Navjot Sethi Abhijit Singh Kahlon Misbah Hassan

PRICING

Many entrepreneurs lose money in international transactions, because they were unable to precisely determine their export costs, foreign exchange risks or price they should have negotiated. So therefore it is very important to take into consideration all cost factors before finalizing the price.

Inco Terms Export Costing Sheet Pricing Strategies Other Important Definitions Evaluating the Viability of the Transaction

 Related to transfer of ownership/liability/obligation from exporter to importer Are internationally recognized Important for resolving contractual disputes Four categories- E term, F terms, C terms and D terms

 E term- (Ex Works-EXW) exporter makes good available at importers premises F terms- (FCA-Free Carrier, FAS-Free alongside ship, FOB-Free on Board) exporter delivers the goods to a carrier appointed by the importer C terms- (CFR-Coast and Freight, CIF-Cost, Insurance and Freight, CIP-Carriage and insurance paid to, CPT-Carriage paid to) exporter delivers the goods at a decided destination and is free obligations after that D terms-(DAF-Delivered at frontier, DES-Delivered Ex Ship, DEQDelivered Ex Quay Duty Paid, DDP-Delivered Duty Paid, DDUDelivered Duty Unpaid) exporters responsibility to bring goods to the country of destination EXW- minimum responsibility of exporter DDU-highest responsibility of exporter

 is break down of total cost into categories, such as production, cost of sale, marketing, promotion and shipping. Following elements are included Product Cost Cost of Sales and Promotion Preparation for Transport Other Costs of Preparation for Transport Inland Transportation Costs Port Charges and loading Main Carriage Insurance Coverage Unloading Charges Import Duties and Delivery Export Financing Cost

Three factors to be considered for Price determination Price Floor- firms cannot sell its product at a loss Price Ceiling- if firm charges high price it would loss to competition/substitutes Optimum Price- between price ceiling and the price floor, determined by supply and demand forces

 Market Skimming- charging premium prices from a particular set of customers to maximize profits from a relatively low sales volume Market Maintenance Pricing- firm decreasing its prices to gain a market share International Pricing Constraints- three price constraints that are anti dumping, resale price maintenance, price ceiling & level to be considered.

 Determining the Export Cost- all real costs to be included and profit margin being added Elaborating the Pricing Strategy- internal, market, environmental factors to be considered Assessing the Transaction- transaction assessed taking constraints into account.

 Time and risk closely linked Variables:

Economic downturns, civil unrest Currency changes, currency shortages Volatility of commodity prices

Longer term increases financing costs

Funds committed for longer term Greater risk Higher reserve requirements Management and monitoring

Short term financing extends to maximum limit of 24 months

 Choose the financial solution that best suits a companys needs Various tools and term available Right choice is key to transaction success and trading relationship Payment delays and risk Cash flow challenges

 Payment methods effectively become financing solutions Documentary collections and letters of credit chosen because they often satisfy the needs of both buyer and seller Nature of transactions need to be considered before choosing payment and/or financing methods

Cash in Advance Exporter Most secure

Open Account Importer

Least secure

Importer

Exporter

Cash in advance Open account Sale of foreign receivables for cash Import financing Bank financing Supply chain finance

 Determining factors in choosing payment methods

Relationship Proven

Evolving

New Expertise

Low

Medium

High

New relationship, low expertise in trade, represents highest risk

Intended to finance operations and increase investment in inventory to expand exports Type and amount of lending takes into account commercial performance, financial health and client list Secured by charge against receivables, inventory and other assets Margin for lending Export credit insurance

 Outright purchase of receivables at a discount Factoring company pays seller for receivable, buyer pays factoring company when invoice is due Factor assumes credit risk of invoice and pays seller, less a discount (non-recourse) Restrictions for certain buyers or countries based on history and ability to collect payables Expensive: Discount can be 1-9% of invoice, plus 10% holdback

 Similar to factoring except seller sells a purchase order Financing agency buys goods and sells to purchaser Useful when seller has firm order from reputable buyer but cant complete manufacture or delivery of goods Allows access to financing earlier in the transaction cycle Last resort financingvery expensive; for sales with high profit margin

 Useful for receivables from proven buyer where lender is familiar with exporters business On recourse or non-recourse basis to exporter Reduces pressure on operating lines and improves cash flow and exporting capacity Usually results in most risky receivables remaining on exporters books

 used to support capital goods and services Larger value transactions from $50,000 to millions Financing provided by banks, other financial institutions, or by ECAs, directly or collaboratively Time period 2-7 years for medium term and 7-15 for long term

Buyer credits Direct loans Line of credit allocations Supplier credits

Financing for exports through loan to buyer Negotiated between lender and foreign buyer on individual basis to meet terms of underlying commercial transaction Used to avoid lengthy and costly negotiations of direct loan financing Financing arranged with the exporter which has extended terms of credit to the buyer (importer)

 Whether a Buyer Credit or Direct Loan, the lending agreement has several major components Identity of the borrower and guarantor Loan amount and related costs/expenses Security and disbursement conditions Borrower covenants Event of default Jurisdiction and governing law

 Interest for entire term is deducted in advance when discounting Higher yield to lender and greater costs to borrower at maturity Used for larger transactions covered by series of promissory notes maturing semi-annually for 2-5 years, sometimes only one year Notes avalized by buyers bank and guaranteed Guarantee must be unconditional, irrevocable and transferable

 Advantages
Quick source of cash No need for export credit insurance Eliminates collection and administration tasks Eliminates commercial, political and foreign exchange risks Offers possibility of 100% financing

Disadvantages
Not readily available to small businesses Difficult to arrange for medium-sized ones Costs often higher than conventional financing

 Ownership of goods stays with lender (lessor) Use of goods transferred to borrower (lessee) Retained ownership of goods allows lender to extend lease financing to otherwise unsuitable borrower Leases generally fall into two classes
Operating lease Financial lease

Off-balance sheet financing Potential tax advantage

Specialized form of lending for specific circumstances Employed for larger capital purchases Rarely funded entirely by a single bank Lenders secure loans by using cash flow and collateral from project plus undertakings and guarantees by project sponsors Substantial risk Typically require project feasibility study

 Foreign aid agencies channel financial assistance to the supply of products Combine, to varying degrees, elements of aid with political objectives Suppliers (exporters) must demonstrate technical ability and competitiveness and minimum level of local content Exporters will usually have previous experience in commercial or ECA funded transactions

 Stimulate economic activity and foster development Operate with funds contributed by member countries
Annual capital subscription Special contributions to concessional (low-interest) funds Technical assistance programs

Lend funds to developing countries to purchase goods and services needed to complete projects

 Multilateral development institution affiliated with United Nations (UN) Central planning and funding agency for technical assistance provided by the UN More than 130 countries make contributions Financing to support international trade in professional services Developing country issues tenders and reviews foreign supplier service offers; winner performs services and receives payment from UNDP

EXPORT CREDIT AND INSURANCE AGENCIES

 The Berne Union 1934 (52 members)

international organisation of public and private sector providers of export credit and investment insurance.

The Private Sector (leading providers)

Atradius Netherlands Coface France Euler-Hermes Germany American International Group - USA

Borders blur
Notion of providing services (export credit insurance, guarantees& finance) globally

 Legislative Review
Periodic legislative review is common among the public- sector ECAs. Export Development Canada (EDC) Parliamentary review Export Finance Insurance Corporation (EFIC) Australian Parliament U.S. EXIM Bank Congressional review

The OECD arrangement

Organization of Economic Cooperation and Development sets forth generous export credit terms for its members (minimum interest, appropriate risk fees and maximum repayment terms) Member Countries: Australia, Canada, European community, Japan, Korea, New Zeland, Norway, Switzerland and United States

Corporate Social Responsibility

Support Greener cleaner and environmentally friendly businesses Note: ECAs are also subject to regulations set by World Trade Organization

 Privatization of ECAs or aspects of their operations is an acknowledged trend.

Example; EDC operates on commercial principles but can secure financing at favorable rates due to its Crown status. It means that market treats EDC as sovereign or government risk not as commercial risk.

Financing Insurance and guarantees Investment Solutions Advisory services Export and trade promotion

 Financing
Financing major projects for governments Financing banks that act in import/export transactions Financing the importer/exporter directly

Insurance and guarantees

Risk and non-payment insurance Bid and performance bonds Insure foreign receivables Insure against wrongful claims

 Investment Solutions
Funding start-up businesses to support foreign investors Foreign investment insurance (to protect against war, expropriation and nationalization)

Advisory services
Advice and counsel on international markets while offering financing and risk-mitigation solutions

Export and trade promotion

ECAs act as de facto trade experts to facilitate international trade opportunities

Credit Insurance (CI) protects exporters against nonpayment of export receivables by foreign importers. Things to consider while purchasing CI; Risks covered by insurer (political, commercial) Extent of risk covered (90/10 rule) The premiums charged Services provided by insurer viz-a-viz credit reports and analysis, country-risk information

Thanks Good luck for the exams !!!