A REPORT

ON
INTERNATIONAL TARDE

By

KOMAL ARORA

HONKONG & SHANGHAI BANKING

CORPORATION
C- SCHEME, JAIPUR

1
 A REPORT
ON
INTERNATIONAL TARDE

By

KOMAL ARORA

JAIPUR NATIONAL UNIVERSITY

Submitted to:- Submitted

By:-
Shreya Bhargav Mam Komal Arora
PGDM lllrd
SEM

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 ACKNOWLEDGEMENT
I take this opportunity to express my deep sense of gratitude to Jaipur
National University for giving us the opportunity to have a corporate experience
by summer training and extending their full support and co-operation towards the
completion of this project.

I express my sincere thanks to all my Faculty members of the institute for

their kind support during my project. The Director Prof. Rajesh Mehrotra to
experience the corporate during the Summer Training.

I express my immense thanks to my mentor Mrs. Shreya Bhargav for

helping and guiding to perform the summer training successfully.

I express my deep sense of gratitude to Mr. Vaibhav Kala (Asst. Manager)

who has given me the opportunity to perform a project in International Trade
HSBC which has given me the real life experience.

Komal Arora
PGDM lllrd SEM
Jaipur National University

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 TABLE OF CONTENTS
TITLE PAGE

COVER PAGE

ACKNOWLEDGEMENT

1. THE ORGANIZATION

2. INTERNATIONAL TRADE- AN INTRODUCTION

3. PARTIES INVOLVED IN TRADE

4. MOVEMENT OF GOODS

4.1 MODES OF TRANSPORT

4.2 INCOTERMS

4.3 INSURANCE

4.4 FREIGHT FORWARDNESS

5. DOCUMENTATION

5.1 IMPORTANCE

5.2 FINANCIAL DOCUMENTS INVOLVED

a. BILL OF EXCHANGE

b. PROMISORY NOTE

5.3 OTHER TRADE DOCUMENTS

a. COMMERCIAL INVOICE

b. PACKING LIST

c. INSURANCE POLICY

d. BILL OF LADING

e. SEAWAY BILL

f. AIRWAY BILL

g. ROAD CONSIGNMENT NOTE

h. RAILWAY CONSIGNMMENT NOTE

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 i. CERTIFICATE OF ORIGIN

j. CERTIFICATE OF INSPECTION

k. CERTIFICATE OF HEALTH

l. CARNET

6. PAYMENT

6.1 RISK

6.2 WAYS TO SETTLE INTERNATIONAL TRADE DEBT

7. TRADING IN FOREIGN CURRENCY AND MANAGING THE RISK

8. HEDGING

9. FINANCING THE TRADE CYCLE

10. SWOT ANALYSIS

BIBLIOGRAPHY

THE ORGANIZATION
The Hongkong and Shanghai Banking Corporation Limited, based in
Hong Kong, is a wholly owned subsidiary and the founding member of the
HSBC Group, which is traded on several stock exchanges as HSBC Holdings
plc. The business ranges from the traditional High Street roles of personal
finance and commercial banking, to corporate and investment banking, and
private banking. It is the largest bank in Hong Kong and has offices in Asia
Pacific region.

HSBC is one of the oldest banking groups in the modern world. The bank is
known locally in the expatriate community simply as The Bank or as
"Hongkong Bank".

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As of 2010, it is both the world's largest banking and financial services group
and the world's 8th largest company according to a composite measure by
Forbes magazine. Hong Kong served as the bank's headquarters until 1992
when it moved to London as a condition of completing the acquisition of
Midland Bank and as the handover of Hong Kong's sovereignty approached.
Today, whilst no single geographical area dominates the group's earnings,
Hong Kong still continues to be a significant source of its income. Recent
acquisitions and expansion in China are returning HSBC to part of its roots.
HSBC has an enormous operational base in Asia and significant lending,
investment, and insurance activities around the world. The company has a
global reach and financial fundamentals matched by few other banking or
financial multinationals.

Key Attributes:

With a loan-deposit ratio of 90%, HSBC Bank is said to be one of the five
British banks that claim to have more deposits than loans. Such a high loan-
deposit ratio of the bank has been able to retain the trust of its investors and
customers, keeping them assured of its financial strengths. The sound
financial position of the bank can also be attributed to the fact that its stocks
maintained relatively high price even during the credit crunch phase,
something not commonly seen to have happened to other banks.

Presence in India:

In India, the introduction of HSBC Bank can be dated as early as the year
1853, with the establishment of the Mercantile Bank of India in Mumbai.
Currently, HSBC Group operates through a number of its subsidiaries in India,
viz. The Hongkong and Shanghai Banking Corporation Limited (HSBC), HSBC
Asset Management (India) Private Limited, HSBC Global Resourcing / HSBC
Electronic Data Processing (India) Private Limited, HSBC Insurance Brokers

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(India) Private Limited, HSBC Operations and Processing Enterprise (India)
Private Limited, HSBC Private Equity Management (Mauritius) Limited, HSBC
Professional Services (India) Private Limited, HSBC Securities and Capital
Markets (India) Private Limited and HSBC Software Development (India)
Private Limited. The group carries out its Commercial Banking, Banking
Technology, Asset Management, Global Resourcing, Insurance and Data
Processing operations in the country through its subsidiaries.

Achievements:
HSBC Bank is well known for having established the first ATM (Automatic
Teller Machine) in India in the year 1987. As of April 2009, the bank is
present in many prominent cities of the country including Mumbai, New
Delhi, Bangalore, Hyderabad, Jaipur, Chandigarh etc.

HSBC Group entities in India:

• The Hongkong and Shanghai Banking Corporation Limited (HSBC).

• HSBC Asset Management (India) Pvt. Ltd.

• HSBC Global Resourcing/ HSBC Global Data Processing (India) Pvt. Ltd.

• HSBC Insurance Brokers (India) Pvt. Ltd.

• HSBC Operations and processing enterprise Pvt. Ltd.

• HSBC Professional services (India) Pvt. Ltd.

• HSBC Securities and Capital Markets (India) Pvt. Ltd.

• HSBC Software Development (India) Pvt. Ltd.

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 INTERNATIONAL TRADE

- AN ITRODUCTION

International trade is exchange of capital, goods, and services across

international borders or territories. In most countries, it represents a
significant share of gross domestic product (GDP). While international trade
has been present throughout much of history (see Silk Road, Amber Road),

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its economic, social, and political importance has been on the rise in recent
centuries.

Industrialization, advanced transportation, globalization, multinational

corporations, and outsourcing are all having a major impact on the
international trade system. Increasing international trade is crucial to the
continuance of globalization. Without international trade, nations would be
limited to the goods and services produced within their own borders.

International trade is in principle not different from domestic trade as the

motivation and the behavior of parties involved in a trade do not change
fundamentally regardless of whether trade is across a border or not. The
main difference is that
international trade is
typically more costly than
domestic trade. The
reason is that a border
typically imposes
additional costs such as
tariffs, time costs due to
border delays and costs
associated with country
differences such as
language, the legal
system or culture.

Another difference
between domestic and international trade is that factors of production such
as capital and labor are typically more mobile within a country than across
countries. Thus international trade is mostly restricted to trade in goods and
services, and only to a lesser extent to trade in capital, labor or other factors
of production. Then trade in goods and services can serve as a substitute for
trade in factors of production. Instead of importing a factor of production, a
country can import goods that make intensive use of the factor of production
and are thus embodying the respective factor. An example is the import of
labor-intensive goods by the United States from China. Instead of importing
Chinese labor the United States is importing goods from China that were
produced with Chinese labor.

International trade is also a branch of economics, which, together with

international finance, forms the larger branch of international economics.

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PA RT IE S IN VO LV ED I N TR AD E

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• Buyer – importer

• Seller – exporter

• Manufacturer

• Shipping company

• Insurance company

• Government and Embassies

• Custom and Excise

• Lawyers

• Agents

• Shipping registries

• Chamber of Commerce

• Banks

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 M OV EM ENT O F GO OD S

In international trade, goods are in transit for longer periods and over
greater distances. It makes sense to maintain close control over shipping
terms.

4.1 Modes of Transport

The main modes of transport used in carrying goods are:

• By post

• Road haulage with ferry

• General cargo shipping

• Rail

• Air

4.2 Incoterms

Incoterms describe the most commonly used terms of trade in commercial

Contracts and are published by the International Chamber of Commerce
(ICC). These terms aim to standardized the terminology used in international
trade are and are periodically revised to reflect current commercial and
transport practice. They aim to clear doubts between buyer and seller by:

• Defining the methods of delivery of the goods by the seller

• Stating exactly what charges are included in the seller's price

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 • Defining the responsibilities of the parties to the contract of sale for
the arrangement of insurance, shipping and packaging.

However, the use of incoterms is voluntary not automatic; if Incoterm

rules are being applied to a transaction they must be incorporated by
specific reference in the contract.

ICC has given the three letter abbreviation for key incoterms. The
responsibilities of the buyer and seller defined under the key incoterms may
be modified by having additional terms attached to them. Key incoterms are:

1. DDP (Delivered Duty Paid)

"Delivered duty paid" means that the seller fulfils his obligation to deliver
when the goods have been made available at the named place in the
country of importation. The seller has to bear the risks and costs, including
duties, taxes and other charges of delivering the goods thereto, cleared for
importation. Whilst the EX W term represents the minimum obligation for the
seller, DDP represents the maximum obligation. This term should not be used
if the seller is unable directly or indirectly to obtain the import license.

If the parties wish the buyer to clear the goods for importation and to pay the
duty, the term DDU should be used.

If the parties wish to exclude from the seller's obligations some of the cost
payable upon importation of the goods (such as value added tax (VAT), this
should be made clear by adding words to this effect: "Delivered duty paid,
VAT unpaid. (named place of destination)"

2. DDU (Delivered Duty Unpaid)

"Delivered duty unpaid" means that the seller fulfils his obligation to deliver
when the goods have been made available at the named place in the
country of importation but not cleared for import.

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The seller is also responsible for all the costs involved to deliver the goods
to the named place of destination. The seller's risk also does not end until it
reaches the names place of destination.

A common misconception with DDU is that the seller is also responsible for
the inland transport of the goods to their final destination after the buyer has
arranged for import clearance. This is incorrect. The buyer assumes all risk
and responsibility for the import clearance, duties, and delivery to final
destination. Under DDU terms the seller's risk and responsibility end once
the goods have been made available to the buyer at the named place of
destination. The seller is also responsible for all costs up to the named place
of destination, but is not responsible for delivering the goods to their final
destination

3. DEQ (Delivered ex quay)

Delivered Ex Quay (duty paid)" means that the seller fulfils his obligation to
deliver when he has made the goods available to the buyer on the
quay(wharf) at the named port of destination, cleared for importation. The
seller has to bear all risks and costs including duties, taxes and other charges
of delivering the goods thereto.

This term should not be used if the seller is unable directly or indirectly to
obtain the import license. If the parties wish the buyer to clear the goods
for importation and pay the duty the word 'duty unpaid' should be used
instead of "duty paid".

If the parties wish 10 exclude from the seller's obligations some of the costs
payable upon importation of the goods (such as value added tax (VAT), this
should he made clear by adding words to this effect; "Delivered ex quay}.
VAT unpaid. (named port of destination)".

4. DES (Delivered ex Ship)

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"Ex Ship" means that the seller fulfils his obligation to deliver when the
goods have been made available to the buyer on board the ship uncleared
for import at the named port of destination. The seller has to bear all costs
and risks involved in bringing the goods to the named port of destination.

This term can only be used for sea or inland waterway

transport.

5. DAF (Delivered at frontier)

"Delivered at Frontier" means that the seller fulfils his obligation to deliver
when the goods have been made available cleared for export, at the named
point and place at the frontier, but before the customs border of the
adjoining country. The term "frontier" may be used for any frontier including
that of the country of export. Therefore, it is of vital importance that the
frontier in question be defined precisely by always naming the point and
place in the term.

The term is primarily intended to be used when goods are to be carried by

rail or road, but it may be used for any mode of transport.

6. CIP (Carriage and insurance paid)

Costs of carriage and insurance of the goods, duty unpaid to the named
destination. Applies to all modes of transport.

7. CPT(Carriage paid to)

"Carriage paid to..." means that the seller pays the freight for the carriage of
the goods to the named destination. The risk of loss or of damage to the
goods, as well as any additional costs due to events occurring after the time
the goods have been delivered to the carrier is transferred from the seller to

15
the buyer when the goods have been delivered into the custody of the
carrier.

"Carrier" means any person who, in a contract of carriage, undertakes to

perform or to procure the performance of carriage, by rail, road, sea, air,
inland waterway or by a combination of such modes. If subsequent carriers
are used for the carriage to the agreed destination, the risk passes when the
goods have been delivered to the first carrier.

The CPT term requires the seller to clear the goods for export. This term may
be used for any mode of transport including multimodal transport.

8. ClF (Cost, insurance and freight)

"Cost, Insurance and Freight" means that the seller has the same obligations
as under CFR but with the addition that he has to procure marine insurance
against the buyer's risk of loss of or damage to the goods during the
carriage. The seller contracts for insurance and pays the insurance premium.

The buyer should note that under the CIF term the seller is only required to
obtain insurance on minimum coverage. The CIF term requires the seller to
clear the goods for export.

This term can only be used for sea and inland waterway transport. When the
ship's serve no practical purposes such as in the case of roll-on/roll-off or
container CIP term is more appropriate to use.

9. CFR (Cost and freight)

"Cost and Freight" means that the seller must pay the costs and freight
necessary to bring the goods to the named port of destination but the risk of
loss of or damage to the goods, as well as any additional costs due to events

16
occurring after the time the goods have been delivered on board the vessel is
transferred from the seller to the buyer when the goods pass the ship's rail in
the port of shipment.

''The CFR term requires the seller to clear the goods for export.

This term can only be used for sea and inland waterway transport. When the
ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or
container traffic, the FCA term is more appropriate to use.

10. FOB (Free on board)

"Free on Board" means that the seller fulfils his obligation to deliver when
the goods have passed over the ship's rail at the named port of shipment.
This means that the buyer has to bear all costs and risks of loss of or damage
to the goods from point.

The FOB term requires the seller to clear the goods for export.

This term can only be used for sea or inland waterway transport. When the
ship's rail serves no-practical purpose, such as in the case of roll-on/roll off or
container traffic, the FOB term is more appropriate to use.

11. FAS (Free alongside ship)

"Tree Alongside Ship" means that the seller fulfils his obligation to deliver
when the goods have been placed alongside the vessel on the quay or in
lighters at the named port of shipment. This means that the buyer has to
bear all costs and risks of loss of or damage to the goods from that moment.

The FAS term requires the buyer to clear the goods for export. It should not
be used when the buyer cannot carry out directly or indirectly the export
formalities. This term can only be used for sea or inland waterway transport.

12. FCA (Free carrier)

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"Free Carrier" means that the seller fulfils his obligation to deliver when he
has handed over the goods, cleared for export, into the charge of the carrier
named by the buyer at the named place or point. If no precise point is
indicated by the buyer, the seller may choose within the place or range
stipulated where the carrier shall take the goods into his charge. When,
according to commercial practice, the seller's assistance is required in
making the contract with the carrier (such as in rail or air transport) the
seller may act at the buyer's risk and expense.

This term may be used for any mode of transport, including multimodal
transport. "Carrier" means any person who, in a contract of carriage,
undertakes to perform or to procure the performance of carriage by rail,
road, sea, air, inland waterway or by a combination of such modes. If the
buyer instructs the seller to deliver the cargo to a person, e.g. a freight
forwarder who is not a 'carrier', the seller is deemed to have fulfilled his
obligation to deliver the goods when they are in the custody of that person.

"Transport terminal" means a railway terminal, a freight station, a

container terminal or yard, a multipurpose cargo terminal or any similar
receiving point.

"Container" includes any equipment used to unitise cargo, e.g. all types of
containers and/or flats, whether ISO accepted or not, trailers, swap bodies, ro-
ro equipment, igloos, and applies to all modes of transport.

13. EXW (Ex-works)

"Ex works" means that the seller fulfils his obligation to deliver when he has
made the goods available at his premises (i.e. works, factory, warehouse, etc)
to the buyer. In particular, he is not responsible for loading the goods on the
vehicle provided by the buyer or for clearing the goods for export, unless
otherwise agreed. The buyer bears all costs and risks involved in taking the

18
goods from the seller's premises to the desired destination. This term thus
represents the minimum obligation for the seller.

This term should not be used when the buyer cannot carry out directly or
indirectly the export formalities. In such circumstances, the FCA term should
be used.

4.3 Insurance

For most international trade transactions, the contract should clearly state
which Party is responsible for arranging insurance and in some cases, the
point at which responsibility changes from supplier to buyer. This will be
reflected in the incoterm applied to the contract. Irrespective of
responsibility, it is important that the insurance cover is in the force for the
entire journey being undertaken, including any loading, unloading and
temporary storage.

Where the supplier is responsible for arranging insurance certificate or policy

will be sent with the shipping documentation as evidence of cover.

Insurance cover arranged by the supplier can end when the goods are landed
at the port of arrival which can lead to problem such as:

• Cover needing to be arranged for the transit of goods from the port
arrival to the buyer premises or those of the ultimate purchaser.

• Goods arriving damaged or incomplete at the port of arrival may lead to

dispute between seller and buyer. Unless the goods are inspected
immediately on arrival, it will be difficult to prove where loss or damage
occurred

• Delay in submission of claims if insurance is arranged through an

overseas
insurer.

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These problems can be avoided by:

• Extending the seller's marine insurance cover to the ultimate

destination, with the buyer assuming responsibility for the insurance
premium relating to the period after arrival at the port of entry.

• Separate insurance cover being arranged by the buyer covering the

final stages of transit though this may not resolve demarcation
disputes.

• The buyer taking responsibility for insurance from the supplier

premises to the ultimate destination.

4.4 Freight Forwarders

For an importer, a physical presence at the port or airport of arrival is

essential. One way to achieve this is to employ forwarding agents.
Alternatively, make use of the clearance departments maintained by the
major carrying lines to prepare and lodge import declarations.

Suppliers often arrange the dispatch of orders through services of an

international freight forwarder. These are firms experienced in transportation
procedure who can advise on and arrange transport, prepare some of
necessary documents and arrange insurance cover. Economics of scale
usually means that consignments by freight forwarders are consolidated with
others in containers which are consigned through to a named point, usually a
clearance depot.

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 Documentation

The commercial contract should provide all details of the documents required.
If, the documents are drawn incorrectly, there may be delay in payment.

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5.1 Importance Of Documentation

Documentation provides tangible evidence that the goods ordered are

produced and dispatched in accordance with the buyer's requirements.

Consignment details need to be communicated accurately to various parties

so both importers and exporters need to be familiar with the principal
documents used.

Documentation is also used to satisfy government regulations and has

become an increasingly important factor in obtaining finance for
international trade.

It is normally the responsibility of exporter to make sure that document for

the transport of goods are complete, accurate and properly and promptly
processed. Failure to do so may result in extra cost being incurred. The
importer has the responsibility for completing accurately the necessary
forms for the goods to be licensed for import and cleared through customs.
Incorrect documentation can cause delay in clearance of goods at their
destination. Goods can be impounded, warehoused, left on quayside, with
the risk of damage or loss and consequent expense. The use of a forwarding
agent can help reduce administrative and documentation pressures on
importers and exporters.

5.2 Financial documents

The principal financial documents used in international trade are:

(A) Bill Of Exchange

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 A bill of exchange is a kind of check or promissory note without
interest.

It is used primarily in international trade, and is a written order by one

person to pay another a specific sum on a specific date sometime in the
future. If the bill of exchange is drawn on a bank, it is called a bank draft. If
it is drawn on another party, it is called a trade draft. Sometimes a bill of
exchange will simply be called a draft, but whereas a draft is always
negotiable (transferable by endorsement), this is not necessarily true of a bill
of exchange.

As with all financial documents, the source, i.e. the drawer or issuer of the
bill of exchange, must be carefully investigated. If it is a bank, then the bank
must be contacted to verify the authenticity of the document, and the
creditworthiness of the bank must be established through independent
research. If the bill of exchange is drawn on a private party, then the risk
depends on the creditworthiness

• A “sight” bill is payable on demand or on sight.

• A "term" or "advance" or after import payment bill is payable at a fixed

or determinable future time. The drawee agrees to pay on the due date
by writing an acceptance on the bill.

The Bill of Exchange must conform exactly with the terms of the Letter of
Credit, with the sum specified not exceeding the amount of the LC.

Unless the Documentary Letter of Credit stipulates that Bills of Exchange are
required to be in duplicate, a single (sola) Bill of Exchange will be acceptable.

Bill of Exchange forms may be purchased from printers or stationers, or they

may be drawn on a company's notepaper or even a blank sheet of paper.
When being presented for payment, the Bill of Exchange must be correctly
endorsed by the payee.

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Bill of exchange is usually defined as;

• An unconditional order in writing

• Addressed by one person (the drawer)

• To another (the drawee)

• Signed by the person giving it (the drawer)

• Requiring the person to him it is addressed

• To pay on demand or at a fixed date

• A sum certain in money

• To or to the order of a specified person or to bearer (the payee)

(B) Promissory Note

A promissory note is a promise to pay issued by the buyer (the maker) in

favour of the seller (the payee). Although it is similar to a bill of exchange it
does not always carry the same legal rights. Promissory notes are popular in
forfeiting arrangements and with countries where there is some fiscal reason
for not issuing a bill of exchange.

A promissory note is usually defined as:

• An unconditional promise in writing

• Made by one person (the maker) to another

• Signed by the maker

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 • Engaging to pay, on demand. Or at a fixed or determinable future
time.

• A sum certain in money

• To, or to the order of, a specified person or to bearer (the payee)

5.3 Other International Trade

Documents

(A) Commercial Invoice

A commercial invoice is a claim for payment for the goods under the terms of
the commercial contract. It is addressed to the importer to us porter. An
invoice will normally include a detailed description of the goods together
with unit prices, totals, weights, and terms of payment, as well as packing
details and shipping marks. It serves as a check lists so that a particular
consignment can be identified and is the main evidence in any assessment
for the customs duty.

Several copies of the document are produced as are required by customs,

excise authorities overseas etc.

(B)Packing List

Where there are several packages in one consignment, an invoice is

accompanied by a packing list which details the content of each package
and may also show their weights and measurements.

This is a document that records the contents of transported goods units. The
list will show packing details as well as weight details of goods. The list must
agree with other documents relating to same shipment.

(C) Insurance Policy or Certificate

25
The terms of a contract between the importer and the exporter should
define
the responsibilities of arranging insurance cover whilst the goods are in
transit
and what risks are to be covered.

An insurance policy may only be issued by the camp and is usually in

standard form covering the customary risks for any method of transport.

Regular Exporters can organize an open policy to cover all exports during a
specific period. Individual insurance certificates are issued for each
shipment by either the insurers and/or the Exporter. This certificate must
contain the same details as the policy, with a shortened version of the
provisions of the policy under which it is issued.

(D) Bill of Lading

A Bill of Lading is a receipt given by the shipping company upon shipment of

the goods and is evidence of a contract of carriage. It is a document of title
to the goods, and as such is required to enable them to clear the goods at
the port of destination.

Two or three signed sets of the original copies of the Bill of Lading are
usually made out.

These are known as ‘negotiable copies’, any one of which can give title to
the goods. Unsigned, non-negotiable copies also exist, which are not
documents of title, but are used for record purposes.

The goods will only be released to Consignee agents. Normally Bills of

Lading are made out to order, unless the documents are made out to the
Importer as the Consignee of the goods.

26
Types of bill of lading

• Marine B/L

A document signed by the named carrier of goods or their agent, setting out
the condition of carriage and acknowledging the goods have been shipped
on board a particular vessel bound for particular destination. If issued by the
carrier's agent the name of the carrier should be evidenced on the
document. The B/L serves as an evidence of the freight contract between
shipper and the carrier and will indicate weather the freight costs paid or still
are to collected.

• Received for Shipment B/L

This is evidence of receipt of the goods for shipment requiring a later dated
clause or stamp "shipped on board" to raise it to the status of the "receipt

for goods shipped". Usually only used in bulk trades where cargo is received
and delivered alongside.

• Combined Transport B/L or Multimodal Transport document

Most general cargo is now "containerized" either at the factory or

consolidated with other merchandised at a receiving point operated by ocean
carrier or special operator. These locations are remote from the ports so the
ocean carrier's liability commences when the goods are received at
shipper's premises or container freight station. Hence, the concept of
multimodal transport. Cargo will be delivered to the consignee at the(inland)
place named as destination.

(E) Sea Waybill

Like a B/L a sea waybill provides receipt for goods and evidence of contract
for their carriage by sea. However, it is not a negotiable document and

27
cannot be used to convey title to the goods. The shipper can vary the
consignee and delivery instruction at any time prior to deliver.

It is simple alternative where transferable nature of bill of lading is not

required.

(F) Airway bill

An Air Waybill (or air consignment note) is a receipt for goods for dispatch by
air. It is often referred as an “air consignment note”. Like seaway bill it is
also not transferable. It is not a document of title. The Consignee, can take
possession of the goods without it.

Air Waybills are issued in a minimum of three and frequently in sets often

(G) Road consignment note

This is issued for international transport by road. It is not document of title

and it is not transferable. It is more commonly known as certificate of
movement by road (CMR) or truck waybill.

(H) Railway consignment note

This is used for international transport by rail. The receipt is evidence of

dispatch only.

(I) Certificate of origin

This is a signed declaration stating the country of origin of the goods, it is

required by the customs authority of certain countries for the purpose of
assessing import duty. In some cases this certificate may be incorporated
into the commercial invoice. Generally it has to be authenticated by a local
chamber of commerce. In some instances certificate must be legalised by

28
the embassy or other representative of country concerned. The certificate
should include the name of the exporter, the manufacturer (if different), the
importer, a description of goods and, if required, the signature and seals of
authorizing organization.

(J) Certificate of Inspection

Sometimes the Importer may require the goods they are purchasing to be
inspected by an independent party prior to shipment. The inspection will
ensure that the goods being shipped are the same as those described in the
contract.

The goods will be inspected for their composition, quality, packaging, weights
and measurements. Once inspected, a seal is put on the goods by the
independent party verifying that both the quality and price of the goods is
acceptable.

(K) Certificate of Health

Agriculture and animal products may require a certificate stating that they
comply with the importing country's health regulations. This certificate must
be authorized and signed by the health authority in the exporter country.

(L) Carnet

A carnet is a document that makes customs clearance of certain temporary

exports and imports easier by replacing:

• Normal custom documents in the exporter's country

• Normal custom documentations and security in the country into
which the
goods are imported.

29
ATA (admission temporiare/temporary admission) is the main carnet in the
use. This is an international customs document issued by chambers of
commerce in major countries. It can be used practically for all kind of goods
and can provide simple exit or entry to or from a single foreign country or for
numerous multi-destination journeys during the validity of carnet. This
validity can never exceed one year.

While applying for the carnet, the trader must provide the issuing authority
with an equivalent security either in cash, by bank draft, most often through
counter guarantees from a bank or financial institution. The security must be
for an amount equal to the highest rate of duty and taxes applicable to the
goods in any country of destination and transit.

PAYMENT

30
Securing payment is a vital consideration in any international trade
transaction. Remember that an export is a gift until it is paid.

Due to the physical distances between buyer and seller, and the fact that the
transaction may have taken place without the two parties actually meeting,
minimizing exposure to risk is on the minds of both parties. The buyer wants
to make sure they receive their order in acceptable condition and on time,
and the seller needs to know they will get paid for it.

6.1 The risks

It is important to identify the risk that may be faced when trading

internationally and to be aware of the methods available to reduce these
risks. In international trade generally, there are more risks for the seller of
goods than for the buyer. Many of these risks can be insured against or
mitigated through the payment mechanism.

However, as demonstrated by the risk ladder, if the exporter reduces his risk
this has the effect on increasing importer risk. Some of the main risks in
international trade are:

a. Country Risk

These are the risks which are not controled by importer or exporter

• Political and economic instability can be a risk factor

• Currency control can be other kind of risk
• War and civil disturbance of the country
• Import and export regulation of the country

b. Importer Risk

These are the risks on the part of the importers

• Importer does not make the payment for invoices

31
 • Importer delays the payment of invoices
• Buyer becomes insolvent

c. Industry Risk

Risk depended on industrial situation of the country

• Increasing demands for particular product

• Recession in particular industry
• Competitive products and pricing
• Fashionable or seasonal goods

d. Foreign exchange Risk

• Fluctuation in exchange rates has effect on pricing and profits of the

trader.
e. Exporter Risk

These are the risks on the part of the exporters

• Problems in producing correct documentations.

• Exporter fails to provide the goods as per the contract of sale.

f. Transportation Risk

These are risk involved in transportation of goods.

• Risk associated with the mode of transport, e.g. marine risks

• Storage facilities in ports
• Delays in shipment can be a reason of risk

32
Factors affecting decisions of payment modes

Many of these risks can be insured against, or reduced by, the payment
method you use. However, reducing your own risks may transfer both risk
and cost to your trading partner, which will impact upon your
competitiveness. The method of payment that you and your trading partner
should choose depends on a number of factors:

• The level of trust between you

• The creditworthiness of your partner

• Your respective bargaining power

• Any conditions imposed by a third party

• Import/export regulations (in certain countries)

• Financing requirement

The risk ladder

The 'risk ladder' below shows the four main ways of settling international
trade and the way in which the payment method you choose can affect your
security.
EXPORTER
IMPORTER

Least Secure Most

Secure

Open a/c

Bills for Collection

Documentary Credit

Advance Payment

Most Secure Least

Secure
33
6.2 Ways to settle international trade debts

The four main ways to settle international trade debts are:

• Open account
• Bills for collection
• Documentary credit
• Advance payment

1.Open Account

The open account method of payment is probably the most favored. It saves
costs and procedural difficulties, although the risks to the exporter are
obviously greater. Converse, it represents the highest degree of security for
an importer.

Trading on open account terms implies that the exporter trusts the overseas
buyer’s business integrity and ability to pay. This could be by having
established a longterm relationship with the buyer, through obtaining
favorable status reports or credit assessments on the buyer or it provides
the confidence to trade on these terms. Alternatively, market forces may
simply dictate that open account terms are only viable option to conduct
business.

With the open account trade, the goods and relevant documents are sending
by exporter directly to overseas buyer who will have agreed to pay the
exporter upon the arrival of documents or within certain period after the
invoice or shipment date. The exporter loses all control of the goods, trusting

34
that the payment will be made by the importer in accordance with the
original sales contract.

However, an open account arrangement is not entirely without risk to the

importer. For example, if the importer is committed to producing goods
dependent upon receipt of imported materials, or has already "on-sold" the
goods to the third party, losses could occur if the goods or material fail to
arrive on time or are faulty.

The exporter receives payment only after the buyer has received and
inspected the goods.

It works as follows:

• The seller ships the goods and forwards the documents directly to the
buyer The buyer clears the goods upon arrival

• The buyer arranges for payment, either by bank draft or SWIFT

Transfer.

For Cross border payments with open account trading, settlement is usually
made using one of the following:

• Priority payment (telegraphic payments)

This is the fastest method of making an international payment with funds

being remitted through the secure inter-bank communication network
known as swift, or by telex or cable. Payment is usually effected for value
within two business days, but earlier value can sometimes be obtained when
making payments to certain time zones in currencies such as us dollars.

• International banker’s Draft

This is cheque drawn by one bank upon another. This method of payment is
particularly suitable for low-priority, low value payments. If the draft is in the

35
local currency, the beneficiary will usually present it through the local cheque
clearing and will usually receive the full amount without deduction of
charges by the overseas bank.

• Cheques

Receiving a cheque for goods for goods and services supplied does not
necessarily mean that an exporter has been paid. The cheque has to be
cleared before the transaction is considered to be complete. Cheque

clearance cycle can vary considerably. Where cheques are used, there are
several ways in which value can be obtained:

• Negotiating cheques

Negotiating a cheque allows you to obtain immediate value in sterling, or a

predetermined forward value date in the currency of the cheque. Cheques
negotiated are subject to recourse, i.e. a cheque credited to an account will
be debited if it is returned unpaid.

• Collecting cheques

Collections are used in situations where a definite advice of payment is

required, for example, to permit the release of goods to the buyer. Items are
processed individually and value given upon receipt of funds from the
drawee bank overseas.

2.Bills for Collection

The risk ladder illustrates that the collection of commercial documents

through the banking system provides a more secure method of trading than
open account for the exporter. For the importer this method offers a simple
and lower cost alternative to settlement by documentary credit. Collections

36
are also a convenient mechanism for the agreement of a period of credit
between buyer and seller allowing the buyer time to re-sell the goods before

having to make payment.

2.1 Documentary collection

The collection of commercial documents through the banking system

provides an exporter with a more secure method of trading than Open
Account. For the importer this method offers a simple, lower cost alternative
to settlement by Documentary Credit. Collections are also a convenient
mechanism for the agreement of a period of credit between importer and
exporter. This can allow you time to re-sell the goods before having to make
payment.

Documentary collections are those which include shipping/commercial

documents, for example a bill of exchange, bills of lading, invoices and
insurance documents. These are submitted to exporter's bank and then
forwarded to importer bank for release to the importer acceptance or
payment in accordance with the terms set out in remitting bank's collection
order. In many areas of the world it is common practice to defer the
presentation for payment or acceptance until the arrival of carrying vessel.

A documentary collection will take one of the following forms:

• Documents against Acceptance

Documents are released to the importer against their acceptance of a term

bill, payable at a fixed or determinable future date. The importer's
acceptance, normally written on the face of the bill, signifies acceptance of
the terms and agreements to the bill on its maturity date. The importer's
acceptance on the bill of exchange establishes a legal undertaking to pay

37
but does not guarantee payment to the exporter; an accepted bill may be
dishonoured on the due date.

STEPS

1. Exporter (Seller)

The exporter ships his or her goods and prepares his or her export
documents

2. Exporter's Bank

The exporter completes an exporter collection form from his or her

bank (see Useful Forms page) and sends the export documents to the
bank together with a Bill of Exchange (Time Draft) demanding payment
from the importer (Buyer) at a future date

3. Importer Bank

The exporter's bank sends the export documents together with the Bill
of Exchange, to the importer's bank to be released to the importer
against their acceptance of the Bill of Exchange.

4. Importer

The importers bank approaches the importer to accept the Bill of

Exchange. The importer's bank may not release the export documents
to the importer until he or she has accepted the Bill of Exchange.

5. Importer

The importer accepts the Bill of Exchange and returns it to his or her
bank

6. Importer's Bank

38
 Upon receipt of the accepted Bill of Exchange, the importer's bank
releases export documents to the importer. The importer's bank will
also advise the exporter's bank of the due date for payment.

7. Importer's Bank

On the due date for payment the importer's bank will approach the
importer for payment and provided the importer has the money will
remit the proceeds to the exporter's bank.

8. Exporter's Bank

The exporter's bank receives the money from the importer's bank and
pays it to the exporter less any charges due.

• Documents against payment (D/P) or cash against document (CAD)

In their case, the collection is payable upon presentation (at sight) and
documents released to the importer against payment of the amount due.
CAD term are used when a collection order does not contain a bill of
exchange.

Collections on D/P or CAD terms provide the exporter with more security than
D/A bills or open account trade because title documents such as bill of lading
(or in certain cases , goods themselves) are released to importer only when
the payment has been made.

For the importer, there are few risk associated with bills for collection.
However, unlike a documentary credit, shipment schedule and
documentation can not be controlled and, if the payment has been made
against D/P or CAD collection, the importer runs the risks hat the goods
shipped may be of inferior quality.

For the exporter, control control of the good is lost once a D/A has been
accepted and the documents are released to importer. Where the goods have

39
been dispatched to importer by air, road, rail transport, documents of title
are not issued and the goods are originally delivered directly to consignee.
In the countries where the foreign currency is limited, delays in the receipt of
proceeds may be experienced pending allocation of foreign exchange by
authorities.

If delivery of goods were to be refused by the importer for any reason, the
exporter would have to consider arranging storage of the goods, shipping
them back, finding an alternative buyer or even abandoning the
consignment, all of which could be expensive. Although the exporters can
request the collecting bank to protect their interest in case of default, there
may not be adequate facilities at the port of discharge to protect the goods
and legal action overseas can be both expensive and ineffectual. The
exporter's local agent is best placed to take action to protect the goods if
problems are experienced.

STEPS

1. Exporter (Seller)

The exporter ships his or her goods and prepares his or her export
documents

2. Exporter's Bank

The exporter completes an export collection form from his or her bank
(see Useful Forms page) and sends the export documents to the bank.
No Bill of Exchange is necessary. However, many exporters prepare a
Bill of Exchange due at sight to ensure that they can obtain legal proof
that the demand was made to the importer.

3. Importer's Bank

40
 The exporter's bank sends the export documents to the importer's
bank with an instruction to release the documents to the importer only
against full payment of the invoice amount

4. Importer

The importer's bank approaches the importer and asks for authority to
pay the exporter's bank the full invoice value.

5. Importer's Bank

Upon receipt of the importer's authority to pay and provided the

importer has the funds, the importer's bank will release the documents
to the importer.

6. Importer's Bank

The importer's bank remits the invoice value to the exporter's bank.

7. Exporter's Bank

The exporter's bank pays the exporter the proceeds less any
charges deducted.

2.2 Clean collection

A clean collection consists only of a bill of a exchange or promissory note. In

most cases, the bill have already accepted by the importer and is being
presented for payment on its maturity date. As with open account trade, the
underlying shipping documents will usually have been sent direct to the
importer.

2.3 Direct send Collections

41
This service is available to exporters who generate substantial numbers of
export collections and who have comprehensive documentation. The
exporter dispatches shipping documents and collection instructions directly
to importer's bank using specially designed collection forms. This ensures
earliest presentation of documents to the buyer which may result in
proceeds being received earlier then standard collection procedures. All
direct send customer's continue to be benefit from the bank's follow-up
procedures and can monitor the status of outstanding collections
electronically.

2.4 Avalised bills

Avalisation is the endorsement on a bill of exchange by a bank which

guarantees payment. After acceptance of a term bill the importer may
request the bank to avalise the bill in accordance with the terms of a
previously agreed banking facility for this purpose. Avalisation can help
importers to establish new relationships with overseas suppliers or negotiate
improved terms because, like a documentary credit, it provides assurance of
payment which the supplier can use to obtain non-recourse finance.

3.Documentary credit

A Documentary Credit, also commonly called a Letter of Credit, is a

commitment by a bank (the "Issuing Bank") to pay the seller or exporter
("Beneficiary") a certain amount for goods or services, provided the
Beneficiary conforms with the specified terms and conditions contained in the
Credit.

Documentary credit are one of the most important method of settling

international trade transaction because they offer security to both buyer and
seller and because they are honored through the banking system. The seller
(exporter) wants security of payment; the buyer (importer) wants an
assurance that payment will only be made after dispatch of the specified

42
goods. In some countries, settlement by documentary credit is insisted upon
by the authorities who may wish to control imports or the associated
outflows of foreign exchange.

A documentary credit (DC) may be defined as "an undertaking by an issuing

bank, on behalf of an importer (the applicant), that payment will be made for
goods or services payment will be made for goods or services supplied by an
exporter the beneficiary), provide that the exporter complies with all the
terms and conditions established by the credit" DC are usually issued in
irrecoverable form, which means that they constitute a definite undertaking
and cannot be revoked or amended without the agreement of all parties to
the credit.

DC's are completely separate transaction from the underlying commercial

contracts and banks are not concerned with, or bound by, the terms of such
contracts. An important provision of UCP (see below) is that ail DC terms and
conditions should be covered by the documents called for in the credit. In
DC operations, banks deal exclusively with documents and not with the
goods, services or other performance to which the documents relate.

DC's are normally sent to the beneficiary (exporter) via an advising bank in
the beneficiary's country. The advising bank may also request (by the
issuing bank) to "confirm" the credit, i.e. add its own undertaking to that of
the issuing bank. In such cases, the confirming bank assumes the credit risk
of the overseas issuing bank and political risk associated with the importing
country. On an unconfirmed credit, the advising bank does not make any
commitment to honor the DC; the exporter is relying primarily on the
undertaking of the overseas issuing bank to make payment.

The importer can gain additional protection through the document definitions
(e.g. by calling for independent inspection or quality certificates) and can
control delivery schedules and other aspects of the transactions by

43
stipulating specific conditions such as latest shipment date. The importer is
assured that payment will not be made until the issuing bank has checked
that the documents presented are in full conformity with the DC terms and
conditions. However, importer takes the risk that goods may be of inferior
quality.

The DC terms may be provide for payment immediately upon presentation of

conforming documents (sight credit) or at some future date taking account of
any extended payment terms granted by the seller to the buyer (usance or
acceptance credit). For usance or acceptance credits, payment is made (and
the importer’s account debited) at the end of the extended term (i.e. on the
maturity date). However, the shipping documents are usually released to the
importer at the time they are presented to the issuing bank, enabling the
goods to be collected.

Key features and benefits

• Secures payment, provided the terms and conditions are fulfilled

• Delivery and payment occur at the same time

• Offers the exporter and importer maximum security

• Various types of documentary credits are available

• It is time-consuming, but this is offset by the benefits and security of

this
method

• Governed by the Uniform Customs and Practice for Documentary

Credits

• e-Forex, a foreign exchange dealing and payment system, offers you

real time access to currency exchange

44
 • FNB Trade Online is a secure Web-based service that enables you to
issue, update and send Documentary Credits from the comfort of
your office worldwide

STEPS

1. Applicant (buyer)
The buyer completes a contract with the seller and fills in a letter of
credit application form and sends it to his or her bank for approval.

2. Issuing Bank (Buyer’s Bank)

The issuing bank approves the application and sends the letter of credit
details to the seller's bank (advising bank).

3. Advising Bank

The advising bank authenticates the letter of credit and sends

the beneficiary (seller) the details by post or fax.

4. Beneficiary (seller)

The seller examines the details of the letter of credit to make sure that
he or she can meet all the conditions. If necessary, he or she contacts
the buyer and asks for any necessary amendments to be made.

5. Beneficiary

Once the seller is satisfied with the conditions of the letter of credit, he
or she ships the goods and presents the documents to his or her
bankers (advising bank).

6. Advising Bank

45
 The advising bank examines the documents against the details on the
letter of credit and the International Chamber of Commerce rules. If
they are in order, the bank will send them to the issuing bank for
payment or acceptance. If the details are not correct, the advising
bank tells the seller and waits for corrected documents or further
instructions.

7. Issuing Bank

The issuing bank examines the documents from the advising bank and
if they are in order, pays the money promised or agrees to in the
future. If the details are not correct, the issuing bank contacts the
buyer for authorization to pay or accept the documents. If acceptable,
the issuing bank releases the documents to the buyer, and pays the
money promised or agrees to pay it in the future.

8. Applicant

The buyer receives the documents from the issuing bank and collects
the goods. He or she also receives advice about the payment

9. Beneficiary

The seller receives the payment through his or her bank

10.Seller

The seller is notified by the advising/confirming bank that payment

has been made.

4.Advance payment

There is no risk for the exporter when payment is received in advance of the
goods being dispatched. However, if the payment is being made by cheque it
should be remembered that this does not constitute payment until the

46
cheque has been cleared through the banking system. For cheques payable
abroad this can be considerable period.

Advance payment need not always be for the full value of the sales contract;
it is quite common for a partial advance payment to be made, particularly for
contracts involving capital goods.

This method of payment is least secure for the importer who, in addition to
cash flow pressure, has to face several risks:

• Goods may never be shipped

• Goods may be shipped late
• Wrong may be shipped
• Problems with documentation

Other Methods of securing payments

• Credit insurance

Credit insurance is most important feature of open account trade and its
value in management of commercial risk is widely acknowledged. Companies
employing this sound business practice can safeguard themselves against
the unpredictability of buyer default, gain an active partner in risk
management and facilitate access to trade finance.

• Bank guarantees

Guarantees are used extensively in international trade to secure

performance or other obligations. They provide the beneficiary with access
to sum of money should the principal (applicant) fail to fulfil contractual or
other obligation in respect of an underlying transaction, contract or order.
Such guarantees usually promise payment on demand, i.e. upon the
presentation by beneficiary of simple written demand for payment, or

47
against a written demand accompanied by documentary evidence that the
sum is owing. A bank guarantee is, by its nature, a separate transaction from
the commercial contract on which it may be based. The bank (guarantor) is
not in any way connected with or bound by this contract, even though it may
be referred to in the guarantee. These are the most common guarantee
types:

1. Tender guarantee: To support an initial bid or tender for a contract.

2. Advanced payment guarantee: Secure payment for guarantee

advance.

3. Performance guarantee: Covers a failure to fulfill commercial

obligations.

4. VAT /Duty deferment bond: Allows VAT/Duty payable on imports to be

deferred.

5. Retention monies guarantee: Secures the release of any monies

withheld pending completion of contract.

6. Carnet or Custom guarantee: Removes the need to pay duty on goods

or vehicles imported into the country on a temporary basis.

48
 TR A D I N G I N F O R E I G N C U R R E N C Y A N D
MANAGING THE EXCHANGE RISK
If the companies are involved in cross border trade they may gain significant
competitive advantage by tracing in a currency of their trading partner's
choice which could be EURO, US DOLLARS, or any other currency.

Foreign exchange

The foreign exchange (currency or forex or FX) market exists wherever one
currency is traded for another. It is the largest financial market in the world,
and includes trading between large banks, central banks, currency
speculators, multinational corporations, governments, and other financial
markets and institutions. The average daily trade in the global forex and
related markets currently is over US$ 3 trillion.[ 1 ]

49
Foreign exchange consists of trading one type of currency for another. Unlike
other financial markets, the FX market has no physical location and no central
exchange. It operates "over the counter" through a global network of banks,
corporations and individuals trading one currency for another. The FX market
is the world's largest financial market, operating 24 hours a day with
enormous amounts of money traded on a daily basis.

Unlike any other financial market, investors can respond to currency

fluctuations caused by economic, political and social events at the time they
occur, without having to wait for exchanges to open. Access to modern news
services, charting services, 24- hour dealing desks and sophisticated online
electronic trading platforms has seen speculation in the FX market explode,
particularly for the individual trader.

The currency markets are not new. They've been around for as long as banks
have been doing business. What is relatively new is the accessibility of these
markets to the individual speculator, particularly the small- to medium-sized
trader

As a result of trading in foreign currency, a company will be exposed to

currency risks from the fluctuations in exchange rate.

Companies who have to manage this exchange risks are faced with three
main choices:

• Do nothing and trade in spot market as and when the currency is

required.
Whilst simple to operate, it provides no protection against
movement in
rates.

• Full downside protection is afforded by the use of forward contracts,

which

50
 allow firms to book an exchange rate now for delivery some time in
the
future. This enables effective planning and price certainly but offers
no
opportunity to benefit from a favorable rate movement in the
meantime.

• Premium-based products such as currency option and average rate

options
(ARO) offer the best both worlds by guaranteeing a 'worst-case'
protection
but allowing the spot market if the rate is better.

Identifying foreign exchange risk factsheet with HSBC

Identifying the Risk

Businesses that trade or have operations overseas are likely to be exposed to

foreign exchange risk arising from volatility h the currency markets.

The most common cause of foreign exchange exposure arises from having to
pay invoices for imported raw materials priced in a foreign currency or
receiving foreign currency for your exported finished goods. However,
exposure can also arise from:

• Your competitors having a cost base and/or selling their products in a

foreign currency

• Assets located overseas

• Foreign currency borrowing or surplus cash balances of overseas

subsidiaries

51
• Borrowing denominated in foreign currency

The impact that exchange rate fluctuations have on profitability will vary but
in many cases it can be significant

The following is a simplified extract from a profit and loss account of an

exporter that receives revenues in a foreign currency. It shows the impact of,
in this case a ten per cent adverse movement in the exchange rate.

Sales down 10%

BEFORE(GB AFTER(GB RESPONSE

Sales 1500
P) 1360
P) 2700
Variable
revenues 1200 1200 2400
(+100%)
Gross
costs profit 300 150 300
Fixed costs 20D 200 200
Net Profit 100 -50 100

The table shows that following a ten per cent adverse exchange rate
movement, this company will need to double its turnover to restore
profitability to previous levels!

Managing foreign exchange risk factsheet

Managing foreign exchange risk does not have to be complicated. HSBC

advocates the use of the following four-point plan. This simple plan lays
the foundations for the management of your foreign exchange exposures:

• Understand your exposures

• Understand the products

• Develop a strategy

• Implement it

52
Point 1 - Understand Your Exposures

There is a raft of factors to take into account when assessing your exposure
to foreign exchange rate risk, for example:

• What proportion of your business relates to imports or exports?

• What currencies are involved?

• What are the timings of payments?

• What impact would an adverse rate movement have on your

profitability?

• Is the level of overseas business likely to change?

• Do you pay and receive in the same foreign currency - it may be

possible to
mitigate the exchange risk by using a foreign currency bank
account?

Point 2 - Understand the Products

There are only three basic alternative methods to manage foreign exchange
risk.

• Do nothing and buy or sell your currency in the spot market. You act
on the day you want to buy or sell your foreign currency. We will
quote you an exchange rate and the transaction will settle two
working days later. Whilst simple, this approach means you will not
know how much sterling you will need to pay or receive for your
foreign currency until the day in question - this can be a high risk
strategy as the exchange rate may have moved significantly since
you agreed the price with your customer/supplier. If rates have

53
 moved the wrong way, your profit will be reduced accordingly.

• Lock in to fixed rates - as soon as you become aware of a need to

exchange
foreign currency at a future date, you can fix the exchange rate by
booking a
forward contract. This approach provides certainty but you could
suffer an
opportunity loss if rates subsequently move in your favour and you
are
obliged to transact at the forward contract rate.

• Use flexible products - a currency option will offer you the potential
for
upside benefit if rates move in your favour - like a spot deal, but will
provide
protection against adverse rate movements - like a forward contract.
For this
flexibility we will normally charge a premium although there are a
range of
alternative structured option products available where an up front
premium
is not required.
Point 3 - Develop a Strategy

It may not always be best to adopt any one of the three- alternatives in
isolation to manage your foreign exchange risk. Many businesses, reflecting
their altitude to risk, their view of the currency markets, preparedness to pay
premiums and a host of other factors, will adopt a portfolio approach - using
a combination of spot, forward exchange contracts and currency options,
HSBC will work with you to develop a strategy that best meets the
requirements of your business. For example in an uncertain exchange rate

54
environment, you may decide to transact 25 per cent of your currency in
spot, fix 25 per cent with a forward contract and cover 50 per cent with
flexible solutions such as an option. This way, if rates move in your favour,
you will benefit on 75 per cent of your exposure (spot and options) whilst if
rates move against you, you are protected on 75 per cent (forward contracts
and options). This is a balanced approach that provides flexibility, and avoids
you paying a premium for all of your protection.

Point 4 - Implement it

It is often tempting to defer a decision to implement your foreign exchange

risk management strategy, perhaps in the hope that rates may move in your
favour in the short term. Historically, currency markets have been extremely
volatile and unpredictable - it makes sense therefore, once you have
formulated a strategy, to implement it without delay and ensure your profits
are protected.

55
 HEDGING

In finance, a hedge is an investment that is taken out specifically to reduce

or cancel out the risk in another investment. Hedging is a strategy
designed to minimize exposure to an unwanted business risk, while still
allowing the business to profit from an investment activity. Typically, a
hedger might invest in a security that he believes is under-priced relative to
its "fair value" (for example a mortgage loan that he is then making), and
combine this with a short sale of a related security or securities. Thus the
hedger is indifferent to the movements of the market as a whole, and is
interested only in the performance of the 'under-priced' security relative to
the hedge. Some form of risk taking is inherent to any business activity.
Some risks are considered to be "natural" to specific businesses, such as the
risk of oil prices increasing or decreasing is natural to oil drilling and refining
firms. Other forms of risk are not wanted, but cannot be avoided without
hedging. Someone who has a shop, for example, expects to face natural
risks such as the risk of competition, of poor or unpopular products, and so

56
on. The risk of the shopkeeper's inventory being destroyed by fire is
unwanted, however, and can be hedged via a fire insurance contract. Not all
hedges are financial instruments: a producer that exports to another country,
for example, may hedge its currency risk when selling by linking its expenses
to the desired currency. Banks and other financial institutions use hedging to
control their asset-liability mismatches, such as the maturity matches
between long, fixed-rate loans and short-term (implicitly variable-rate)
deposits.

Forex Hedging: Forex hedging protects your foreign currency assets and
liabilities from adverse moves in foreign currency rates.

Basic Concept: The forex hedge’s change in value is opposite to the

change in value of the foreign currency exposure (hedged item). These two
amounts offset each other to obtain cost certainty or revenue certainty.

All forex hedges are recorded on the balance sheet at their fair market value
(FMV). The items recorded on the other side of the journal entry depend on
whether a forex hedge was designated for special accounting treatment
(provided it met applicable criteria).

If your company has more assets than liabilities in a foreign currency, then
your company is exposed to a potential drop in that currency's exchange
rate. Each 1 % drop lowers the value of the assets by 1 %, when you convert
the net assets to the reporting currency or your balance sheet. This loss would
be recorded as an expense to the profit and loss statement.

Unless the amount is small, one do not want to be exposed to currency

fluctuations—foreign currency gains and losses on the income statement are
difficult to justify. Furthermore, there is no need to be exposed to currency
fluctuations because one have the ability to manage this risk through
hedging.

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To counteract currency risk, one can lock in the exchange rate used in ones
company's foreign currency transactions by hedging. Consider an example
where one have a net foreign currency asset exposure on ones balance
sheet. To effect the forex hedge, one will enter into an offsetting sale
agreement (hedge) for that foreign currency in an amount equal to the net
asset position on ones balance sheet. Through the hedge, one would sell the
foreign currency and purchase the reporting currency. This hedge balances
out any unfavorable rate changes on your existing net foreign currency asset
position on the balance sheet, as shown below:

Recorded Foreign Currency Amount

Foreign Recorde Market Change

Currency d Rate Rate in Value
Amount
Net asset on 1,00,000 15,000 14,500 $(5,000)
the balance
sheet
Hedge--sell (1,00,000 15,000 14,500 $5,000
foreign )
currency
FINANCING THE TRADE CYCLE

The trade cycle

All companies trade cycle will be unique although there will be elements (e.g.
purchasing, manufacturing, shipping, credit, etc.) which are common to all.
Each stage in a trade cycle places different demands on a company's
finances but a key component in determining overall level of working capital
required for any business is the time taken between the start of the cycle
(i.e. ordering goods or raw materials) and receipt of payment for
corresponding sales of finished products. The bank, through its knowledge of
customer's business and terms of trade, can structure facilities that provide

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the working capital for the different stages in cycle and, in consequence,
directly relate to the needs of their business.

The most widely used forms of short term finance for the international trade
are outlined as follows:

Short term bank finance as by HSBC

1. Overdraft

The most obvious but not necessarily the most appropriate, method of
financing international trade is through a bank overdraft facility. Overdrafts
are available in most major currencies and it is clearly very simple and
convenient to overdraw within an agreed facility and then to replenished
accounts with payment received.

However, it is that importers and exporters can finance all elements of their
contracts entirely from an overdraft, particularly as borrowing in this way
may be more expensive than the other forms of specially designed finance.
Other demand on the overdraft may constraint the amount of working capital
available for business growth which is typically when the company needs it
the most. Importantly, an overdraft may not be the most appropriate and low
risk route to providing working capital from the Bank's point of view.

2. Import finance

The time between placing an order for goods and receipt of cash in respect of
their subsequent resale can put a significant strain on an importer's
resources. Seasonal peaks, long transit times and lengthy credit terms all
added to the demands on the importer. It is important that the finance to
meet these fluctuations in the importer's working capital requirements is
geared to the terms and method of payment agreed between buyer and
seller. This may require a combination of facilities. For example,

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documentary credit might be required to cover the pre-shipment period whilst
post-import finance can be obtained through an import loan.

3. Import documentary credit facilities

The importer may need to issue a documentary credit (DC) weeks or months
in advance of shipment to allow the exporter time to purchase raw materials,
manufacture the goods and organise delivery. This period (prior to
presentation of documents) is often referred to as the ‘DC lead time’.
Documentary credit facilities can be combined with import loan facilities to
permit the importer to finance the entire period between purchase and sale
of the goods.

The DC mechanism can also be used to provide a period of extended credit

by allowing usance (term) drafts to be drawn. If correct documents are
presented, a banker's acceptance would be created under the DC extending
the importer's liability up to the maturity date of the acceptance and possibly
the expiry date of the DC. When assessing the level of DC facilities required,
importer's need to consider their maximum potential period of liability, i.e.
the validity period plus any usance period, as well as the anticipated
turnover for which DCs will be issued.

4. Import loans

Import loans provide importers with the flexibility to take a period of

extended credit undisclosed to the seller, whilst allowing optimum payment
terms to be offered. This allows the importers time to sell the goods and
realise the proceeds before having to repay the loan.

It is common for the underlying transaction to be settled on "sight" basis with

the goods being consigned to the order of the bank. By offering to settle
import bills immediately, importers may be able to negotiate better terms
and prices with their suppliers.

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Where credit is still taken from the supplier, the facility can be can be used to
meet the importer's obligation on maturity date of term bill and provide
finance for an extended period to match sales receipts. Where goods are
consigned to the order of the bank, they can be warehoused in the bank's
name for an agreed period of time and may be drawn by the importer's from
time to time (against cash payment). Where immediate from possession of
the goods is required, e.g. to fulfil orders already received, the goods may
be released to importer 'in trust' for an agreed period at the end of which,
payment would be required. In either case, the agreed period would take
account of the importer's usual terms of trade and would commence from
the date of the bank's payment in settlement of the underlying transaction.

Import loans usually cover individual shipments of goods and may be

arranged in all major currencies. Interest is usually payable at maturity of the
loan.

5. Export finance

Financing the post-manufacture/sale period is an important consideration for

any exporter. The method chosen will be influenced by a number of factors:

• The terms of trade

• The payment mechanism

• The availability of export credit insurance

• Currency and cash flow considerations

Most exporting companies sell their goods on terms which typically do not
exceed 180 days and where the payment mechanism will vary from open
account through bills for collection to irrevocable documentary credit. With
longer term transactions, secure payment mechanisms are usually
demanded by the seller.

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Financing export receivables separately from other short term cash
requirement makes tracking export-related debts simpler and, by having an
identified source of repayment, banking facilities can become more
accessible.

Whilst some facilities are undertaken with recourse to the exporter,

transactions covered by credit insurance or where payment is made via
documentary credit may be suitable for non recourse financing.

6. Advance against export collection

After shipping goods under a commercial contract where payment is to be

made by a documentary collection, there can be a considerable time lag
before the exporter receives payment. This period represents the transit
time, the time taken for documents to reach the buyer, for the buyer to
effect payment and, for some countries, the allocation of foreign exchange
with which to effect settlement. Whilst the costs associated with this delay
can be allowed for in the price charged for the goods, this financing gap can
still present cash flow problems to an exporter. Where bills for collection are
chosen as the method of payment, the collection can be use as the basis for
an advance of funds. These advances can be obtained in both sterling and
foreign currency.

After shipment, the exporter submits the usual collection document to the
bank and receives an advance for the face amount of the bill. This
immediately benefits the exporter's cash flow. The advance is repaid when
the proceeds of the collection are received, and interest for the period of the
advance by the exporter. If an overseas buyer defaults on payment, the
bank has recourse to the exporter.

7. Finance for credit insured exports

Credit insurance is an essential component of international trade providing

cover for many of the commercial and political risks faced by an exporter

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when selling goods in overseas markets. This protection can also be a key
factor in securing access to export finance which can enhance exporter's
competitiveness by providing the flexibility to meet market requirements for
extended credit terms as well as price.

Exporters may obtain short-term or long-term finance for credit insured

receivables via bank facility linked to term of the exporter's credit insurance
policy. The bank takes a formal interest in (or charge over) the policy,
usually by means of a specific endorsement, but the bank's role is typically
that of funder only; the exporter's relationship with the insurer and the
administration of the policy will not usually alter. Finance is provided by way
of a debt-purchase facility, usually undisclosed to buyer, covering both export
bills and open account transactions which allows considerable flexibility in
deciding which individual debts require financing in line with cash flow needs.

These facilities can provide up to 100% finance for short-term credit insured
debts. The finance is without recourse to the extent of the credit insurance,
provided that there is a valid claim on the insurer in the event of default by
the buyer.

8. Finance under documentary credit

• Post-shipment finance

There are several ways in which an exporter can obtain finance under DC,
each depending upon how the DCs is usually based on inter bank rates which
will be fixed and at a finer rate than other forms of finance such as bank
overdraft.

• Pre-shipment finance

There are two ways in which pre shipment finance can be raised from a
documentary credit. The simplest is for the DC terms to include a clause
(known as a 'red clause') permitting an advance of funds to the beneficiary

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(exporter) prior to presentation of the shipping documents. In this way, the
importer directly finances the exporter.

Alternatively, the exporter's bank can provide a short-term loan, for a

percentage of the DC value, which is repaid from the proceeds of the
subsequent presentation under the DC. The existence of the DC does not, in
itself, normally constitute security for such loans; a banking facility, subject
to normal lending criteria would be required. The term 'packing credit
advance' is generally used to describe loans of this type.

Transferable DCs, or back to back DCs, are commonly used where there is an
agent or middleman acting between the buyer and seller and this may allow
the opportunity to finance the underlying trade transactions with facilities
being put in place, as appropriate.

9. Factoring

Financing for exports receivables as well as local sales can be provided by a

factoring company who will purchase trade debts for cash providing exporter
with immediate cash flow. Usually a maximum of 80% of the invoice value is
paid immediately upon presentation of invoices with remainder becoming
available as soon as payment is received from the buyer.

Export factoring is most suited for short-term debts (typically up to 90 days)

involving the sale of products or services which are complete at the point
invoicing and for trade with those parts of the world in which open account
is accepted of transacting business. Most factors operate a "two factor"
system, whereby a correspondent factor in the buyer's country is used to
access the credit standing of the buyer. Factoring can also provide finance
where credit protection is already available to an exporter through a credit
insurance policy.

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SWOT ANALYSIS OF HSBC
STRENGTHS

 World Wide Recognition

 Strong Brand Name

 Good Reputation among customers

 Global Standard services in all Branches

 Fair deal in all Transactions

 Customer Services at Door Step.

 Ethical conduct

 Infrastructure

 Customer Relationship

 Highly professional and trained staff

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WEAKNESS

 Less no of advertisements.

 Only one branch in Jaipur and two in whole Rajasthan.

 Only one ATM in Jaipur.
OPPORTUNITIES

 Scope in Jaipur as it is in the developing phase.

 Large no. of exporters as it is Jewellery hub of India.

 Lack of awareness and lot of wealth with the people.
THREATS

 Large no of competitors.

 Myth among Jaipurites that multinational banks are not trustworthy

SBIBLIOGRAPHY

1. www.hsbc.co.in
2. www.tradeservices.hsbc.co.in
3. www.barclays.com
4. www.rbi.org.in
5. Taxmann’s Foreign Exchange Management Act

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