International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CHAPTER 11

International Trade Financing

The propensity to trade, barter and exchange one thing for another . . . is common to all men, and to be found in no other race of animals.

Adam Smith

If a good face is a letter of recommendation, a good heart is a letter of credit.

Edward Bulwer-Lytton

Tata Motors of India's export manager, Raju Aneja, has just signed an export order for 1,000 Nanos—its new revolutionary minicar—with Atlas Distributors, a Vespa scooter dealership based in Casablanca (Morocco). The export sale is denominated in euros (€) and calls for payment of €20 million upon delivery—scheduled for approximately three months from the time of shipment. Tata Motors has never had any commercial dealings with Atlas but was envisioning a long-term relationship with the Moroccan firm. However, it was concerned about the importer's solvency. The Moroccan dirham was pegged to the euro and partially convertible. How should Tata Motors finance its export trade? Raju knew that this would be the first of many similar deals that Tata Motors was hoping to forge with other emerging market countries where the Nano was expected to meet with much commercial success.

In this chapter you will gain an understanding of:

• The different risks faced by exporters.
• The difference between documentary credit and a letter of credit.
• How trade documentation allows for hedging or significant mitigation of risks faced by exporters.
• The different methods of trade financing.
• How government agencies assist ...