CHAPTER 2: INTERNATIONAL TRADE CHAPTER 5: FOREIGN EXCHANGE CHAPTER 6: PAYMENT IN INTERNATIONAL TRADE CHAPTER 8: LOGISTIC & TRANSPORTATION

1. Explain the methods used by the governments to promote international trade 1. For what 4 reasons do investors use the foreign exchange market? 1. What are the roles of banks in the four common payment methods? 1. What is logistics?
The most common instruments used by governments to promote trade are: - Individuals, companies, and governments use it, directly or indirectly, to convert one currency into • Active Role: Banks get involved in the payment process, supporting both Importer & Exporter - • It is the process of planning, implementing and controlling the flow and storage of goods, which
- Subsidies: financial assistance to domestic producers in the form of cash payments, low-interest another L/C- check the accuracy of docs and guarantee payment aims at ensuring that the right product will be in the right place at the right time in the most cost
loans, tax breaks, product price supports, or some other form - It offers tools with which investors can insure against adverse changes in exchange rates • Passive Role: transfer docs and funds - DC, open account, advance payment efficient way based on customers' needs.
- Export Financing: Governments can offer export financing - loans to exporters that they would - It is used to earn a profit from arbitrage - the purchase and sale of a currency, or other interest- 2. What are the risks faced by exporters in the 4 common payment methods? • It is the process of planning, implementing and controlling the efficient, effective forward and
not otherwise receive or loans at below-market interest rates: government provides loan paying security, in different markets • Open account: Non-payment. The exporters lose control of the Goods. reverse flow and storage of goods, services, and related information between the point of origin and
- It is used to speculate about a change in the value of a currency • Documentary collection: Importer may fail to accept the B/E, or dishonor the accepted B/E at the point of consumption in order to meet customers' requirements.
guarantee - government will pay a company's loan if the company should default on repayment
2. What is foreign exchange market? maturity. The Exporter may have to ship the goods back home. 2. What are the order management costs?
- Foreign Trade Zones: a designated geographic region in which merchandise is allowed to pass
Foreign exchange market is the market in which currencies are bought and sold and in • L/C: few risks. Failure to present compliant docs to the bank will result in the Exporter losing the • New Product Release Phase-In and • Order Fulfillment
through with lower customs duties (taxes) and/or fewer customs procedures.
Maintenance • Distribution
- Special Government Agencies: organize trips abroad for trade officials and businesspeople and which currency prices are determined protection of the credit.
• Create Customer Order • Transportation, Outbound Freight and Duties
open offices abroad to promote home country exports. 3. Distinguish between spot rate and forward rate. How is each used in the foreign exchange • Advance payment: No risks associated with non-payment. The Exporter receives payment in full
• Order Entry and Maintenance • Installation
2. Why are trade tariffs created? market? or in part before the goods are dispatched.
• Contract/Program and Channel Management • Customer Invoicing/Accounting
- to encourage local production - A spot rate is an exchange rate that requires delivery of the traded currency within 2 business 3. What is the difference between documents against payment (D/P) and documents • Installation Planning
- help local firms export and thus build worldwide market share days. This rate is normally obtainable only by large banks and foreign exchange brokers against acceptance (D/A)?
Others: - The forward rate is the rate at which 2 parties agree to exchange currencies on a specified future • D/P: The Buyer can only receive the documents once he has paid the sight draft. The Supplier 3. What are the Six Rights of Logistics?
- to protect local jobs by shielding home-country businesses from foreign competition; date. Forward exchange rates represent the markets expectation of what the value of a currency retains title to and control over the Goods until he gets payment The right Goods in the right Quantities in the right Condition are delivered to the right Place at the
- to encourage local production to replace imports; will be at some point in the future right Time for the right Cost.
• D/A: the Buyer can get the documents just by accepting payment on a future date. The Buyer
- to protect infant industries that are just getting started; 4. Explain the differences among currency swap, options and futures. 4. What are the elements in the logistics cycle?
writes the word “ACCEPTED” on the draft & signs it.
- to reduce reliance on foreign suppliers Companies involved in international business make extensive use of certain financial instruments - Major activities in the logistics cycle:
4. How does a documentary collection differ from a letter of credit as a means of financing
- to encourage local and foreign direct investment in order to reduce exchange-rate risk • Serving customers.
international trade?
- to reduce balance of payment problems - A forward contract requires the exchange of an agreed-upon amount of a currency on an agreed- • Product selection.
- to promote export activity; upon date at a specific exchange rate • Documentary Collection: The bank acts as an intermediary. The Banks do not verify the • Quantification.
- to prevent foreign firms from dumping (selling goods below cost in order to achieve market - A currency swap is the simultaneous purchase and sale of foreign exchange for two different documents, take risks, nor guarantee payment. The banks just control the flow of documents. • Procurement.
share); dates • L/C provides increased assurance to both Exporter and Importer so long as they fulfill their • Inventory management: storage and distribution.
- to promote political objectives such as refusing to trade with countries that practice apartheid or - A currency option is a right to exchange a specific amount of a currency on a specific date at a obligations. The bank not only verifies the document accuracy and authenticity, but also - Heart of the logistics system:
deny civil liberties to their citizens specific rate. It sometimes used to acquire a needed currency. guarantees payment. • Logistics management information systems (LMIS)
3. What are commonly used barriers? 5. Why would an exporter ask for a confirmed letter of credit? • Other activities- organization & staffing, budgeting, supervision and evaluation
- Price-based barriers - Quality monitoring
The risks of issuing bank are borne by the confirming bank. If the issuing bank gets out of biz, the
- Quantity limits - Policy and adaptability
confirming is obliged to pay the L/C.
5. What is LMIS (Logistics Management Information Systems)?
- International price fixing
6. When do people use the 4 payment methods? LMIS collects data about commodities, which is often used for activities, such as filling routine supply
- Financial limits
• Open account: 2 sides have long-established trading relations. orders for facilities. Logisticians emphasize the use of logistics data for making decisions about
- Foreign investment controls
• Advance Payment: 2 sides are unfamiliar. activities within the logistics cycle.
6. What is green logistics?
• L/C: The Importer's credit rating is questionable, The Exporter needs an /C to obtain financing.
• Green logistics includes any business practice that minimizes the environmental impact of the
• Documentary Collection: there is ongoing business relation between the Parties, and the
logistics network and delivery.
importer is situated in a politically and economically stable market. • Green logistics involves considering the environmental footprint of a company when organizing its
logistics. It is applied to the entire supply chain and its objective is to reduce the company's impact
on the environment, without affecting its economic activity.
• This is achieved through more or less substantial changes in a company's logistics activity, either by
the choice of suppliers, infrastructures, optimization of storage space or automation.

CHAPTER 9: INSURANCE 4 principles

- Indemnity: the insurer agrees to pay no more than the actual amount of the loss; stated
READING 1 differently, the insured should not profit from a loss.
1. Explain each of the following characteristics of a typical insurance plan. - Purpose:
a. Pooling of losses: - • to prevent the insured from profiting from a loss.
Pooling is the spreading of losses incurred by the few over the entire group, so that in the - • to reduce moral hazard
process, average loss is substituted for actual loss. In addition, pooling involves the grouping of a - Insurable interest: the insured must be in a position to lose financially if a covered loss occurs.
large number of exposure units so that the law of large numbers can operate to provide a - Purposes
substantially accurate prediction of future losses. - • To prevent gambling
Pooling implies - • To reduce moral hazard
• the sharing of losses by the entire group - • To measure the amount of the insured's loss in property insurance
• prediction of future losses with some accuracy based on the law of large numbers. - Subrogation: substitution of the insurer in place of the insured for the purpose of claiming
b. Payment of fortuitous losses: indemnity from a 3rd party for a loss covered by insurance. Stated differently, the insurer us
Fortuitous loss is one that is unforeseen and unexpected by the insured and occurs as a result of entitled to recover from a negligent 3rd party any loss payments made to the insured.
chance. - Utmost good faith: a higher degree of honesty is imposed on both parties to an insurance
c. Risk transfer: contract than is imposed on parties to other contracts.
Risk transfer means that a pure risk is transferred from the insured to the insurer, who typically is This principle is supported by 3 doctrines:
in a stronger financial position to pay the loss than the insured. + representations
d. Indemnification: + concealment
Indemnification means that the insured is restored to his or her approximate financial position + warranty
prior to the occurrence of the loss.
5. Explain the doctrines: READING 2
a. Representations: Answer the following questions
Representations are statements made by the applicant for insurance 1. Why is marine insurance required?
The insurance contract is voidable at the insurer's option if the representation is (1) material, (2)  Exporters and importers face all the time uncertainties of loss of their goods
false, and (3) relied on by the insurer.  Insurance is used to protect their financial interests against such risks and actual losses
• Material means that if the insurer knew the true facts, the policy would not have been issued, or  Without adequate insurance and protection of the interests of those with goods in transit,
it would have been issued on different terms. international trade would be negatively affected
• False means that the statement is not true or is misleading.  Liabilities of carriers to the goods is very limited
• Reliance means that the insurer relies on the misrepresentation in issuing the policy at a 2. What are the risks excluded from a marine insurance policy?
specified premium.  Willful misconduct of the assured; Delay; Wear and tear; Ordinary leakage and breakage;
b. Concealment: Inherent vice
A concealment is intentional failure of the applicant for insurance to reveal a material fact to the 3. What documents are typically requested for marine insurance claims? (6)
insurer. Concealment is the same thing as nondisclosure; that is, the applicant for insurance 1. Original policy or certificate: Proof of insurable interest, describing the subject
deliberately withholds material information from the insurer. matter, insured value, and relevant clauses.
c. Warranty: 2. Invoices and packing specifications: Needed to assess the percentage of a partial loss
A warranty is a statement that becomes part of the insurance contract and is guaranteed by the and where the lost or damaged goods were packed.
maker to be true in all respects. 3. Original bill of lading or other transport document: Proves goods were in apparent
good order when shipped and evidences the contract of carriage for any legal action.
4. Survey report or other evidence of loss or damage: Independent report on the
nature and extent of the loss, ideally from an approved agency.
5. Landing Account/Weight Notes at Destination: Carrier’s or stowage broker’s record
of goods at destination, useful for identifying where damage occurred.
6. Any correspondence with the carrier/other parties: Ensures insurers can maintain
legal rights and no rights have been waived.