign Exchange Risk Mitigation Techniques/Summary|Summary]]
*[[Foreign Exchange Risk Mitigation Techniques/Resources|Resources]]
*[[Foreign Exchange Risk Mitigation Techniques/Activities|Activities]]
*[[Foreign Exchange Risk Mitigation Techniques/Assessment|Assessment]]

'''Correlation''': Materials from this unit correlate with [http://www.nasbitecgbp.org NASBITE CGCP]'s Knowledge Statement 04/02/01: Knowldege of foreign exchange risk mitigation techniques and required documentation (e.g., hedging tools, currency option contracts, transfer pricing)

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==Assessment==
1. It is essential to validate resources by cross referencing:
::a. a reliable resource you have used in the past
::b. multiple sources containing the same information
::c. an official government website containing the same information
::d. the latest news publication

2. The best place to find the most recent data is on:
::a. printed publications from the current year
::b. government statistic bureaus
::c. international organization publications
::d. websites that have been updated with in the last 30 days

3. The main source of information for foreign country statistics can be found at:
::a. local newspaper sites
::b. international organization sites
::c. official government or travel/tourism sites
::d. U.S. government sites

4. The U.S. Government agency that provides the most thorough international trade data and statistics is:
::a. the Commerce Department
::b. the State Department
::c. the Treasury Department
::d. the Department of Defense

('''Correct answers''': 1=b, 2=d, 3=c, 4=a)

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==Activity==
Have each student select a different country. Direct each student to:

* Identify the 10-15 top websites that publish political and economic data/risk for their country. For each site have them identify the web address and identify the type of information available, date of publication, and validity.

* Select 1-2 world organizations, databases, &/or publications and find information about their country. For each site have them identify the web address and identify the type of information available, date of publication, and validity.

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==Resources==
''International business: The Challenge of Global Competition'' (7th ed.) Burr Ridge, IL: Irwin/Mcgraw-Hill.

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==Summary==
As indicated there are more resources available on the internet than listed in the previous pages. We have included only the homepages to each of the references rather than highlighting specific articles or pages to avoid the problem of dead links. Please remember this list is by no means exhaustive. Start with your favorite search engine and search away. Be cautious however, you might end up in the black hole of cyber-knowledge and miss a few days of the week.

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==Databases==
* [http://www.fuld.com Competitive Intelligence Guide]
* [http://www.kompass.com Kompass]
* [http://www.stat-usa.gov Stat/USA/USA Trade Online]
* [http://www.tpusa.com Trade Point]
* [http://www.tradeport.org/ts/ Trade Port]
* [http://www.un.org UN Comtrade]
* [http://www.worldbank.org World Bank Trade Statistics]

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==Credit Agencies==
* [http://www.coface-usa.com Coface North America]
* [http://www.creditworthy.com Credit Management Information & Support]
* [http://www.creditreportsworld.com Credit Reports Worldwide]
* [http://www.dnb.com Dun & Bradstreet]
* [http://www.experian.com Experian]
* [http://www.fcibglobal.com FCIB]
* [http://www.graydonamerica.com Graydon America]
* [http://www.hoovers.com Hoovers]
* [http://www.moodys.com Moody’s]
* [http://www.rundtsintelligence.com SJ Rundt & Associates]
* [http://www.standardandpoor.com Standard and Poor]

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==World Organizations==
* [http://www.bis.org Bank for International Settlements]
* [http://www.heritage.org Heritage Foundation]
* [http://www.iso.ch International Organization for Standardization (ISO)]
* [http://www.iccwho.org International Chamber of Commerce]
* [http://www.imf.org International Monetary Fund]
* [http://www.oecd.org Organization for Economic Cooperation and Development (OECD)]
* [http://www.un.org United Nations]
* [http://www.unesco.org UNESCO Economics Intelligence]
* [http://www.world.wtca.org World Trade Center Associations]
* [http://www.worldbank.org World Bank]

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==Publications==
* [http://www.worldculture.com Body Language Around the World]
* [http://www.businessmonitor.co.uk Business Monitor]
* [http://www.businessweek.com Businessweek]
* [http://www.emwl.com Euromoney]
* [http://www.ft.com/index.htm Financial Times]
* [http://www.forbes.com Forbes]
* [http://www.fortune.com Fortune]
* [http://www.iht.com International Herald Tribune]
* [http://www.joc.com Journal of Commerce]
* [http://www.webcom.com/darrel/ Asian Business News]

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==Regional Resources==
Search for the official government website and/or travel and tourism organization of the country you are researching. In many cases the text will be translated into a variety of languages.
===Africa===
* [http://www.unido.org Investment Guide for African Nations]

===Asia & Australia===
* [http://www.apec.org Asia-Pacific Economic Cooperation (APEC)]
* [http://www.webcom.com Asian Business Watch]
* [http://www.asiandevbank.org Asian Development Bank]
* [http://www.asean.or.id Association of Southeast Asian Nations (ASEAN)]
* [http://www.statistics.gov.au Australian Bureau of Statistics]
* [http://www.info-china.com China- Country Data]
* [http://www.china-embassy.org China- Economic & Commercial Office]
* [http://www.hongkong.org Hong Kong Information]
* [http://www.tdc.org.hk Hong Kong Trade Development Council]
* [http://www.jetro.org or www.jetro.go.jp Japanese External Trade Organization (JETRO)]
* [http://www.miti.go.jp Japanese Economic Information (Ministry of International Trade & Industry)]
* [http://www.cic.sfu.ca/forum/steers.html Culture and Communication Patterns in Korean Firms]
* [http://www.kotra.or.kr Korea Trade-Investment Promotion Agency (KOTRA)]
* [http://menic.utexas.edu/mes.html Middles East Studies] (links to information on Middle Eastern Nations)
* [http://www.singstat.gov.sg Singapore Demographics]
* [http://www.nectec.or.th Thailand]
* [http://www.viam.com Vietnamese Business Journal]

===Europe===
* [http://www.europa.eu.int European Union]
* [http://www.europeonline.com European Online]
* [http://www.efta.org European Free Trade Area]

===North America===
* [http://www.nafta-sec-alena.org NAFTA]
* [http://www.gc.ca Canada]
* [http://www.gob.mx Mexico]

===U.S. Government===
* [http://www.doc.gov Department of Commerce]
* [http://www.export.gov Foreign & Commercial Service]
* [http://www.ita.doc.gov International Trade Administration]
* [http://www.ia.ita.doc.gov Import Administration]
* [http://www.cia.gov CIA World Factbook]
* [http://www.cbp.gov Customs & Border Protection]
* [http://www.customs.gov Customs & Border Protection 2]
* [http://www.stats.bls.gov Department of Labor]
* [http://www.state.gov Department of State]
* [http://www.ustreas.gov Department of the Treasury]
* [http://www.irs.gov Internal Revenue Service]
* [http://www.exim.gov Export-Import Bank of the United States]
* [http://www.ftc.gov Federal Trade Commission]
* [http://www.census.gov U.S. Census]
* [http://www.usitc.gov U.S. International Trade Commission]
* [http://www.ustr.gov U.S. Trade Representatives]
* [http://www.opic.gov Overseas Private Investment Corp]
* [http://www.sba.gov Small Business Administration]
* [http://www.sba.gov/oit/ International Office]
* [http://www.usaid.gov/business/ Center for Trade & Investment]
* [http://www.sec.gov Security Exchange Commission]

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==Unit 1.3- Resources for Determining Political and Economic Risk==

The technology of today allows us to communicate freely and easily. Unfortunately not everyone has had exposure to this easy access of information from an early age. This can be a slight handicap to some until the benefits of using the internet are explored and exploited. Using the internet as an information tool continues to grow tremendously with no sign of abatement. The internet is easily navigated providing global information at your finger tips. This is a resource that is constantly adding more information to its data base.

How do we get started for the technically challenged? The first recommendation is to jump in immediately. UNESCO has posted on the internet an article that can help understand the impact of the internet on the world of today. “Key word” search requests are the most common and fastest means to get the most potential data to explore. The most direct is to go directly to the web page by the direct address.

When gathering any type of information whether it be on-line or in publications it is important to verify your source and if possible to gather multiple sources that provide the same data. This type of cross referencing will help you avoid making decisions based on a biased perspective or unreliable data.

The list of international websites on the following pages is extensive but by no means comprehensive. This just demonstrates how vast and extensive information can be by providing a means to communicate and easily engage in international business.

===Unit Objective===
The goal of this material is to identify sources of information in hard copy and on the internet that provide financial risk data including government agencies, organizations, credit bureaus, etc. By the end of this unit your will be able to:
* identify sources of information that indicate a country’s level of risk that may affect financial issues.

===Unit Outline===
* [[Resources for Determining Risk|Introduction]]
* [[Resources for Determining Risk/Regional Resources|Regional Resources]]
* [[Resources for Determining Risk/Publications|Publications]]
* [[Resources for Determining Risk/World Organizations|World Organizations]]
* [[Resources for Determining Risk/Credit Agencies|Credit Agencies]]
* [[Resources for Determining Risk/Databases|Databases]]
* [[Resources for Determining Risk/Summary|Summary]]
* [[Resources for Determining Risk/Resources|Resources]]
* [[Resources for Determining Risk/Activities|Activities]]
* [[Resources for Determining Risk/Assessment|Assessment]]

'''Correlation''': Materials from this unit correlate with [http://www.nasbitecgbp.org NASBITE CGCP]'s Knowledge Statement 04/01/03: Knowledge of resources for determining risk (e.g., U.S. government organizations, websites, Moody’s, Standard and Poor’s, Euromoney, credit bureaus such as Graydon America and Coface Veritas)

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==Assessment==
1. As you develop your international business, your ability to collect payment in a timely manner can be affected by the
::a. weather in the country.
::b. contract that was signed.
::c. culture of the country.
::d. demand for the product that is sold.

2. Due to the unlimited variables that may affect an international business transaction, the most important foundation to establish is a
::a. complete understanding of the legal system in which you will conduct business.
::b. thorough understanding of the religions present in a country.
::c. complete understanding of the language of a country.
::d. strong relationship with your business associates abroad.

3. In a country where the level of corruption is very high, it is likely that an international manager will be required to pay
::a. bribes (grease payments).
::b. corporate taxes.
::c. high duty rates.
::d. high interest rates.

4. Cultural restrictions within a country may limit businesses
::a. to selling a limited quantity of products during the year.
::b. from utilizing financial and foreign exchange tools.
::c. from completely understanding the legal system in which you will conduct business.
::d. from thoroughly understanding the religions present in a country.

('''Correct answers''': 1=c, 2=d, 3=a, 4=b.)

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==Activity==
Assign each student a country. Have them research the cultural aspects of the country including:

# religion
# language
# social norms
# Hofstede’s Dimensions – www.geert-hofstede.com
# Corruption Perception Index – www.transparency.org

Once the students have completed their research, appoint each either as an importer or exporter. Pair the students and have them discuss the following issues from their countries’ perspective:
# language
# religion and government
# timely payment
# government involvement in business
# presence of corruption and the need for bribes
# possible affects on profitability of business between the countries.

Once the discussions are complete, have each group present their findings to the class with a decision as to whether it makes financial sense to conduct business between the countries.

This research and the discussions can be divided between individuals or in small groups, depending on the size of the class.
This assignment would also work well in an on-line environment.

To make the assignment more specific each group could also be assigned a product or service to trade.

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==Resources==
===Print resources===
* ''Culture's Consequences: Comparing Values, Behaviors, Institutions, and Organizations Across Nations'', by Geert Hofstede, 2nd Edition
* ''The Global Entrepreneur'', by James Foley, 2nd Edition

===Web resources===
* [http://www.geert-hofstede.com Geert Hofstede]
* [http://www.globaledge.msu.edu MSU globalEDGE] Modules on Culture
* [http://www.transparency.org Transparency International]

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==Summary==
Culture is an enormous topic because it differs over time by location and by age group. Trying to learn the details of every culture would be close to impossible; however, understanding that there are similarities and differences is the first hurdle. An important step before going abroad for business is that an international manager should prepare by researching the cultural norms, business etiquette, and the taboos. Developing strong personal relationships is critical.
Culture does affect business and the ability for a business to be financially successful. Culture may also determine the ways business is conducted and the speed at which transactions take place.
Research, prepare, and be ready for anything to happen.

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==Culture Applied==
Culture is most often viewed as the language or religion of a country, but there is obviously more to culture than these two components as Hofstede’s model shows. A successful international business manager must know what cultural matters may affect developing relationships and the impact they have financially on a business venture.

===Language===
Financial issues are very much affected by language. Negotiations between a buyer and seller include price, delivery dates, shipping methods, and methods of payment. If either party is not completely fluent in the other party’s language, misunderstandings may arise which could lead to late payment or no payment at all. This situation may also arise between individuals who speak the “same” language as well. Consider the differences in word connotations and spelling between the English spoken in the US, UK, Australia, South Africa, and New Zealand. English isn’t the same English everywhere.

Another language issue that may affect payment, as Hofstede indicates, is the meaning of words. Consider the classic example of the Spanish word “mañana.” Literally translated, it means “tomorrow”; however in business it more appropriately means “not today.” So, if you are asking your customer in Latin America when payment will be ready to wire transfer and the answer is “mañana,” you very likely will not know when payment will actually be made. It could be the next day, but such is not a guarantee since the word has very broad usage.

Another issue has to do with the Asian issue of saving face. Rarely will a business associate say “no” directly since this is considered too bold, direct, and rude. The issue, of course, is how then does an American business person know if payment will be made or if the shipment will be ready on time if the Asian company does not give a direct answer. Knowing and understanding the nuances of a culture will help in interpreting the meaning of statements and therefore knowing when and how business will be conducted.

===Religion===
In the US, business and religion are interrelated since there is consideration of both secular and religious holidays in product offerings, sales and distribution. What we rarely experience in the US is a crossover between business law and religion. Such, however, is not the case all over the world.

In countries where Islam is the predominant religion, Sharia law is the body of Islamic law which regulates the public and some private aspects of life. Islamic law prohibits usury, the collection and payment of interest, and prohibits trading in financial risk (which is considered a form of gambling). Islamic law also prohibits investing in businesses that are considered unlawful (businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). These prohibitions may limit international business dealings with companies located in the countries that practice Sharia law. Ideas to overcome these issues could include:

# utilizing a bank that does not charge interest on loans
# removing statements on invoices that add interest to balances if payments are late
# creating independent companies that do not deal in products forbidden by Islamic law
# avoiding long-term foreign exchange exposure which will eliminate the need for future or option contracts.

Another example of religion affecting financial transactions can be found in Israel. During the Passover season businesses are not allowed to come in contact with or inventory any products that contain yeast, which means destroying the product or selling it prior to Passover. Unless previous arrangements are made, this situation could increase the cost of products, or lead to spoilage and loss of inventory.

===Corruption===
Corruption as defined by Webster’s Collegiate Dictionary (11th edition) is an “inducement to wrong by improper or unlawful means (as bribery).” Political corruption, that is, corruption of a political system or institution where public officials seek illegitimate personal gain through actions such as bribery, is the kind of corruption that directly affects the financial side of business.

The level of corruption that is present in a system will affect how business is conducted between companies as well as the interaction or payment required by government or other officials. Being aware of the potential situation and the possible added costs to business are important for an international manager to prepare for. One tool that can be used is the Corruption Perceptions Index, which measures "the degree to which corruption is perceived to exist among public officials and politicians."

[[Image:World Unit 1.2.jpg]]

Blue colors indicate little corruption; red colors indicate much corruption. Data source: Corruption Perceptions Index 2006 by Transparency International

The greatest challenges occur when business is conducted between companies located in a country that is blue and one that is red. Understanding that the individuals in the red country may not consider bribery illegal or immoral but simply the way business is done can be a significant challenge for “blue country” companies. Questions that international managers may have to consider include the following:

# How much do we budget for “grease payments”?
# Can such payments be legally made?
# How are such payments accounted for on the financial records?
# Will the delay in such payments result in a slowdown of business or payment?
# Will a larger payment from a competitive company limit our ability to conduct business?

===Government Involvement===
The culture of a country may also determine the level of government involvement that is present in a market. Laws developed based on a society and its religion will ultimately impact the business law structure of the country as well. Issues that international managers may encounter include these:

# code law (written law) versus common law (application of precedent) systems
# level of development of the business law system: consider the British system which has been around for centuries versus the Chinese system which is being created daily
# cultures that prefer to litigate over a dispute versus those that prefer to arbitrate or mediate
# systems that require that laws be written before business is conducted (Europe) versus those that wait until issues arise to legislate (US)
# inclusive versus exclusive statements: many countries in the Middle East will not allow product to pass through Israel. The

US does not allow exclusionary statements such as this to be made in business documents.
All of the above issues may cause delays in the simple ability to conduct or understand how to conduct business, receive payment in a timely manner, or move currencies to make payment for products.

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==Culture Defined==
Culture is defined as the integrated system of learned behavior patterns that are distinguishing characteristics of the members of any given society, including everything that a group thinks, says, does and makes – its customs, religion, language, material artifacts and shared systems of attitudes and feelings. Understanding culture involves understanding people, which is, as we all know, an extremely difficult task. Today, because of technology, the internet, the media, travel, and the opening of once-closed societies, culture attitudes have shifted somewhat, becoming more dynamic and less geographically sensitive.

Geert Hofstede, a Danish psychologist, interviewed thousands of IBM employees during his employment and subsequently developed a cultural model which he claims summarizes the different cultures.

Hofstede’s model contains five dimensions, with each dimension given a value between 1 and 120:

# individualism versus collectivism – looks at the relationship between individuals and others in their society.
# power distance – quantifies how well individuals accept the different levels of power that may be evident among them.
# uncertainty avoidance – looks at how well individuals accept uncertainty and risk.
# masculinity versus femininity – ranks the extent to which a society embraces masculine values (assertiveness, status, financial rewards) versus feminine values (quality of life). Societies with a stronger masculine culture tend to emphasize the differences in the role of the sexes.
# long-term versus short-term orientation – added to help distinguish the difference in thinking between the East and the West.

Models like Hofstede’s provide international managers with a tool to differentiate, compare, and understand cultures and the individuals they will be dealing with abroad. Two important points every international business person must remember:

# Understanding culture does not mean judging or ranking cultures or individuals. One’s own culture is not the standard against which others are to be judged. Avoid being ethnocentric.
# Applying too many generalizations is dangerous. A manager must understand culture as a framework in which to deal with individual business partners.

There is a saying in international business, “Business is based on relationships.” Developing strong relationships with individuals is often the best way to make business ventures successful.

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==Unit 1.2- Cultural Issues Affecting International Trade==

Understanding cultural differences is a critical aspect of international business. An international manager is not expected to master the cultures of the world; however, understanding the ways culture affects business is necessary. When selecting markets for entry or as a source of supply, an international manager must become familiar with the specific cultural factors, business etiquette and issues involved in conducting business abroad.

===Unit Objective===
The goal of this material is to introduce you to cultural issues that may arise in a buyer’s country and the impact they may have on payment and money transmission methods, as well as the level of government control, corruption issues and sources of financing that may or may not be available in the country. By the end of this unit your will be able to:

* identify cultural issues that may impact trade finance negotiations.
* identify cultural issues that may affect international finance methods.

===Unit Outline===
* [[Cultural Issues Affecting International Trade|Introduction]]
* [[Cultural Issues Affecting International Trade/Culture Defined|Culture Defined]]
* [[Cultural Issues Affecting International Trade/Culture Applied|Culture Applied]]
* [[Cultural Issues Affecting International Trade/Summary|Summary]]
* [[Cultural Issues Affecting International Trade/Resources|Resources]]
* [[Cultural Issues Affecting International Trade/Activities|Activities]]
* [[Cultural Issues Affecting International Trade/Assessment|Assessment]]

'''Correlation''': Materials from this unit correlate with [http://www.nasbitecgbp.org NASBITE CGCP]'s Knowledge Statement 04/01/02: Knowledge of cultural issues of buyer’s country which may impact payment methods, money transmission methods, language used, credit control procedures, level of governmental control, corruptionissues, and sources of finance

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==Assessment==
1. Which of the following factors do companies find the most difficult to assess when initially trying to penetrate a foreign market?
::a. the need to obtain legal advice on the country in question
::b. evaluating the socio-cultural and socio-economic factors of the foreign environment and the need to visit and assess the foreign environment without being dependent only on information provided
::c. the basic need for the product or potential for foreign trade or investment
::d. the evaluation of country risk and exposure

2. The inability or unwillingness of the buyer to accept delivery of a shipment when it is ready is referred to as
::a. economic risk.
::b. political risk.
::c. commercial risk.
::d. country risk.

3. Fluctuation of exchange rates causing the price products to plummet and causing the seller to renegotiate pricing before shipment would be considered
::a. commercial risk.
::b. country risk.
::c. political risk.
::d. economic risk.

4. Country risk =
::a. political risk + commercial risk.
::b. economic risk + commercial risk.
::c. political risk + economic risk.
::d. commercial risk + transaction risk.

('''Correct answers''': 1=b, 2=c, 3=d, 4=c.)

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==Activity==
The purpose of this activity is to promote discussion and understanding of the differences and similarities of risks of slow or non-payment from domestic and international trade situations.

As a class or in smaller student groups, present ways you would respond to the following situations covering the risk and the possible mitigation of that risk.

Your customer has failed to obtain an import license. Evaluate:
*the disposition of the goods and related costs
*international risk of payment or recovery of the goods
*the ability to acquire the license after the fact

Your customer is located in a land-locked country. The closest port is in a country that is at war. Evaluate:
*alternative distribution channels and logistics
*the use of insurance if the goods might be confiscated, embargoed, or destroyed by activities associated with a war
*the financial impact of delays in delivery caused by the war or by alternative routes

Your customer is located in a country that has an unstable government. Evaluate:
*the impact of foreign currency fluctuations and the use of hedging mechanisms to overcome them
*an alternative form of payment to be employed such as bartering
*the risk of nationalization by the government of private industries

Your customer is located in a country that has hyper-inflation and anyone who has liquid assets and the ability to move those assets out of the country is doing so. Evaluate:
*the impact on the value of the currency in the open markets
*the impact on the foreign currency reserves of the country
*the impact of the central bank restricting payments outside their country under these circumstances

Your customer sends you a financial statement prepared by a local accounting firm. Evaluate:
*the translation risk of the foreign assets and the impact of a major currency fluctuation against those assets
*whether generally-accepted accounting practices apply internationally as well as domestically
*the ability to get credit information on the company and from what sources

Your sales department has communicated with a new customer by fax and e-mail. The customer needs your company to start work on building a unique piece of machinery. The down payment and the purchase order will follow shortly. Evaluate:
*the payment vehicles that could or should be employed before the manufacturing process begins
*the need for an underlying contract to bind the parties in the transaction
*the potential for miscommunication on the required needs or functionality of the machinery being ordered

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Archive:Introduction to Political and Economic Risk/Resources

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==Resources==
*I. Brady and B. Isaac, ''A Reader in Cultural Change'', vol.1 (Cambridge, MA Schenkman Publishing, 1975) p. x.
*V. Barnouw, ''An Introduction to Anthropology'' (Homewood, IL, Dorsey Press, 1975) p. 5.
*''FITT Skills International Trade Finance Participants Manual'', Forum for International Trade Training (FITT)
*''International Business: The Challenge of Global Competition'' (7th ed.) Burr

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Archive:Introduction to Political and Economic Risk/Summary

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==Summary==
There are many forms of risk associated with business and more so with international business because of the added pressure caused by sovereign governments, geography and culture. A successful international business manager does not go into business with a blind eye. He/she identifies the potential risks, assesses the potential profits, and puts the appropriate risk mitigation tools into place. There are a variety of types of risk associated with international transactions, political, economic and commercial risk, all of which may render a buyer or seller incapable of conducting business (getting paid or receiving shipment). You must understand the complex interactions of the various kinds of risk. A simple way to differentiate commercial and country-risk is provided below:

*country risk = political risk + economic risk
*commercial risk = business transaction risk

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Archive:Introduction to Political and Economic Risk/Cultural Risks

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==Cultural Risk ==
Cultural risks occur as the result of different expectations, misunderstandings and miscommunications between a buyer and the seller.

*A seller wants to make a large sale to meet a quarterly quota. The buyer wants to be polite and may be saying “yes,” acknowledging the seller’s explanation of the features and benefits of the product. The seller asks for the potential buyer’s standard shipping instructions, which are then promptly provided. The seller enters the “order,” and the shipment is made. But the buyer has never placed a proper order and therefore rejects the shipment.
*A request for a quotation arrives that is misinterpreted to be a purchase order. A lack of communication resulting from language problems results in a shipment being made that has not been ordered.
*A buyer promises to pay promptly when the goods are delivered. What the seller fails to realize is promptly will be after the month-long holiday in the buyer’s country during which the goods may be shipped but will not be picked up by the company until after the holiday. Thus payment is delayed, and demurrage costs may accumulate.
*A seller, by not doing extensive marketing research, exports a product for distribution only to find out that for religious and cultural reasons it will not be purchased and therefore is rendered worthless.

Risk is an inherent part of all business transactions. There is risk of slow or non-payment in domestic transactions that arise primarily from the unwillingness or inability of a buyer to pay a seller when payment is due. When international transactions take place, more risks are added because of the laws, regulations and politics of the buyers’ and sellers’ countries as well as possible third countries. The financial condition of a buyer’s country may cause delayed or blocked payments. Changes in the relative value of buyers’ and sellers’ currencies pose risks. The number of documents required in many cross- border transactions opens the possibility of missing documents or discrepancies in the forms to be filed, leading to slow or blocked payment.

There are many misunderstandings that can occur in business transactions negotiated among countries in distant time zones, with different languages, varying cultural practices and dissimilar ethical values. Any or all of these can contribute to payments not being received when due.

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Archive:Introduction to Political and Economic Risk/Economic Risks

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==Economic Risk==
Economic risks can endanger the ability of a seller to get payment for goods or services in many ways. This type of risk can sometimes be forecast but is often completely out of the control of either the buyer or seller. Purchasing transaction insurance is essential for a buyer to minimize economic risk. Elements of economic risk include but are not limited to:

*convertibility risk
*foreign exchange risk
*translation risk
*central bank activities (interest rate fluctuation, availability of funds)
*economic indicator movement (GDP, unemployment, purchasing power, inflation, etc.)

===Convertibility Risk===
Convertibility risk is an issue when a buyer has received the goods promised and is now ready to make payment but can’t because, for any number of possible reasons, the buyer’s government bars the conversion of its local currency to that of any other country. The reasons for this action could be a possible war, a major building infrastructure program, or a massive negative trade balance. The buyer naturally has the currency of his own country in his bank account. When the buyer goes to the bank to exchange the local currency to the currency specified in the purchase contract or to the currency of the seller’s country – or for that matter the currency of any “hard currency” country, the conversion cannot be made without proper authorization. Convertibility risks usually occur when the buyer’s currency does not have a ready world market. Although the transfer of the local currency out of the buyer’s country may not have been specifically barred, it provides little value since the seller may not be able to find a buyer for the funds.

===Foreign Exchange Risk===
Foreign exchange risk is not the same as either transfer risk or convertibility risk. Foreign exchange risk occurs when the rate of exchange between the seller’s currency and the buyer’s currency changes dramatically between the time the order is quoted and the time the final payment is received. When payment is not made in a cross-border transaction, the difficulty of collection can be compounded significantly, especially if the transaction is hedged. Therefore, it is much better to assess the level of risk and know ways to mitigate, manage, transfer or accept the risks.

For example, a seller and buyer agree that the seller will be paid in the seller’s currency. The buyer has the financial strength and character at the time of the contract to be willing and able to make payment when the goods are delivered. Between the time the order is placed and the time the buyer is to make payment, however, the buyer’s currency drops significantly in value against the seller’s currency. The cost of the goods may now be more than the profit margin of the buyer, or the buyer may have to pay much more than anticipated in the buyer’s local currency. It may take the buyer much more time to obtain enough local currency to buy enough of the seller’s currency to make full payment. It may be that the buyer will never be able to make a full payment for the purchase. Hedging against foreign exchange risk is the best solution for this type of problem.

===Translation Risk===
Translation risk involves the revaluation of foreign assets that are held in a foreign currency. There may be a difference in the current foreign exchange rate from the time of the original transaction to time of the fulfillment of the sales contract. Assets held on the balance sheet in foreign currency must periodically be revalued to the current market price of that currency. This kind of revaluation to the current market will create an exchange loss or gain. This exchange gain or loss is unrealized but still impacts the value of the assets held overseas. An example follows:

Plant and equipment of an international company are marked to market at year-end for financial reporting purposes. Conditions throughout the year have caused a decline in the value of the currency of their foreign holdings of 20%. This decline has the immediate affect of reducing the value of these assets by 20%, which then has the direct impact of reducing the company’s profitability for the year by the same value even though no direct transaction has occurred other than the revaluation to create this loss.

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==Country-Related Risks==
Both the seller’s country and the buyer’s country have laws governing cross-border trade. These laws may address:

*the need for export and import licenses
*customs and import duties
*limitations on sending money out of the country (currency control laws and regulations)
*embargos

There are transnational rules and agreements that may also affect trade:

*protocols and common practices for banking transactions that may be found in International Chamber of Commerce publications for collections, letters of credit and SWIFT (Society for Worldwide Inter-bank Telecommunications systems) procedures to execute payments and to communicate on collections and letters of credit
*terms of sale as defined in Incoterms, another International Chamber of Commerce publication that details when the costs, risks and responsibilities for transporting goods transfer from seller to buyer.

Some examples of country-related risks illustrate payment risk issues in cross-border transactions. Sovereign or country-related risks stem from the actions of one or more governments and government agencies or by civil war, civil unrest and strikes. A seller has a contract to deliver perishable goods to a buyer in another country. There are actions by the government that could prevent the delivery and the completion of the transaction. War by a third country with either the buyer’s or seller’s country could cause the goods not to be transported and/or delivered by one of the warring countries. An embargo or blockade could bar the delivery of the goods. A strike in the logistic pipeline could also stop the goods from being delivered.

Purely political actions like transfer and convertibility risks must also be considered as a part of sovereign risk. Transfer and convertibility risks arise as the result of issues with currency used by the buyer, seller, or other parties involved in the transaction. It should be kept in mind that transfer and convertibility risks are not the same as foreign exchange risk which will be discussed later.

It is imperative to evaluate the potential level of risk by using several different approaches and techniques, which range from relying on experts to making your own judgments. Additional risks may arise in the course of international or cross- border transactions. These risks fall into several general and common categories: sovereign, documentary, foreign exchange, and cultural.

===Political Risk===
Sovereign or country-related risks fall into several major subcategories: '''political''', '''transfer''', and '''convertibility'''. Political risks are those risks that arise from the legal and foreign relations actions of the national governments of a seller, a buyer and sometimes third countries, especially third countries through which cargo may travel. Transfer and convertibility risks also relate to the buyer and seller’s countries, but more specifically in terms of the management of the currency and the availability of foreign currencies, also known as foreign reserves.

Sometimes when a country, usually through its central bank, needs to ration the foreign currency it has available to it, it will place controls on transfer currency, sometimes even its own currency out of the country. This situation is called transfer risk. The buyer or debtor is willing and able to pay, but restrictions have been instituted that prevent the payment from taking place.

Convertibility risk is somewhat similar. The buyer or debtor is willing and able to pay with local currency and the currency may be transferred out of the country; however, there is no ready market to convert it to a currency the seller or creditor can use. The buyer or debtor may be prevented from legally exchanging the currency in his own country because of currency controls imposed by his own country, usually through the central bank. If the buyer sends his local currency to the seller, the seller could be faced with having to exchange it for a usable currency at deep discount or not being able to exchange the currency at any rate of exchange. Foreign currency exchange under a free-floating environment can be very volatile over time and should be hedged by the inexperienced.

===Documentary Risk===
Documentary risks are the primary cause of slow or non-payment in international trade. In its simplest form, documentary risk arises from a missing or incorrectly prepared document that is required to complete the buy/sell transaction and/or make payment. Cross-border transactions very often involve many documents, but just one missing document or a discrepancy in a document can stop a payment temporarily or permanently.

Some of the more common document problems are caused by

*letters of credit
*import and export licenses
*certifications such as certificates of origin
*customs documents
*transportation documents
*other bank and legal documents.

Here are examples of letter of credit document problems. A seller has received a letter of credit that is denominated in his/her own currency. The seller has eliminated the risk that the buyer will be unable or unwilling to make payment when it is due because the bank that issued the letter of credit now has the payment obligation. The letter of credit states that the seller will be paid upon presentation of certain documents that need to be in conformity with the bank’s (and buyer’s) requirements under the letter of credit. Documents required by commercial letters of credit for payment may include but are not limited to:

*ocean bills of lading
*air waybills
*certificate of the country of origin
*invoice
*packing list
*insurance certificate
*certifications of weight, quantity or technical specification.

The documents required enable the buyer to clear the goods through customs and comply with any other contractual agreements. All of the requirements for acceptable documentation examination are set for in the ICC Uniform Customs and Practice for Documentary Credits (UCP) published by the International Chamber of Commerce in its latest version. Any modification or amplification to acceptability of required documents will be found on the face of the letter of credit. If any one of the required documents is missing, is not exactly in compliance as required in the UCP and on the face of the letter of credit, is inconsistent with other documents, or is not properly endorsed, the issuing bank will not pay the seller. Some common problems with documents being used for payment with a letter of credit include the following:

*Weights may be in pounds on one document and in kilograms on another.
*Description of goods in the letter of credit is in Spanish, but the invoices and/or packing lists describe the goods in English.
*Goods are not shipped in the quantity or time frame required under the letter of credit.
*There are misspellings in the letter of credit, but other documents have those words spelled properly.
*Negotiable transportation documents are not properly endorsed or consigned.
*Too much or too little has been shipped.
*The name and address of the buyer or seller is not in strict compliance with the letter of credit.
*Documents are not properly labeled to match the documents required under the letter of credit.
*There are inconsistencies between documents for carton, weight or number counts.
*There are incorrect consignment or notification parties on the bill of lading.
*These are only a few of the potential discrepancies that occur with a commercial letter of credit.

Standby letters of credit are issued to a seller by the buyer’s bank to cover for noncompliance with agreed upon payment terms. The standby letter of credit virtually “stands by” to pay if the buyer does not meet his/her payment obligations. The documentary requirement to claim under a standby letter of credit is a simple statement declaration made by the seller to the issuing bank of the standby letter of credit. Standby letters of credit are used when shipments are done consistently on a revolving basis to the same buyer. The cost of doing a standby over a commercial letter of credit needs to be evaluated before deciding which payment instrument should be used.

Other documentary risks arise as the result of export and import licenses as well as currency control requirements.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The buyer has, however, failed to obtain an import license. The goods are held by customs in the buyer’s country, and thus the delivery cannot be completed.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The buyer has a valid import license permitting the importation of a particular quantity of goods during a particular time window. The seller ships the wrong quantity and/or the goods are not shipped into the buyer’s country during the specified time window. The goods are held by customs in the buyer’s country, so the delivery cannot be completed.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The seller has failed to obtain a required export license. The goods may be held by authorities in the seller’s country, and/or there may be severe civil and/or criminal penalties imposed on the seller.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The buyer has, however, failed to obtain appropriate authority to convert his local currency to that of the purchase contract. The goods may or not be held by customs in the buyer’s country, but the seller will generally not be paid when payment is due, and/or payment may not be made at all.

===Transfer Risk===
Transfer risks can occur when a buyer has received the goods promised and is ready to make payment. The government of the buyer’s country sees its foreign reserves rapidly leaving the country. The law or central bank institutes regulations to stop all movement of funds out of the country without specific approval. This program halts the transfer out of the country of the buyer’s currency as well as the currency of any other country. The buyer is willing and able to make the payment to the seller; however, by government intervention, the payment is blocked from taking place.

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