StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

International Trade Finance: The of Stainless Cookware Limited - Case Study Example

Cite this document
Summary
This study looks into various aspects of international trade finance in relation to Stainless Cookware Ltd. The report will first analyze import/inward documents against payment collection in international trade since the company also engages in inward trade…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.2% of users find it useful

Extract of sample "International Trade Finance: The of Stainless Cookware Limited"

Case Study Report Introduction As a business operating in international business, Stainless Cookware Ltd is likely to face various challenges and opportunities regarding to international finance. There are issues of risks and foreign exchange fluctuations. The company will also engage with foreign bankers and financing institutions. Since the company engages in export of products, its international finance will also involve international trade charges including duties and other forms of taxes. Transportation of products to the UK also consumes more money from the company. Generally, international trade involves various financial transactions that may cause difficulties in international engagements in the company. This report looks into various aspects of international trade finance in relation to Stainless Cookware Ltd. The report will first analyse import/inward documents against payment collection in international trade since the company also engages in inward trade that requires inward financing and documentation. The report will also identify an appropriate banking product that Mr. Gupta, the director of the company can use to finance imports. The Incoterm that is currently used in the Saudi contract will also be evaluated, and recommendation will be given on whether another alternative may be used. Furthermore, the report will highlight how else the bank may protect the company. Advantages of invoicing using the USD will also be discussed while at the same time providing the three quotes alongside their sterling equivalent. This will demonstrate a deep application of international finance in the case study. There are also some documentation and other e-commerce financial aspects that can be used in international trade. Methods of payment in international trade will further be analysed. Import/inward documents The Stainless Steel Cookware records its imports on documents against payment (DP) collection. The DP mechanism involves the release of import documents upon payment by the buyer. It is a crucial method of payment in international transactions which can enhance faster and effective payment for Stainless Steel Cookware. In this mechanism, the exporter asks the bank to present shipping and title documents to the importer only when he pays for the bill of exchange or draft. This is cash against documents, and it ensures that the importer pays for the goods as he takes possession of them (Carr & Stone, 2013). DP is therefore an effective method of payment for Stainless Steel Cookware because it ensures that the importers of its goods pay for their imports as soon as they receive the title and shipping documents. It ensures that there are no delays in payment and that debts are collected on time from the international transaction. This is an important mechanism of billing imports because it enables buyers to be keen on building their businesses. In this method of payment, three stakeholders are involved: the bank acting as agent, the importer acting as the buyer, and exporter acting as the seller. The seller instructs the agent to present the documents of shipment as payments are made by the buyer. The seller can retain the ownership of the goods until the buyer pays for the goods. Banking product to ease cash flows Stainless Steel Cookware should manage its day-to-day cash flows using appropriate banking products. One of the most important approaches is to use short-term borrowing options provided by various banking institutions in the international market. Currently, the business uses a bank overdraft as an alternative of enhancing its cash flows. One of the advantages of using this method is that it is easy to arrange. Furthermore, interest rates for bank overdrafts are low and are only charged on what the company uses. It is also flexible because it allows the company chooses an amount that suits its circumstances. However, I consider invoice finance as an important banking product for Stainless Steel Cookware to ease its cash flow. This banking product works by generating cash from invoices. This improves the company’s working capital (Madura, 2007). The bank also helps the company to release cash from its invoices. This product is also important for the company to protect itself from bad debtors and improves the company’s invoice value each day. Banking product to finance imports Stainless Steel Cookware uses a debenture as a method of financing its imports with the Director’s unsupported personal guarantee and a mortgage on the company’s premises. This is a risky method of payment because if the importer fails to pay, the director may lose his own personal finance while the company will lose its premises. However, an important bank product that can be used by the company to raise money for importing goods is import loan. This method of financing enhances easy access to import financing because it allows the importer to use the goods as a security in case he/she fails to pay for the goods (Seyoum, 2013). Import loans are not provided by all banks. There are some international banks that offer this type of loan to international businesses with low chances of default. An import loan improves the company’s cash flow and provides it with the required amount of money to purchase more imports (Seyoum, 2013). This helps to grow the business. Import loans can be used alongside documentary credit and documentary collections to obtain enhance payment to suppliers and payment from customers. Import loans are provided against transport documents and invoices, which indicates that the goods themselves are security for the transaction. In this case, the bank pays for the goods directly to the sellers. Repayment of the loan depends on the trade cycle of the business. This reflects a true flexibility for the import loans. Incoterms Incoterms are International Commercial Terms in full. They include predefined terms of the international chamber of commerce used by international businesses when transacting with each other. They are mainly three-letter words with common sales contract clauses. The main purpose of Incoterms is to communicate the activities, costs and risks that may be experienced during the transportation and delivery of goods across borders (Zivot, 2000). Governments, business practitioners and legal authorities agree on these terms as mechanisms of enhancing effective business communication in international trade. This minimizes uncertainties in international trade and enhances a common understanding of terms in order to make international transactions and movement of goods easier. Stainless Steel Cookware used a letter of credit to purchase goods in contract with the Saudi company Sheikh Inc. The terms agreed upon in the contract was based on the FOB. This stands for Free on Board. The terms of this agreement suggest that the person selling the goods should pay government tax in the country where the goods are sourced from (Rowbotham, 2013). This tax payment acts as a form of commitment to load the ordered goods on the transport vessel directed by the buyer. Another term or condition of this shipping agreement is that costs and risks associated with the import goods are shared by both the seller and the buyer while the goods are still on the transporting vessel. In FOB, the seller is also obligated to inform the buyer about the details of the shipping vessel and the port where the goods will be offloaded (David, 2013). The carrier or forwarder is not involved referenced in the transaction between the buyer and the seller. In general, FOB terms require the seller to pay for the transportation fee to the port of shipment and the loading fee. On the other hand, the buyer pays for marine freight fee, insurance, transportation fee from port of arrival, and unloading costs. Risk can only be transferred once the goods are in the hands of the buyer. There are several other Incoterms which could alternatively be used by Stainless Steel Cookware. One of the Incoterms suggested by this report is FAS which stands for Free Alongside Ship. In this concept of shipment, the seller delivers the goods once they are placed alongside the vessel of the buyer at the named port of shipment. This is extremely hard on the buyer because the buyer bears all risks and costs include damage or loss since the time the goods are placed alongside the buyer’s vessel. This term used for sea or inland waterway transport is necessary for the Stainless Steel Cookware because the goods will arrive faster if the buyer is concerned with all risks and costs of shipment or transport. In this case, the seller bears the responsibility to clear the goods for export and not the buyer. However, if the seller and buyer agree that the export be cleared by the buyer, this should be included in words within the contract of sale. Forward Rates and Sterling Equivalent Forward rates for forward exchange contracts are important derivatives that are commonly used in finance (Buckley, 2012). The seller locks in a forward contract to sell foreign exchange currency. This helps the buyer to avoid risks of currency fluctuation fluctuations. The buyer may lock in an exchange rate using a forward contract so that he/she can use the same exchange rate in future. Forward contracts may be fixed or open. Fixed forward contracts allow the buyer to take the delivery of his forward currency on a specific future date while the open forward contract allows the buyer to take delivery of the foreign currency once (Johnson, 1997). In the case of Stainless Steel Cookware, the foreign currency used is USD. The business needs to protect itself from foreign exchange fluctuations as it deals with imports from a foreign country. For the three quotes in the Saudi contract, the company may place a fixed future contract which will allow it to take the delivery at a specific future date. The Forward rates for the forward exchange contracts and the equivalent sterling are indicated below. Order No. USD Current exchange rate (USD/GBP) Sterling (GBP) Forward Rates Sterling (GBP) 456 15,000 0.585 8,775 0.510 7,650 457 17,000 0.585 9,945 0.510 8,670 458 19,500 0.585 11,408 0.510 9,945 Table 1: Forward Rates and Sterling equivalent From the table above, the current exchange rate for GBP against the USD is 0.585 which yields GBP 8,775, GBP 9,945, and GBP 11,408 for the three quotes of Stainless Steel Cookware. However, if the GBP is expected to strengthen against the US dollar in future the forward rates may be fixed at 0.510 so that the company will buy the goods at lower prices of GBP 7,650, GBP 8,670, and GBP 9,945 respectively. In this case, the company has secured itself from fluctuations so that it can buy the prices at low prices instead of buying them now at high prices which could possibly eat up its profits. Advantages and Disadvantages of invoicing in USD An international business should use an internationally recognised currency used by all countries in order to make foreign exchanges easier and faster. If a business trades with a country where its currency is not exchanged directly with the currency of its home country, then it will be necessary to change the home country first into an international currency and then exchanged into the currency of the host currency. This makes foreign exchange exercise and international trade transactions easier and quicker (Eun and Resnick, 2011). Invoice currency is an important consideration for companies when making international invoice transactions. The international currency that Stainless Steel Cookware uses is the US dollar as the international currency in its international trade. Using this currency has its own advantages and disadvantages. One of the obvious advantages of using the US dollar to invoice transactions in international business is that the currency is available in many countries including Saudi Arabia, UK and India where the company conducts business. Therefore, it will be convenient and easy for the company to engage with international clients, suppliers and partners when invoicing various transactions. The use of US currency as an international currency is an important way of validating the local currency in other countries where it could otherwise not be recognized. The foreign party to whom the invoice is intended will also find it easier to transact using the US dollar instead of the local currency because it may be difficult to exchange local currencies without involving an international currency like the US dollar. The dollar is also advantageous because it used as the world’s reserve currency (Gopal, 2006). The currency is acceptable in most countries and invoices provided in US dollar will also be acceptable in most countries. This is advantageous for international businesses which engage with many countries in their business transactions. In terms of disadvantages, invoicing using the US dollar will lead the company to incur a exchange rate costs. When converting the local currency to US dollar and then to the foreign country intended in the invoice, a lot of exchange charges will be incurred and the company is likely to loose on its profits because the exchange rate costs will act as expenses for the company. Furthermore, fluctuations in the US dollar may also cause losses for the company if the exchange rate of the local currency does not change. For example, if the value of host country’s currency remains constant or strengthens while the dollar remains weakens, the company will sell incur losses because it will have to indicate a lot of dollars in the invoice to reflect the strength of value in the host currency of the host country. Additional Protection from the Bank Under the advised LC, the bank may provide additional protection for Stainless Steel Cookware. Banks may offer protection in terms of insurance in addition to the letter of credit. In terms of insurance, banks may protect the company against common risks and enable them to meet legal requirements in order to avoid legal risks. The bank may also protect the company from loss of future earnings. Furthermore, banks may develop insurance policies to protect the company from losing its assets. They also protect the company from fluctuations in interest rates and foreign exchange. This process will require the company to fill special insurance forms. The bank will then link each form with the letter of credit for the company. The company is then covered after it pays an insurance premium required by the bank. Potential consequences for not presenting compliant documents In order to ensure that there is a good working relationship between the bank and the company in international company, the company is required to present documents of compliance, failure to which the bank may take appropriate action. Following the letters of credit, if the company does not present compliant documents or presents non-compliant documents the bank may stop issues the letter of credit to the seller as a prove of payment by the company. In this case, the effect of agreement between the bank and the company may be stopped until the matter is resolved. This may even affect the relationship between the bank and the company. As a result, the company may lose its agent; hence making its transactions with the international clients and partners difficult. The seller may even take action if he realizes that compliant documents are not presented. He may make claims against the bank. The bank may take specific actions to correct the situation. For example, the bank may decide to dishonor the letter of credit for the non-compliant company and communicate the dishonor of LC to the seller. If Gupta insists on not presenting compliant documents, the company may even be taken to court under the strict compliance rule which requires the company to present all compliant documents to the bank when engaging with international business. Banks require beneficiaries to provide compliant documents in order to protect their own interests. As a result, they apply strict measures to non-complying beneficiaries. One of the major steps that banks take is to reject the letter of credit of the company that has not presented its compliant documents adequately. Banks may also stop future engagements with the company if Gupta fails to present compliant documents. Risks faced by participants in international trade One of the risks faced by participants of international trade is fluctuations in exchange rates. For instance, if the exchange rate increases the prices of products will be higher because the local currency will be in low value (Villanueva, 2007). Another risk in international trade is political risk. For instance, if the government of a foreign country changes the country’s business it may affect international business. Uncertainty in revenues is also common in international trade because a business may not be sure whether it can earn profits in international business. One of the solutions to these risks is to use forward contracts to overcome problems associated with fluctuations in exchange rates. For example, if the current exchange rate between USD and GBT is 0.585 now, and GBT is expected to be weaker in future, a business may use a fixed forward contract to maintain the current rates. Documentation or e-commerce equivalent and means of payment in International Trade There are key documentations required in international trade. First, there should be a documented written contract between the buyer and the seller including international trade contracts and Incoterms. There is also import and export documentation including duty and tax charges documents. Documentation is an essential element even in payment. Doing the right documentation makes payments easier. For instance, the documentary collection can be used by an exporter to prepare a BOE which states the amount of money to be paid and by when. A letter of credit may also be arranged by the customer in the bank which should then be documented. This documentation and means of payment in international trade reduces chances of non-payment. References list Buckley, A 2012, International finance: A practical perspective. Harlow, England: Pearson. Carr, I, & Stone, P, 2013, International Trade Law. Hoboken: Taylor and Francis. Cavusgil, ST., Knight, GA., & Riesenberger, JR, 2012, International business: The new realities. Upper Saddle River, N.J: Prentice Hall/Pearson. David, PA 2013, International logistics: The management of international trade operations. Berea, OH: Cicero Books. Dornfeld, R., & Waukesha County Technical College 1991, Export documents and payment methods. Pewaukee, Wis.: Waukesha County Technical college International Trade Technical Center. Eun, CS, and Resnick, BG 2011, International Financial Management, 6th Edition. New York, NY: McGraw-Hill/Irwin. Eun, CS, Resnick, BG, & Sabherwal, S 2012, International finance. New York: McGraw-Hill Irwin. Gopal, CR 2006, Export Import Procedures - Documentation and Logistics. New Delhi: New Age International Pvt. Ltd., Publishers. Hinkelman, EG, & Denegri, P 2013, Dictionary of international trade: Handbook of the global trade community includes 34 key appendices. Petaluma, Calif: World Trade Press. Johnson, TE, 1997, Export/import procedures and documentation. New York: AMACOM. Madura, J 2007, International Financial Management: Abridged 8th Edition. Mason, OH: Thomson South-Western Moffett, MH, Stonehill, AI, and Eiteman, DK 2009, Fundamentals of Multinational Finance, 3rd Edition. Boston, MA: Addison-Wesley. Ramberg, J, & International Chamber of Commerce 2011, ICC guide to incoterms 2010: Understanding and practical use. Paris: ICC Publishing S.A. Rowbotham, M 2013, Introduction to Marine Cargo Management. Hoboken: Taylor and Francis. Sargeant, N 2014, What risks do organizations face when engaging in international finance activities? Accessed July 15, 2014 from http://www.investopedia.com/ask/answers/06/internationalfinancerisks.asp. Seyoum, B 2013, Export-Import Theory, Practices, and Procedures. Hoboken: Taylor and Francis. Sherlock, J., Reuvid, J., & Institute of Export (London, England) 2008, The handbook of international trade: A guide to the principles and practice of export. London: GMB Pub. Sosvilla-Rivero, S, and Park, YB 1992, “Further tests on the forward exchange rate unbiasedness hypothesis”. Economics Letters, Vol. 40, no. 3, pp. 325–331. Villanueva, OM 2007, “Spot-forward cointegration, structural breaks and FX market unbiasedness”. International Financial Markets, Institutions & Money, vol. 17, no.1, pp. 58–78. Zivot, E 2000, “Cointegration and forward and spot exchange rate regressions”. Journal of International Money and Finance, vol. 19, no. 6, pp. 785–812. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“International Trade Finance Essay Example | Topics and Well Written Essays - 2500 words”, n.d.)
International Trade Finance Essay Example | Topics and Well Written Essays - 2500 words. Retrieved from https://studentshare.org/business/1652675-international-trade-finance
(International Trade Finance Essay Example | Topics and Well Written Essays - 2500 Words)
International Trade Finance Essay Example | Topics and Well Written Essays - 2500 Words. https://studentshare.org/business/1652675-international-trade-finance.
“International Trade Finance Essay Example | Topics and Well Written Essays - 2500 Words”, n.d. https://studentshare.org/business/1652675-international-trade-finance.
  • Cited: 0 times

CHECK THESE SAMPLES OF International Trade Finance: The Case of Stainless Cookware Limited

International Trade and Globalisation

The paper 'international trade and Globalisation' focuses on free trade which signifies the free movement of goods, services as well as capital in which governments actually do not place any restrictions.... hellip; Free Trade emerged as a result of the trends towards globalization which advocated more open economies and no or very limited trade barriers.... Normally, governments often impose trade restrictions such as quotas and other barriers....
6 Pages (1500 words) Case Study

Paderno Competition Analysis and 4p's Strategy Analysis

Paderno Competition Analysis and 4p's Strategy Analysis Introduction This present paper is based on the case study of the Paderno Cookware company, whose headquarters are located in Canada and they specialize in the manufacture of high quality cookware.... The analysis of the Paderno cookware Company will mainly focus on analysis of its competitors and the strategic analysis of its four key marketing mix elements also known as 4Ps.... The Paderno cookware Company operates in a highly competitive environment since there are other key players in the industry such as Meyer Canada, which is a leading global distributor of metal cookware that have been manufactured by its affiliate companies....
4 Pages (1000 words) Case Study

International Trade Policy

This paper "international trade Policy" focuses on the fact that no country can exist in isolation, global interaction is essential for survival and existence.... The policies or regulations that essentially govern and deal with defining the international trade between countries are known as the Foreign Trade Policy or international trade Policy.... The following paragraphs highlight the main aims and objectives of the international trade policy relating to the export of goods and services [7, 9]....
5 Pages (1250 words) Case Study

Globalization and International Trade

This paper "Globalization and international trade" discusses whether international trade is socially beneficial or not cannot be definitively stated, since different conclusions suggest themselves when the trade is examined from different perspectives.... In reference to international trade facilitated by globalization and the opening up of borders, Mittelman refers to globalization as a historical transformation - “a political response to the expansion of market power” resulting in a transformation “in the economy, of livelihoods and modes of existence” (Mittelman, 2000: 6) and McMichael corroborates this view, seeing the process of global integration taking place on the basis of “market rule on a global scale”(McMichael, 2000:149)....
9 Pages (2250 words) Case Study

Strategic Factors of Reebok International

This case study "Strategic Factors of Reebok International" analyzes Reebok International's strengths and weaknesses, opportunities, threats, reviews the current mission and objectives, strategic alternatives and recommended strategy.... nbsp;… Reebok international, Ltd.... is led by a strong management team, rallying the growth of the company's footwear and sports apparel business across multiple segments of the US and international markets—men, women and children....
4 Pages (1000 words) Case Study

Convenience Cookware case

For instance, it is easy to recall defective product in small quantities than large quantities as illustrated in the case study of Convenience Cookware.... The acquisition of inventory and converting it into cash should be a short period hence the current assets should not be overstocked as illustrated in the case study given above.... Public relations The other change that can be made by the company is to use Public Relations (PR) in its operations especially in times of crises such as the one revealed in the case study....
2 Pages (500 words) Case Study

Stabilizing Weak Currency

As the result of the 2008 economic downturn, many countries have continued to experience weak currency an aspect that has affected other sectors of the economy.... The devaluation of… Based on the importance of local currencies for example in undertaking local transactions and paying taxes, it is vital for the governments experiencing weak One of the ways through which persistently weak currencies can be stabilized is by use of the preexisting currency....
5 Pages (1250 words) Case Study

International Finance Case

Merck Sharp and Dohme international (MSDI) is considering replacing its semiautomatic inspection equipment with a new automatic photo electric sensing inspection equipment which functions electronically to measure the number and size of the particles in the… The proposed equipment is efficient in materials and labor costs, it would eliminate human variability that caused ampules spoilage and had a capacity of 6 million, 25% more than MSDI had anticipated in 1988....
5 Pages (1250 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us