1Chapter 9Marketing 4220 International Sourcing, Logisti.docx

1
Chapter 9
Marketing 4220
International Sourcing, Logistics
& Transportation
International Documents
5/25/2015
1
International Documents
Documentation Requirements
Invoices
Export Documents
Import Documents
Transportation Documents
Documents as a Marketing Tool
2
Documentation Requirements
Most international transactions require numerous documents:

It is important that each of these documents be filled correctly
and within a specific time frame. Each document has different
requirements.
It is common to issue more than one original document – one
for each of several parties.
Most countries still require documents to be printed on
paper and not submitted electronically.
3
Invoices
Commercial invoices for transactions conducted
in an international environment are much more complete
and detailed than in a domestic environment.
They must include:
A detailed description of the goods, with HS number, so
that the goods can be classified correctly by Customs
The Incoterms® rule of the transaction
Details on the costs of domestic transportation, loading,
insurance, etc., to help Customs determine the dutiable value of
the goods
Details on the weight and dimensions of the goods
Details on the itinerary of the shipment
The terms of payment

4
A simple
international
invoice
5
Other Invoices
Pro forma Invoice
A quote (preview of the commercial invoice) provided by
the exporter to the importer for the purpose of obtaining a
letter of credit.
Consular Invoice
A commercial invoice that is printed on stationery provided by
the consulate of the country in which the good will be imported.
Specialized Invoice
Some countries require that invoices be printed on special
forms.
6

Export Country’s Regulations
Export Documents
Shipper’s Export Declaration
Export License
Certificate of End-Use
Destination Control Statement
Export License
An export license is an express authorization by a given
country’s government to export a specific product before it
is shipped.
What types of products need an export license?
Depending on the country of export, it could be:
National treasures, antiques, or works of art
Products put under control for political or military purposes
Scarce natural resources
8
An Export
License from
Malaysia

U. S. Export Controls
The United States export control policies (regrouped
under the Export Administration Regulations [EAR]
and administered by the Bureau of Industry and Security) focus
on three elements to determine if an export needs a
license:
The type of product exported
The person or entity purchasing the product
The ultimate country of destination
It is the always the responsibility of the exporter to ensure that
the goods can be legally exported from the United States.
10
- Product -
The Bureau of Industry and Security maintains a Commerce
Control List, in which all products of concern to the United
States are given an Export Control Classification Number
(ECCN).
Products need a license because they may be potentially
dangerous or have “dual use.”
Goods in the CCL may fall under the control of one or more
government agencies including the Department of Defense,
Department of State or the Drug Enforcement Agency.
Items not requiring a license are classified as “EAR99.”

Most goods are classified EAR 99.
11
- Person or Entity -
Even if a product is classified as EAR99, exporters still
need to determine if the purchaser of the product is on one
of several lists:
The Entity List
The Unverified List
The Specially Designated Nationals
and Blocked Persons List
The Denied Persons List
A product sold domestically can still be subject to export
controls, if the purchaser is on one of these lists.
12
- Country-

The U.S. government considers some countries “friendly”
and others “unfriendly.”
For five countries, the U.S. has a total embargo, and no
products can be exported there; Currently the U.S. has an
embargo on Cuba, Iran, North Korea, Sudan and Syria.
For other countries there are many limits to what can be
shipped there: Burma/Myanmar, the Democratic Republic
of the Congo, Iraq, the Ivory Coast, Liberia, Libya, Somalia,
Yemen and Zimbabwe.
If a license is necessary, an exporter needs to obtain
an Individual Validated Export License, or the express
authorization to ship to a country.
13
Destination Control
Statement
A Destination Control Statement is required for products
that have obtained a Validated Export License:
“This merchandise licensed by U.S. for ultimate destination
[country]. Diversion contrary to U.S. law prohibited.”

14
Shipper’s Export
Declaration
The Shipper’s Export Declaration (SED) is a data-collection
document. It is used to tabulate what products are exported
from the United States, and to which countries they are
exported.
Most other countries have a similar data-gathering export
requirement. The European Union has a similar requirement,
called the Single Administrative Document.
Interestingly, the United States does not require an SED
for shipments to Canada but it is required for shipments
to the U.S. Virgin Islands, Puerto Rico and Guam.
15
The United
States Shipper’s
Export
Declaration

End Use Certificate
An End-Use Certificate is a document required
by some exporting countries in the case of sensitive
exports, such as ammunition, to ensure that the product
is used for acceptable (to the exporting country’s
government) purposes.
17
Export Taxes & Quotas
Some countries require exporters to pay an export tax
on certain commodities.
Export quotas are a limit, set by the exporting country’s
government, on the quantity of a specific commodity
that can be exported in a given year.
Governments control their exports when the commodity
that is exported is scarce.
They can also do it when their country is one of the few
that produces a particular product.

18
Importing Country’s Regulations
Import Documents
Import License
Certificate of Origin
Import Forms
Certificate of Insurance
Certificate of Inspection
Certificate of Free Sale
Phyto-Sanitary Certificate
Consular Invoice
Certificate of Manufacture
Certificate of Analysis
Certificate of Certification
Other Certificates
Origin of Goods
Certificate of Origin
A Certificate of Origin is a document provided
by the exporter’s chamber of commerce that attests
the goods originated from the country in which
the exporter is located.
Certificate of Manufacture
A Certificate of Manufacture is a document provided
by the exporter’s chamber of commerce that attests that
the goods were manufactured in the country in which the
exporter is located.
The NAFTA Certificate of Origin is actually a Certificate
of Manufacture.

20
A Certificate
of Origin from
New Zealand
A NAFTA Certificate of Origin (Certificate of
Manufacture) from
The United States
Inspection of Goods
A Certificate of Inspection is a document provided
by an independent inspection company that attests the
goods conform to the description contained in
the invoice provided by the exporter.
Certificate of Analysis
A Certificate of Analysis attests that the goods conform
to the chemical description and purity levels contained
in the invoice provided by the exporter.

Phyto-Sanitary Certificate
A Phyto-Sanitary Certificate attests that agricultural goods are
free or pests and disease and conform to the standards of the
importing country.
23
A Certificate of Analysis from Iran
A Phyto-Sanitary Certificate from
The Ukraine
Conformity of the Goods
Certificate of Certification
A document provided by an independent inspection company,
or by the Agricultural Department of the exporting country’s
government, that attests that the goods conform to the
agricultural standards of the importing country.
Certificate of Free Sale
A document that attests that the product exported conforms to
all of the regulations in place in the exporting country and that
it can be sold freely in the exporting country.

Some importers use this certificate as a guarantee of quality
if worried that the exporter will ship sub-standard goods.
26
A Certificate of Certification from the Czech Republic
A Certificate of Free Sale from Thailand
Certificate of Insurance
A Certificate of Insurance is a document provided
by the exporter’s insurance company that attests
that the goods are insured during their international voyage.
A certificate of insurance can be based on a single policy
specifically contracted for a particular voyage or it can be based
on the open policy that covers all of an exporter’s shipments.
In the case of an open policy, the insurance company
provides the exporter with a series of certificates
to use as needed.
29

A Certificate of
Insurance from
Australia
Other Import Documents
Consular Invoice
A commercial invoice that is printed on stationery
provided by the consulate of the country in which the
good will be imported.
Import License
The express authorization, granted by the government of
the importing country, to import a particular product in
a given country.
Import Forms
All countries have specific administrative forms that have to
be submitted by the importer in order to clear Customs.
31
Transport Documents
Ocean Bill of Lading
Air Waybill
Intermodal Bill of Lading

Uniform Bill of Lading
Bills of Lading
Charter Parties
Aircraft Leases
Packing List
Manifest
Bill of Lading
A bill of lading is a generic term used to describe a document
that fulfills three functions in international transport:
It is a contract between the and the shipper. The carrier agrees
to transport the goods from A to B for a given price.
It is a receipt for the goods. Signed by the carrier, it signifies
that the goods were received in good condition.
It is a certificate of title. Whichever party has the original bill
of lading is the owner of the goods.
However, it can get slightly more complicated.
33
Bill of Lading as
a Contract of Carriage
A bill of lading is a contract between the carrier (the company
operating the mode of transportation) and the shipper (the firm
that enters the contact with the carrier) .
The shipper is either the exporter or the importer, depending on

the Incoterm s® rule used; the Incoterms® rule determines
which is responsible to arrange for pre-carriage, main carriage
or on-carriage.
For a given amount of money, the carrier agrees to transport
the goods from a certain location to another.
Each contract of carriage can be negotiated, but most are
standard agreements. Some include the costs of loading
and unloading the goods, others do not.
34
Bill of Lading as
a Receipt for Goods
There are two alternatives when the carrier receives
the goods in the exporting country:
If the goods are received in good condition, the carrier just
signs the bill of lading, without any other annotation. Such a
bill of lading is called a clean bill of lading.
If the goods are received in a condition that concerns the
carrier (dirty, wet, poorly packaged, rusty, leaking etc.), the
shipper makes an annotation of the issue, then signs. Such a bill
of lading is called a soiled bill of lading.
Letters of credit always call for a clean bill of lading.
35

Bill of Lading as
a Certificate of Title
On a bill of lading, there is a box called “consignee,” in which
the shipper identifies the firm that will take delivery of the
goods from the carrier. There are two alternative ways to fill
this box:
If the box is left blank or the words “to order” are used, then
the bill of lading is said to be negotiable, and the owner of the
goods in the destination port is the entity with the original bill
of lading. The goods can be sold while they are being
transported.
If the name of the consignee is entered, then only that firm can
pick up the goods from the carrier. Such a bill of lading is
called a straight bill of lading.
Only ocean bills of lading are negotiable.
36
Types of Bill of Lading
A bill of lading takes different names depending on the mode
of transportation chosen:
It can be called an ocean bill of lading for transportation by
ocean
An air waybill when the goods travel by air
An intermodal bill of lading when the goods travel on more
than one mode of transportation under a single contract
A uniform bill of lading when the goods travel by road or rail
The shipper (the firm that enters the contact with the carrier) is
either the exporter or the importer, depending on the

Incoterms® rule used.
37
An Ocean Bill of Lading from Hong Kong
An Air Waybill from the
United States
Charter Party
A charter party is a type of contract of carriage between a
carrier and a shipper, in which the shipper uses all or most of
the carrying capacity of the ship. It is generally used to
transport bulk commodities, such as grain, fertilizer, ore or oil.
A charter party can be a contract for a single voyage,
but it can also be for a series of voyages to transport a large
quantity of a particular commodity, or for a specific duration of
six months or a year.
40

Aircraft Leases
(1 of 2)
A shipper intent on utilizing the entire capacity of an aircraft
enters into a lease agreement. The agreement can be for a single
voyage, a series of voyages, or a duration.
Wet Lease
An agreement under which the owner of the aircraft provides
the airplane, insurance, maintenance services, fuel, and a flight
crew to the lessor, who has to cover all of the other variable
costs, such as airport fees.
ACMI Lease
An agreement under which the owner of the aircraft provides
the airplane, crew, maintenance, and insurance to the lessor,
who has to cover all of the other variable costs, such as airport
fees and fuel.
41
Aircraft Leases
(2 of 2)
Dry Lease
An agreement between the owner (lessor) of an aircraft
and the lessee in which the owner provides only the aircraft and
no other services.
Damp Lease
An agreement between the owner of an aircraft and the lessee,
under which the owner provides some services in addition to the
aircraft itself. For example, an ACMI lease is a damp lease
because it does not cover fuel.

42
Packing List & Manifest
Packing List
A document prepared by the exporter that lists out what
a shipment contains, in great detail. A packing list always
accompanies every shipment.
Manifest
A document generated by the shipping company
(the carrier), which lists all cargo onboard the transportation
vehicle. There is a manifest for every voyage undertaken
by the carrier.
The manifest is frequently requested by the Customs authorities
of a port of call.
43
Shipper’s Letter of Instruction
A Letter of Instruction is a document in which the shipper
spells out how it wants the carrier to handle the goods while
they are in transit.
For refrigerated cargo, it specifies the temperature that must
be maintained in the container and the monitoring frequency
of that temperature. For live cargo, the frequency of feeding,
quantities required, and water needs.
For manufactured goods, the letter of instruction can specify
a position on the ship. To minimize movements, the cargo can
be stowed below deck, at the water line. If it is dangerous,

the shipper can request a stow above deck.
44
Dangerous Goods
Shipments of dangerous goods are regulated by the
International Maritime Organization’s International Maritime
Dangerous Goods Code, the International Civil Aviation
Transport Association’s Dangerous Goods Regulations,
the International Civil Aviation Organization’s Technical
Instructions for the Safe Transport of Dangerous Goods
by Air or by local shipment codes.
All require different additional documents and specific stowing
instructions.
45
Electronic Data Interchange
- EDI - (1 of 2)
Electronic Data Interchange (EDI) is the electronic exchange
of documents, from computer to computer.
EDI allows the instantaneous notification of the other party
when a particular step in the shipping of goods has taken place.
Under a DAT shipment, for example, once the goods have been
unloaded at the terminal, the exporter can notify the importer
electronically that the goods are now its responsibility.
Under a CPT shipment, the exporter can notify the importer

that the goods have been delivered to the first carrier.
46
- EDI - (2 of 2)
The sender and the recipient must reach two agreements in
order for EDI to work well:
They must agree to a technical EDI understanding —the
specific technology used for the exchange. The United Nation’s
EDI FACT standard is the most likely to eventually prevail as
the international standard, but there is currently no official
international standard.
There must also be a legal agreement between the parties
defining the responsibilities, timing, liabilities for errors, the
“evidentiary value” of messages and other legal issues.
47
Document Preparation as
a Marketing Tool (1 of 2)
An exporter that does an excellent job at preparing documents
can get a strategic advantage, as the importer is likely to be able
to clear Customs quickly and process payment efficiently if all
documents conform.

The pro forma invoice must be a perfect preview
of the actual invoice.
The commercial invoice must be clear, detailed and precise.
It must include all the information that is necessary for the
importer to clear Customs and minimize the duty that it has
to pay.
All the certificates requested have to be provided in the manner
requested.
48
Document Preparation as
a Marketing Tool (2 of 2)
The correct number of originals and copies of all
documents must be prepared or collected.
The packing list must be prepared carefully
and precisely. An incomplete or imprecise packing
list increases the probability of a Customs inspection.
The export paperwork must be prepared and filed
correctly and in a timely manner.
49

9-16Chapter 9: International Commercial Documents
Chapter 9: International Commercial Documents9-15
Chapter 9
International Commercial DocumentslEARNING oBJECTIVES
At the end of this chapter, YOU SHOULD:
1 Identify the basic functions of commercial invoices in
international trade.
2 Identify the basic functions of export documents in
3 Identify the basic functions of import documents in
4 Identify the basic functions of transportation documents in
5 Identify the basic functions of electronic data interchange
(EDI) in international trade.
6 Understand the strategic advantages for an exporter of having
good document preparation.
Preview
A sure thing about international commerce: it requires large
amounts of paperwork.
This chapter examines invoices, export documents, and export
controls.
Chapter Outline9-1 Documentation Requirements
I. Most international trade transactions require numerous
documents, filled out with specific information and instructions,
and filed in a certain time frame
9-2 Invoices9-2-1 Commercial Invoice
I. The invoice that accompanies the shipment is called the
commercial invoice
II. This invoice should present precisely what the importer is
being billed for
a. A very precise description of the product should be given
b. The tariff paid is a function of the classification (type) of the
product imported
c. Tariff rates are determined using a multiplicity of criteria:

i. Number of units in shipment
ii. Dimensions
iii. Weight
iv. Total value
d. Terms of trade (Incoterms)
e. Detailed list of items exporter has pre-paid for importer
f. Terms of payment
g. Currency of payment
h. Shipping information
i. Customary information—names, addresses, …etc.9-2-2 Pro
forma Invoice
I. Not an invoice but a quote
II. Must be written with extreme care to avoid discrepancies
with letter of credit which can result in complexities
surrounding amendments
III. Should include an expiration date
a. Under Uniform Commercial Code of the United States (UCC)
and under the domestic laws of many other countries, the offer
can be withdrawn at any time, without prejudice, for almost
whatever reason
b. In international transaction conducted under the United
Nations’ Convention on the International Sales of Goods (CISG)
the offer cannot be withdrawn by the seller (or the buyer) before
its expiration date. Most countries have now adopted this
convention9-2-3 Consular Invoice
I. Necessary for exports to decreasing number of Latin
American countries
II. Commercial invoice printed on stationery of importing
country’s consulate and stamped by the consulate
III. Time consuming
IV. Favored by countries attempting to accurately forecast
needs for foreign currency
V. Also generates revenues as fees are expensive
VI. Considered to be a trade barrier9-2-4 Specialized
Commercial Invoices
I. Some countries require that all commercial invoices be

printed on a standard form
II. Form is usually easily available at a low cost from
specialized printers of international stationery
III. In general, these requirements are not considered trade
barriers
9-3 Export Documents
I. A country’s government may require a number of documents
before a product can be exported
II. United States requires Shipper’s Export Declaration (SED)
III. In some cases, government wants to control outflow of
certain goods and will require an export license9-3-1 Shipper’s
Export Declaration
I. Shipper’s Export Declaration (SED) is a data-collection
document required by U.S. government for:
a. Exports valued at more than $2,500 per item category ($500
for parcels sent through the postal system)
b. Shipments requiring an Individual Validated Export License
c. SED must be sent to U.S. Customs Service
II. SED allows U.S. government to tell what products are
exported from U.S. to where
III. Census Bureau has developed incentives for electronic
filing of SEDs9-3-2 Export Licenses
I. An express authorization by a given country’s government to
export a specific product before it is shipped
II. Reasons for export license:
a. Government is attempting to control the export of national
treasures or antiques
b. Government is trying to exert some control over foreign trade
for political or military reasons9-3-3 U.S. Export Controls
I. Basis of U.S. export policy:
a. Previous secret agreement among western countries to deny
access to some military technologies
b. Export Administration Act once controlled the type of goods
that could be exported to certain “unfriendly” countries

c. Fenwick Anti-Terrorist Amendment of the Export
Administration Act prevents exports to nations supportive of
international terrorism
d. Comprehensive Anti-Apartheid Act, which created a number
of regulations for exports to the country of South Africa
II. These documents brought into existence the current
Commerce Control List, which details which products can and
cannot be shipped to certain countries
a. List is updated regularly, and published in the U.S. Export
Administration Regulations (EAR)
b. In 1996, the EAR were completely revised to reflect a major
shift from a policy of “everything that is not explicitly
authorized needs an export license” to a policy of “everything is
authorized unless it is specifically prohibited”
III. For some products, therefore, the United States government
wants to ascertain that the goods are purchased for a legitimate
commercial (not military) purpose
IV. Bureau of Industry and Security (BIS) publishes the
Commerce Control List (CCL) in the EAR, which gives an
Export Control Classification Number (ECCN) to each product
V. When license is not required, the exporter must determine if
importer or intermediary is on:
a. The Entity List—people, companies, and organizations
engaged in weapon proliferation, drug smuggling, or terrorism
b. The Unverified List—individuals, companies, and
organizations that are suspected of illegal activities
c. The Specially Designed Nationals and Blocked Persons
List—U.S. persons with whom exporters are expressly warned
not to do business
d. The Denied Persons List—U.S. persons, companies, or
organizations whose export privileges have been revoked
VI. When license is required, the U.S. government requires:
a. The exporter to obtain an Individual Validated Export
License—an express authorization to ship that particular
product to a particular country
b. Writing of a Destination Control Statement on the

Commercial Invoice and the Shipper's Export Declaration: This
merchandise licensed by U.S. for ultimate destination [country].
Diversion contrary to U.S. law prohibited.
VII. Product not on the CCL or whose ECCN does not call for
an export license is classified as “EAR99”—statement needs to
be included on Shipper’s Export Declaration9-3-4 End-Use
Certificates
I. Certifies that the product is going to be used for a legitimate
purpose
II. Most of these certificates are provided by the governments of
the importing country9-3-5 Export Taxes
I. Several countries require exporters to pay an export tax on
certain commodities
II. May be used when goods are minerals in short supply, or
when the product has been heavily subsidized by the
government 9-3-6 Export Quotas
I. Several countries have export quotas to limit amount of
certain goods leaving country
II. Strategy can be used to control scarce resources or prices of
products for which country has monopoly
9-4 Import Documents
I. Reasons for import documents:
a. Keep out shoddy goods
b. Determine appropriate tariff classifications
c. Help determine import goods values
d. Protect importers from fraudulent exporters
e. Limit or eliminate imports government finds inappropriate
II. Country may use import documents to promote
protectionism9-4-1 Certificate of Origin
I. Most common document
II. Must be signed by exporter’s chamber of commerce
III. Statement that goods originated in a specific country
IV. Often used by importing countries to determine tariff of
goods9-4-2 Certificate of Manufacture

I. Similar to Certificate of Origin
II. Attests to location of manufacture of exporting product9-4-3
I. Sometimes requested by importer
a. Document signed by independent third party attesting to
authenticity and accuracy of shipment
b. Several ways useful to importers:
i. In purchases based on documentary collection or letter of
credit, banks only inspect documents before making importer’s
payment
ii. If merchandise is defective, no way to stop payment
iii. Certification of inspection provides protection for importer
in that goods are examined
II. Pre-shipment inspection (PSI) required by some companies9-
4-4 Certificate of Analysis
I. Attests to composition of certain products
II. Usually provided by independent laboratory or another
independent inspection company9-4-5 Phyto-Sanitary
Certificate
I. For agricultural products and foodstuffs
II. Usually written by governmental agency in charge of
agriculture or food service (U.S. Department of Agriculture or
Food and Drug Administration)9-4-6 Certificate of Certification
I. Define technical characteristics of good before it can be
imported
II. Usually written by independent company or trade
association9-4-7 Certificate of Free Sale
I. Certificate of Free Sale attests that the goods are legal for
sale in the exporting country
II. For some importing countries, a CFS guarantees that the
goods meet basic standards of performance and that they are not
second-rate
III. A CFS also guarantees that the goods are not past their
normal shelf life9-4-8 Import License
I. Some countries require importers to have an import license
II. Designed to prevent importing if non-essential or overly

luxurious products in developing countries with a short supply
of foreign currency9-4-9 Consular Invoice
I. May be required by importing country
II. Regular commercial invoice printed on stationery provided
by country and visa-ed by its consulate in exporter country9-4-
10 Certificate of Insurance
I. Incoterms determine if Certificate of Insurance is
responsibility of exporter or importer
II. Readily available from insurance company insuring the cargo
9-5 Transportation Documents9-5-1 Bill of Lading
I. Fundamental international shipping document in ocean
transportation
a. It is a contract
b. It is a receipt for the goods
c. It is a certificate of title
II. Also called ocean bill of lading or, when applicable, air
waybill9-5-2 Uniform Bill of Lading
I. Fulfills same functions as ocean bill of lading
II. Used for inland transportation
III. In most cases, uniform bill of lading is a straight bill of
lading9-5-3 Intermodal Bill of Lading
I. Fairly recent document due to increased carrier-managed
intermodal shipments
II. In most cases, they are straight bill of lading9-5-4 Air
Waybill
I. Fulfills same functions as ocean bill of lading but for air
freight
II. It is always a straight air waybill9-5-5 Charter Parties
I. A contract between the shipper and the carrier when the
shipper uses all or most of the carrying capacity of a vessel
II. Most charter parties are industry-specific
III. Charter parties can include or exclude the crew of the ship
(in that case, they are called bareboat charter parties)
IV. Concept also applies to airfreight:

a. Wet lease means that the aircraft owner also provides crew,
fuel, maintenance, and insurance to the lessor
b. Dry lease means that the aircraft owner only provides the
aircraft
c. Damp lease is one in between (one or more of the crew,
insurance, maintenance, and fuel are provided). Most typical is
an ACMI lease (Aircraft, Crew, Maintenance, and Insurance—
but no fuel)9-5-6 Packing List
I. Always accompanies a shipment
II. Spells out how many containers are in the shipment and what
merchandise is in each container9-5-7 Shipper’s Letter of
Instruction
I. Delivered to shipping company if shipper (exporter or
importer depending on terms of trade or Incoterms) wants
specific directions followed during transport
II. Can be critical in livestock shipments9-5-8 Shipments of
Dangerous Goods
I. Regulated by:
a. International Maritime Organization’s International Maritime
Dangerous Goods Code
b. By the International Air Transport Association’s Dangerous
Goods Regulations
c. By the International Civil Aviation Organization’s Technical
Instructions for the Safe Transport of Dangerous Goods by Air
d. Local shipment codes, such as the United States’ Code of
Federal Regulations, Title 49 (abbreviated 49CFR)
II. Good to use specialized shipper to handle paperwork,
packaging, and labeling of goods9-5-9 Manifest
I. Manifest is shipping document not similar to what has been
seen so far in this chapter
II. Lists exact makeup of cargo, ownership, port of origin, port
of destination, specific handling instructions, …etc.
III. Officially an internal document of the shipping company,
but is often examined by government entities

9-6 Electronic Data Interchange9-6-1 Proprietary Commercial
I. Alternative way to send documents is through Electronic Data
Interchange (EDI)
II. EDI is an electronic exchange of documents from computer
to computer
a. Sender and recipient must agree to technical parameters of
EDI
b. Sender and recipient must have legal agreement:
i. Definition of responsibilities
ii. Timing of contract information
iii. Liabilities for errors
iv. Evidentiary value of messages in court (to date courts go by
laws designed for written documents) 9-6-2 Network Electronic
Data Interchange: Swift’s Bolero System
I. Society for Worldwide Interbank Financial
Telecommunication (SWIFT) developed secure electronic
network to exchange banking documents like letters of credit
II. Bolero is similar to SWIFT but allows transmission of all
sorts of documents like invoices, bills of lading, certificates,
…etc.
a. Does not offer payment capability
b. Shared EDI network as opposed to being proprietary
c. Competes on many points with TradeCard:
i. Bankers have longtime trust of company that developed
Bolero
ii. TradeCard has advantage of having payment capabilities
III. Paper documents should disappear by 2010–2015
9-7 Document Preparation as a Marketing Tool
I. Excellent preparation of documents, both before shipment and
after shipment, is essential and can earn the thorough exporter a
competitive advantage
Key terms
ACMI lease
A type of leasing contract in which an airplane is leased, along
with a crew, maintenance services, and insurance.

air waybill
A bill of lading used in the transportation of goods by air,
domestically or internationally. An air waybill is always
straight.
bill of lading
A generic term used to describe a document issued by the
carrier to the shipper. A bill of lading is (1) a contract between
the carrier and the shipper whereby the carrier agrees to deliver
the goods for an agreed-upon price to an agreed-upon
destination; (2) a receipt for the goods, whereby the carrier
certifies that it received the goods in good condition from the
shipper; and (3) a certificate of title, whereby the party in
possession of the original bill of lading is the owner of the
goods.
carrier
The transportation company that will provide transportation
services to the shipper.
certificate of analysis
A document provided by an independent inspection company
that attests that the goods conform to the chemical description
and purity levels contained in the invoice provided by the
exporter. A Certificate of Analysis is always obtained by the
exporter in the exporting country before the international
voyage takes place.
certificate of certification
that attests that the goods conform to the manufacturing
standards of the importing country. A Certificate of
Certification is always obtained by the exporter in the exporting
country before the international voyage takes place.

certificate of conformity
Another term for a Certificate of Certification. See Certificate
of Certification.
certificate of free sale
A certificate that attests that the product that is exported
conforms to all of the regulations in place in the exporting
country and that it can be sold freely in the exporting country.
certificate of inspection
that attests that the goods conform to the description contained
in the invoice provided by the exporter. A Certificate of
Inspection can also attest that the value of the goods is reflected
accurately on the invoice. A Certificate of Inspection is always
obtained by the exporter in the exporting country, before the
international voyage takes place. Such an inspection is called a
pre-shipment inspection (PSI).
certificate of insurance
A document provided by the insurance company of the exporter
that attests that the goods are insured during their international
voyage. This certificate is obtained only at the request of the
importer, and for transactions under certain Incoterm terms of
trade, such as CIF and CIP.
certificate of manufacture
A document provided by the exporter’s chamber of commerce
that attests that the goods were manufactured in the country in
which the exporter is located.
certificate of origin
A document provided by the exporter’s chamber of commerce
that attests that the goods originated in the country in which the

exporter is located.
charter party
A type of contract of carriage between a carrier and a shipper,
in which the shipper uses all or most of the carrying capacity of
the ship to transport commodities such as oil, ore, grain, or
polymer pellets.
clean bill of lading
A bill of lading that reflects the fact that the carrier received
the goods in good condition. It is characterized by the presence
of only a signature of the carrier’s representative, and nothing
else. All letters of credit require a clean bill of lading. See
soiled bill of lading.
Commerce Control List
A list maintained by the Bureau of Industry and Security that
details which commodities and products cannot be exported
from the United States without the express authorization of the
U.S. government. Such express authorization is called an
individual validated export license.
commercial invoice
The invoice sent by the seller to the buyer, detailing the goods
purchased and the amount due. A bill. In international trade, a
commercial invoice should be quite detailed and include all of
the pertinent information.
consignee
The party named on a bill of lading as the owner of the goods,
or, at least, as the party to whom the goods should be
surrendered at their destination. The consignee will have the
original bill of lading at the point of arrival of the goods.
consular invoice
A commercial invoice that is printed on stationery provided by
the consulate of the country in which the goods will be

imported. The consulate sells that stationery. Some consular
invoices need to be visa-ed by the consulate as well.
damp lease
A damp lease is an agreement between the owner (lessor) of an
aircraft and the lessee, under which the owner provides some
services in addition to the aircraft itself. For example, a damp
lease could include the aircraft, maintenance, and insurance, but
not the crew, which would need to be hired by the lessee.
deemed export
A product sold in the United States to a non-U.S. citizen.
Destination Control Statement
A formal statement which an exporter has to print on its invoice
and on the Shipper’s Export Declaration if the goods shipped
are subject to a validated export license: “This merchandise
licensed by U.S. for ultimate destination [country]; diversion
contrary to U.S. law prohibited.”
dry lease
A dry lease is an agreement between the owner (lessor) of an
aircraft and a lessee, in which the owner provides only the
aircraft, without any other services. See wet lease and damp
lease for alternative contracts.
Electronic Data Interchange (EDI)
A method to send documents (invoice, certificates, packing
lists, and so on) from one company to another using electronic
means. EDI is different from fax transmission in that it does not
transfer a copy of a sheet of paper, but sends the information it
contains, which is then used by the recipient to create a
document.
end-use certificate
A document required by some governments in the case of

sensitive exports, such as ammunition, to ensure that the
product is used for purposes that are acceptable to the exporting
country’s government.
export license
The express authorization, granted by the exporting country's
government to the exporter, to export a particular product.
export quota
A limit, set by the exporting country’s government, on the
quantity of a specific commodity that can be exported in a given
year.
export tax
A tax collected on the value of the goods exported.
foul bill of lading
Another term for a soiled bill of lading, which is a bill of lading
reflecting the fact that the carrier received the goods in
anything other than good condition; it is characterized by the
presence of comments or notes in addition to the signature of
the carrier’s representative.
import license
The express authorization, granted by the government of the
importing country, to import a particular product in a given
quantity. An import license is granted to the importer.
Individual Validated Export License
The express authorization, granted by the government of the
exporting country, to export a particular product, or to export to
a particular country or particular individual.
intermodal bill of lading
A bill of lading used in the intermodal transportation of goods,

domestically or internationally. An intermodal bill of lading is
generally straight.
intermodal shipment
An international shipment that will use several means (modes)
of transportation (rail, road, air, ocean, barge) under a single
bill of lading. In most instances today, goods shipped on an
intermodal bill of lading are containerized.
manifest
A document, internal to the shipping company (the carrier), that
lists all cargo onboard the transportation vehicle.
negotiable bill of lading
A bill of lading on which the name of the consignee has been
left blank or where the words “to order” have been entered.
Such a bill of lading allows the owner of the goods to sell them
while in international transit. The transfer of ownership is done
with the bill of lading, since it is a certificate of title to the
goods. Whoever has the original bill of lading when the cargo
arrives in the port is the owner of the goods.
Non-Vessel-Operating Common Carrier
A shipment consolidator or freight forwarder that does not own
any means of transportation but issues its own bills of lading
and therefore acts as a carrier.
ocean bill of lading
A bill of lading used in international transportation of goods on
oceangoing vessels. An ocean bill of lading can be straight or
negotiable and can be clean or soiled.
packing list
A detailed list of what is contained in a shipment.

phyto-sanitary certificate
A document provided by an independent inspection company, or
by the agriculture department of the exporting country’s
government, that attests that the goods conform to the
agricultural standards of the importing country. A Phyto-
Sanitary Certificate is always obtained by the exporter in the
exporting country, before the international voyage takes place.
pre-shipment inspection (PSI)
An inspection conducted by an independent inspection company
before goods are shipped internationally. The inspection is
conducted at the request of the importer or of the importing
country’s government to ensure that the invoice reflects
accurately the type of goods shipped by the exporter and their
value. A pre-shipment inspection generates a Certificate of
Inspection.
pro forma invoice
A quote provided by the exporter to the importer for the purpose
of the importer obtaining a letter of credit. The pro forma
invoice should contain exactly the same information as the
future commercial invoice, for the same total cost, so as to
prevent discrepancies at the time of the letter of credit
settlement.
shipper
The party to an international transaction that is responsible for
arranging the transportation of the goods. Depending on the
Incoterm used and on the leg of the journey in consideration,
the shipper is either the exporter or the importer.
Shipper’s Export Declaration
A document collected by U.S. Customs designed to keep track
of the type of goods exported from the United States, as well as
their destination and their value.

shipper’s letter of instruction
A document in which the shipper spells out how it wants the
carrier to handle the goods while they are in transit.
soiled bill of lading
A bill of lading that reflects the fact that the carrier received
the goods in anything other than good condition; it is
characterized by the presence of comments or notes in addition
to the signature of the carrier’s representative. See clean bill of
lading.
straight bill of lading
entered. Such a bill of lading is non-negotiable, which means
that the ownership of the goods cannot change in transit.
to-order bill of lading
left blank, or where the words “to order” have been entered.
Such a bill of lading allows the owner of the goods to sell them
while in international transit. The transfer of ownership is done
with the bill of lading, because it is a certificate of title to the
goods. Whoever has the original bill of lading when the cargo
arrives in the port is the owner of the goods.
uniform bill of lading
A bill of lading used in the transportation of goods on trucks
and trains, either domestically or internationally. A uniform bill
of lading is generally straight.
visa
A process by which the consulate of the country in which the
goods will be imported reviews and approves the consular
invoice for a fee. A visa shows on the consular invoice as a
rubber stamp or a seal.

wet lease
An agreement under which the owner (lessor) of an aircraft
provides the airplane, insurance, maintenance services, and a
flight crew to the lessee, who has to cover all of the other
variable costs, such as fuel and airport fees.
PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !
· Documentation Requirements (1 slide)
· Invoices (3 slides)
· Export Documents (12 slides)
· Import Documents (13 slides)
· Transportation Documents (14 slides)
· Electronic Data Interchange (2 slides)
· Document Preparation as a Marketing Tool (2 slides)
Additional Resources
Johnson, Thomas E., Donna L. Blade, Export/Import Procedures
and Documentation, Revised and Updated Fourth Edition, 2010,
Amacom, American Management Association, 1601 Broadway
Avenue, New York, NY 10019.
A Basic Guide to Importing, U.S. Customs Service, Department
of the Treasury, Government Printing Office, Washington, DC
20402.
A Basic Guide to Exporting, U.S. Department of Commerce,
Government Printing Office, Washington, DC 20402.
The UNZ & Co. Sourcebook: A How-to Guide for Exporters and
Importers, Unz & Co., 190 Baldwin Avenue, P.O. Box 308,
Jersey City, NJ 07303.
International Maritime Dangerous Goods Code, 1994,
Consolidated Edition, International Maritime Organization, 4
Albert Embankment, London SE1 7SR, United Kingdom,
www.imo.org.

Dangerous Goods Regulations, 51st Edition, January 2010,
International Air Transport Association, 33 Route de l'Aéroport,
Case Postale 672, CH-1215 Genève 15 Aéroport, Switzerland
and 2000 Peel Street, Montréal, Québec, Canada H3A 2R4.
Code of Federal Regulations, Title 49, Government Printing
Office, Washington, DC 20402.
The discussion example and question;
What do you believe are the advantages of conducting

international trade using electronic document transmissions,
such as EDI, Bolero or Trade Card? Are there any obvious
disadvantages?
1
Chapter 8
Marketing 4220
International Sourcing, Logistics
& Transportation
Managing Transaction Risks
5/23/2015
1
Sales Contract’s Currency of Quote
The System of Currency Exchange Rates
Theories of Exchange Rate Determinations
Exchange Rate Forecasting
Managing Transaction Exposure
International Banking Institutions
Currency of Payment as a Marketing Tool
2

Sales Contract’s Currency of Quote
The System of Currency Exchange Rates
Theories of Exchange Rate Determinations
Managing Transaction Exposure
International Banking Institutions
Currency of Payment as a Marketing Tool
3
Sales Contract Elements
Terms of Trade
Incoterms® rules determine the costs the exporter should
pay, the costs the importer should pay, and the point at which
the responsibility for the cargo shifts from one to the other.
Terms of Sale
The terms of sale determine the method of payment and
the intermediaries involved in the payment and the handling of
the documents from the importer to the exporter.
Currency
The currency in which the transaction is undertaken: it can be
the exporter's country's currency, the importer's country's
currency or a third country's currency.

4
Sales Contract Currency
Two factors should be considered when choosing a currency
for the sales contract:
Risk of Currency Fluctuation
A speculative risk: the risk could result in positive or negative
outcomes, depending on which way the exchange rate
fluctuates.
Risk of Currency Convertibility
A pure risk: a payment received in a foreign currency cannot be
converted into the exporter’s currency.
5
Currency Convertibility
Hard Currency
A currency that can easily be converted to another currency
Convertible Currency

A currency that can be converted to another currency
Soft Currency
A currency that cannot be easily converted into another
currency
Inconvertible Currency
A currency that cannot be converted into another currency
Sales Currency Choices
An exporter and an importer can agree on three possible
alternatives when choosing the currency in which a
sales contract will be paid:
The exporter’s country’s currency
The importer’s country’s currency

A third country’s currency
7
Exporter’s Currency
The exporter and the importer agree that the currency of the
transaction will be the currency of the exporter's country.
The exchange rate risk is nil for the exporter; all of
the risks are borne by the importer, and it has to
determine how it will handle its transaction risks.
In addition, the possible convertibility problems of
the currency are to be resolved by the importer.
8
Importer’s Currency
The exporter and the importer agree that the currency of
the transaction will be the currency of the importer's country.

The exchange rate risk is nil for the importer;
all of the risks are borne by the exporter, and it
has to determine how it will handle its transaction risks.
In addition, the possible convertibility problems
of the currency are to be resolved by the exporter.
9
Third Country’s Currency
The exporter and the importer can agree that the currency
of the transaction will be a third country's currency.
The exporter and the importer each bear the risks
of currency fluctuation of their respective country's
currency against the currency of the transaction.
In some cases, the exporter and the importer choose
an artificial currency (a non-circulating currency)
for the transaction, the Special Drawing Rights (SDRs)
of the International Monetary Fund. International liability
conventions are expressed in SDRs.
10

Special Status of the Euro
The euro was first created as an artificial currency.
In January 2002, it became a circulating currency.
When new countries join the euro zone, their legacy
currency’s value is translated using a fixed currency
exchange rate with the euro.
The stated goal of the European Union is to eventually
transform the euro into a challenger to the U.S. dollar
as the preferred third-country currency.
Other currencies used as a third-country’s currency
are the Japanese yen, the Swiss Franc and the British pound.
11
The Euro Banknotes
Euro-Dollar Exchange Rate
2001-2013
How many dollars a euro is worth. Source: Federal Reserve
Bank..

Exchange Rate Quotations
Direct Quotation
The value of the foreign currency expressed in units
of the domestic currency.
For example, the direct quotation for the euro in U.S. dollar
terms was $1.3236/€, on August 1, 2013.
This is the preferred way of quoting the euro, the British
pound and the Australian dollar.
Indirect Quotation
The value of the domestic currency expressed in units
of foreign currency.
For example, the indirect quotation for the yen against
the U.S. dollar was ¥99.54/$ on August 1, 2013.
Most currencies are expressed as indirect quotations: the
Canadian dollar, the Swiss franc, and the Japanese yen, etc.
14
Exchange Rate Quotations
=

There is an inverse relationship between the two methods of
quoting a currency exchange rate between two currencies:
Types of Exchange Rates
The exchange rate between two currencies can be quoted in a
number of ways:
Spot Exchange Rate
Forward Exchange Rate
Currency Futures
Currency Options
16
Spot Exchange Rate
The spot exchange rate is the exchange rate for a foreign
currency for immediate delivery.
This “immediate delivery” is somewhat subject
to interpretations that vary from country to country
and, within one country, from one currency to another;
however, it is (roughly) the price of a foreign currency
to be delivered within 48 hours.
This is the most-commonly used exchange rate,
and it can be found in just about any periodical

(The Wall Street Journal, The New York Times,
Financial Times) or financial website.
17
The forward exchange rate is the exchange rate
for a foreign currency to be delivered any number
of days in the future.
The party entering into a forward currency contract
with a bank is committing to purchasing one currency
with another at a certain price on a certain date.
The published forward exchange rate quotes are for
30 days, 90 days, 180 days, or one year in the future.
Forward rates are only published in financial newspapers
such as The Wall Street Journal or Financial Times.
18

Currency Futures
Currencies are also traded as commodities, in the futures’
market.
Futures are contracts between a seller (called the “short”)
and a buyer (called the “long”).
In the U.S., currency futures are limited to fixed
quantities (100,000 Australian dollars, 62,500 British
pounds, 100,000 Canadian dollars, 125,000 euros, 5,000,000
Japanese yen, and 500,000 Mexican pesos) and to fixed
settlement dates (the third Wednesday of the months
of March, June, September, and December).
Because of the limits placed on amounts and dates,
futures are rarely used in international trade transactions.
19
Currency Options
Currency options is a method used to protect against
fluctuations in the value of a currency in the future.
A firm can purchase options to buy, or options to sell
a particular currency at a particular price on a given date.
Unlike in the futures market, options can be for any amount,
and at any date.
An option is the right to buy (or sell) a currency, at a pre-

determined price (called the strike price), but it is not the
obligation to buy or sell at that price. The owner of the option is
the one who decides whether to exercise that option.
20
Call Options
A call option is an option with which a firm agrees to
buy a particular currency at a particular price on a
given date.
Suppose a U.S. firm purchases an option to buy euros for
$1.35/€ on 01/01/201_. It pays U.S. $5,000 for that option.
Two scenarios can take place on 01/01/201_:
If the spot exchange rate is lower than $1.35/€, the firm will
purchase the euros on the spot market, and forgo the
option.
If the spot exchange rate is higher than $1.35/€, the firm
will exercise the option, and pay $1.35/€ for the euros.

21
Put Options
A put option is an option with which a firm agrees to sell
a particular currency at a particular price on a given date.
Suppose a U.S. firm purchases an option to sell British
pounds for $1.25/£ on 03/01/2017. It pays U.S. $2,000
for that option.
Two scenarios can take place on 03/01/2017:
If the spot exchange rate is higher than $1.25/£, the
firm will sell the pounds on the spot market and
forgo the option.
If the spot exchange rate is lower than $1.25/£ ,
the firm will exercise the option and obtain $1.25/£ for
its pounds.
22
Types of Currencies
(1 of 2)
Floating Currency
A currency whose value is determined by market forces. The

exchange rate of a floating currency varies frequently.
Pegged Currency
A currency whose value is determined by a fixed exchange rate
with another, stronger currency.
For example, the Lithuanian litas was pegged to the U.S. dollar
until February, 2002 and then became pegged to the
European euro.
Artificial Currency
A currency that is not in circulation. As of 2013, there is
only one artificial currency, the Special Drawing Rights of
the International Monetary Fund.
23
Types of Currencies
(2 of 2)
Currency Bloc
A group of currencies whose values fluctuate in parallel
fashion.
The currencies within the group have a fixed exchange rate,
but their exchange rates with currencies outside of the
group float.
Before the introduction of the euro, the European
currencies traded as a currency bloc. Several currencies in
Europe are pegged to the euro and act as a currency bloc.

Dollarization
A phenomenon where other countries decide to adopt the
U.S. dollar as their circulating currencies.
Panama and Ecuador utilize the dollar as their domestic
currency.
24
Exchange Rate Determination
The exchange rate between two currencies fluctuates
due to a number of different relationships:
Purchasing Power Parity
Fisher Effect
International Fisher Effect
Interest Rate Parity

25
Purchasing Power Parity is an economic theory that holds
that exchange rates should reflect the price differences
of each and every product between countries.
The idea is that exchange rates should fluctuate in such
a way as to “equalize” the price differences of similar
products between countries, so that a set amount of currency
would purchase the same goods in any country of the world.
26
Big Mac Index
Purchasing Power Parity in reality is essentially
impossible to achieve and measure given the disparity
of goods and services that are purchased worldwide.
Even for a perfectly uniform good, like a Big Mac hamburger,
there are wide discrepancies in its price from one country to
another.
A fine illustration of this inconsistency is with the Big Mac
Index, published by The Economist – Table 8.5 on page 279
of the 4th Ed. text. It observed that the price of one Big Mac

sandwich can vary from 36% (India) to 183% (Venezuela) of
the U.S. price or 5.1 times as much in Venezuela vs. India.
Practically speaking, the World Bank version of PPP uses
a basket of goods and calculates how much domestic currency
an average person would have to spend to purchase it.
27
Fisher Effect
The Fisher effect is an economic theory that holds
that the interest rates that businesses and individuals pay
to borrow money should be uniform throughout the
world.
Also, he nominal interest rates that they actually pay
in a given country are composed of this common (“real”)
interest rate and the inflation rate of that country.
Therefore, if a country has a higher inflation rate
than others, its nominal interest rates will also be higher:
Nominal interest rate = real interest rate + inflation rate

28
International Fisher Effect
The International Fisher effect is an economic theory
that holds that the spot exchange rates between two countries’
currencies should change in function of the
differences between these two countries’ nominal interest rates.
If a country has a higher nominal interest rate, it means (based
on the Fisher effect), that it has a higher inflation rate.
Therefore, if a country has a higher nominal interest rate
than other countries, the value of that country’s currency
will decrease over time.
29
Interest Rate Parity is an economic theory that holds
that the forward exchange rate between two currencies
should reflect the differences in the interest rates
in those two countries.
If a country has a higher interest rate than others,
speculators would borrow in other countries and invest
these funds in the high-interest country.
Since this would create a demand for the high-interest
country’s currency, the value of that country’s currency

would go up, quickly negating the higher interest rate.
30
Forward Exchange Rates
Forward exchange rates theory is an economic theory
that holds that forward exchange rates for currencies are
good predictors of the future spot exchange rates of
that currency.
It is self-evident that speculators forecast, from all
of the information available on interest rates, inflation
rates and other economic factors, what the future value
of a currency will be.
These forecasts are reflected in the forward exchange rates for
that currency.
In essence, the forward exchange rate of a currency
reflects the collective consensus of currency forecasters
and speculators.
31

Forecasted Difference in Inflation Rates
Change in Expected Spot Exchange Rate
Forward Exchange Rate Discount/Premium
Difference in Nominal Interest Rates
Purchasing Power
Parity
Fisher Effect
Interest Rate
Parity
Unbiased
Predictor
International
Fisher Effect
Relationships
of Rates
Technical Forecasting
A method of forecasting exchange rates based upon
time-series analysis. Future movements in the value
of a currency are “mathematically” linked to its past
movements.
Fundamental Forecasting
A mathematical model that uses the exchange rate of
a specific currency as the dependent variable and
the expected inflation rates, nominal interest rates, forward
interest rates and real interest rates as the

independent variables.
Market-based Forecasting
A method of forecasting based on the premise that “the
market knows best” and that, therefore, the forward exchange
rate of a given currency is the best unbiased predictor of the
future spot rate of a particular currency.
33
Managing Transaction
Exposure
Transaction exposure is the risk represented by the fluctuation
in exchange rates between the time at which two companies
enter in an international contract and the time at which that
contract is paid.
These risks can be retained by the firm or be “hedged.”
Hedging is a term used to represent several techniques
designed to reduce the uncertainty of exchange rate
fluctuations.
By hedging, a firm does not eliminate its transaction exposure,
it only manages it.

34
Risk Retention
Risk retention strategy is a risk management strategy in
which a company elects to retain a certain type of risk and
decides not to insure that risk.
Three types of companies typically choose this option:
Very large traders
Exporters or importers that have little exposure
Firms that do not evaluate the international currency transaction
risks clearly; they have no policy, or have a management
that is not well versed in the intricacies of international
trade.
35
Hedging Strategy
There are two possible strategies for a firm with transaction
exposures:

Determine what its decision should be on an invoice-
by-invoice basis, depending on the currency at stake,
the amount of the invoice, and its forecast of currency’s
exchange rate.
Set a policy that the firm follows for all of its foreign currency
receivables and payables.
36
Hedging Techniques
Forward-Market Hedging
A technique that utilizes the forward market for currencies
to manage a firm’s transaction exposure.
Money-Market Hedging
A technique that utilizes the banking system in the foreign
country to manage a firm’s transaction exposure.
Options-Market Hedging
A technique that utilizes the options market for currencies to
manage a firm’s transaction exposure.
37

Forward Market Hedging
for an Exporter (1 of 2)
A U.S. company is selling a product to an Italian firm
on March 1, 201_; the invoice is payable in euros on June 2,
2019_ (90-day credit). The amount that the firm would like to
collect is $200,000.
If it used the spot exchange rate on March 1, 2019 (U.S.
$1.2661/€), the firm would bill the customer € 157,965.00.
However, as of March 1, 2019, the 90-day forward exchange
rate for the euro is U.S. $1.2530/€ indicating that the market is
expecting a decrease in the value of the euro against the
U.S. dollar.
The firm therefore decides to invoice its customer for:
$200,000/1.2530 = € 159,617.00.
38
A forward market hedge, in this case, would consist
of the U.S. firm entering a forward contract with a bank,
in which it would promise to sell € 159,617.00 to the bank
on June 2, 2019, at the predetermined (forward) exchange
rate of U.S. $1.2530/€.

On that date, the U.S. company presents €159,617.00 to the
bank and collects the U.S. $200,000 it wanted to collect.
The U.S. firm is unconcerned about the spot exchange rate
of the euro on June 2, 2019.
39
for an Importer (1of 2)
A German firm is purchasing a machine from a British
firm for £250,000.00. The machine is delivered on April 4,
2019, and payment is expected (in pounds) on July 6, 2019.
On April 4, 2019, this amount was equivalent to € 272,200.00
because the spot exchange rate between the U.K. pound
and the euro was € 1.1008/£.
However, on April 4, 2019, the pound was expected to rise
in value and the 90-day forward exchange rate with the euro
was € 1.1220/£.
40
for an Importer (2 of 2)

A forward market hedge in this case would consist of the
German firm entering into a contract with a bank from which it
promises to purchase £250,000 on July 6, 2019, at a
predetermined (forward) exchange rate of € 1.1220/£.
On that date, the German firm hands € 280,500.00 to the bank
and obtains in exchange the £250,000 that it needs to pay its
British supplier.
The German firm could determine on April 4, 2019, exactly how
much it had to pay for the machine and is unconcerned about the
spot exchange rate of the British pound on July 6, 2019.
41
Money Market Hedging
A firm located in Switzerland sells a piece of machinery
to a firm located in Japan for the equivalent of SwF 150,000.00.
It bills the customer in Japanese yen.
The transaction takes place on January 16, 201x, with
a payment date of March 15, 201x. The transaction amount is
¥12,115,545.00, because the exchange rate on January 16, 201x,
is ¥80.7703/SwF.
The Swiss firm can use a money market hedge, by borrowing
from a Japanese bank the present value (as of January 16, 201x)
of ¥12,115,545.00 on March 15, 201x.

42
If the commercial lending rate in Japan is 3 percent per annum
(about 0.5 percent for two months), the amount the
Swiss firm borrows is:
¥ (1-0.005) x 12,115,545.00 = 12,054,967.28.
On March 15, 201x, the Swiss firm pays the bank back,
using the payment of ¥12,115,545.00 made by its customer.
On January 16, 201x, the Swiss firm would exchange the
proceeds from the loan (¥12,054,967.28) for SwF 149,250.00
(the exchange rate on January 16, 201x is ¥80.7703/SwF). This
amount is roughly equal to the payment of SwF 150,000.00 it
had expected, decreased by the cost of getting the money two
months earlier.
The Swiss firm is unconcerned about the spot exchange rate of
the yen on March 15, 201x.
43

On May 2, 201x, a firm located in Denmark purchases raw
materials from a firm located in Australia, which asks to be paid
in Australian dollars.
The amount of the invoice is A$20,000,000, payable on
November 1, 201x.
The Danish firm can eliminate its exposure to exchange
rate fluctuations by using a money market hedge.
It can invest a sum in an Australian bank that will mature
to A$20,000,000 on November 1, 201x.
44
Assuming an annual interest rate of 4 percent paid on deposits
in Australia (or 2 percent for six months), the Danish firm
would have to invest A$20,000,000/(1 + 0.02) = 19,607,845
krone to have enough to cover its obligation on November 1,
201x.
On May 2, 201x, the Danish firm then converts DKr
80,288,498.36 into Australian dollars (the exchange rate is
A$0.2444/DKr on May 2, 201x).
The Danish firm is unconcerned about the spot exchange rate of
the Australian dollar on November 1, 201x.
45

Options Market Hedging
A company located in the United States sells a large piece of
equipment to a firm located in the United Kingdom and agrees
to be paid in pounds.
The invoice, for £1,000,000, is issued on December 10, 201x,
but is not payable until March 10, 201x.
The exporting firm can minimize its currency fluctuation risk
by using an option hedge; on December 10, 201x, it purchases a
put option—the right to sell £1,000,000 on March 10, 201x —
at an agreed-upon exchange rate of U.S. $1.3615/£.
46
If the spot exchange rate on March 10, 201x, is lower
than U.S. $1.3615/£, then the American firm will exercise
its option and sell the currency at that price.
If the spot rate is higher than U.S. $1.3615/£, the firm
will let its option lapse and will sell the currency it received
at the spot market rate.
47

Because the exchange rate on March 10, 201x, is U.S.
$1.3842/£, the firm sells its pounds without using its option.
The firm still incurs the cost of the option, which is
approximately 1.25 percent of the contract amount or about U.S.
$17,018.75.
However, this cost is offset by the fact that it sells its British
pounds for U.S. $22,700 more than it had anticipated.
The net profits on this financial transaction are U.S. $5,681.25.
48
A company located in Spain purchases a plant located in
Canada. The contract is signed on June 28, 201x, and the firm
has agreed to make three installment payments of Can
$1,000,000 each on December 28, 201x, March 28, 201x and
June 28, 201x (6 months, 9 months, and 12 months after
purchase).
In order to minimize its currency risks, the Spanish firm
can use an option hedge by purchasing call options—the right to
buy Can $1,000,000—at exchange rates of:
Can $1.6522/ € for December 28, 201x
Can $1.7081/ € for March 28, 201x, and
Can $1.7452/ € for June 28, 201x.

49
Because the spot exchange rate for the Canadian dollar
was Can $1.7316/ € on December 28, 201x, the Spanish firm did
not exercise its option, purchased the Canadian dollars on the
spot market and sent them to the Canadian supplier.
On March 28, 201x, the spot market was Can $1.6488/ €,
and therefore the Spanish firm exercised its option
and purchased the Canadian dollars at Can $1.7081/ €
(the strike price of its option), because it was a more favorable
exchange rate than the spot market.
50
As for its future June 28, 201x payment, the firm still
has the possibility of saving money if the spot rate is more
favorable than its option rate; if not, it will exercise its option.
The cost of these successive options for the Spanish firm
was approximately 1.25 percent, 1.5 percent, and 2 percent
of the contract amounts for December, March, and June,
respectively, for a total of approximately € 29,000.00.
However, the costs were reduced by the fact that the firm saved
€ 27,753.00 in December by not having to spend as many euros
as it had anticipated.

51
International Banking
Institutions (1 of 3)
Central National Banks
Every country in the world has a Central Bank, or some
institution that acts as one.
They are responsible for the creation and control of the
monetary supply and they function as a check clearinghouse.
International Monetary Fund
The IMF was created to oversee the fixed exchange rate system
created by the Bretton-Woods Conference.
Today it helps countries manage their balance of payments and
lends them money when they experience difficulties with their
balance of payments.
52
Bank for International Settlements
The BIS was created after World War I to manage Germany's
war reparation payments.
Since then, it has evolved into a major international institution,
providing support to Central Banks and acting as a
clearinghouse between central banks.
World Bank
Created to help countries rebuild their infrastructure

after World War II, it has slowly changed to become the bank in
charge of financing large infrastructure projects.
The government borrowing the funds must be a member of the
IMF.
53
Export-Import Bank (Ex-Im Bank)
A United States federal agency whose purpose is to provide
assistance to U.S. exporters in the form of loans,
loan guarantees, and political risk insurance policies.
SWIFT
The Society for Worldwide Interbank Financial Tele-
communication is a corporation supporting an Electronic Data
Interchange network that was created by banks to obtain a
secure and reliable means of transferring financial information
internationally.
It allows the communication of Letters of Credit and
miscellaneous fund transfers.
54
Sales Contract Currency
as a Marketing Tool
There are four approaches that an exporter can pursue:
Elect to quote in the exporter’s currency.

Elect to quote in the importer’s currency
and minimize the risk of exchange rate fluctuation
with a forward market hedge.
with a money market hedge.
with an options market hedge.
55
8-16Chapter 8: Currency of Payment (Managing Transaction
Risks)
Chapter 8: Currency of Payment (Managing Transaction
Risks)8-15
Chapter 8
Currency of Payment (Managing Transaction Risks)lEARNING
oBJECTIVES
At the end of this chapter, YOU SHOULD:
Identify the risks that currency exchange rates pose for both the
importer and exporter.
Identify the system of currency exchange rates.
Identify theories of exchange rate determination.
Identify means of exchange rate forecasting.
Identify means of managing transaction exposure.
Identify international banking institutions.
Preview
This chapter looks at some of the risks exporters take in dealing

with currencies of different nations. It also discusses ways
currency fluctuations can be predicted and how participants in
international trade can protect themselves from currency
valuation swings that may be against them. Some of the more
technical aspects of the chapter can be omitted if they are too
complex for the level at which the course is offered.
Chapter Outline
Introduction
I. Previous chapters have shown that exporters and importers
must agree on:
a. Terms of trade
b. Terms of sale
II. Another issue of concern is currency for the transaction
a. Exporter country’s currency?
b. Importer country’s currency?
c. Third country’s currency?
8-1 Sales Contracts’ Currency of Quote
I. Risk of currency fluctuation
II. Convertibility of currency8-1-1 Exporter’s Currency
I. Exchange rate fluctuation risk is nil for exporter
II. Exchange rate risks borne by importer8-1-2 Importer’s
Currency
I. Exchange rate fluctuation risk is nil for importer
II. Exchange rate risks borne by exporter8-1-3 Third Country’s
Currency
I. Exporter and importer responsible for fluctuations of their
country’s currency against that of third country
II. Artificial currency such as Special Drawing Rights (SDRs)
on International Monetary Fund (IMF) can be used8-1-4 The
Special Status of the Euro
I. Originally an artificial currency
II. Began circulation in 2002
III. Truly an international currency designed to challenge
international status of U.S. dollar

8-2 The System of Currency Exchange Rates8-2-1 Types of
Exchange Rate Quotes
I. The exchange rate of two currencies is the value of one
currency expressed in units of the second
a. The first way to value a currency is the direct quote, or the
value of the foreign currency expressed in units of the domestic
currency
b. The second way to value a currency is the indirect quote, that
is the value of the domestic currency expressed in units of
foreign currency
c. Direct quote = _____1_____
Indirect quote
II. Spot exchange rate—the exchange rate for a foreign currency
for immediate delivery (at foreign exchange kiosks and banks
worldwide)
III. Forward exchange rate—the exchange rate for a foreign
currency to be delivered 30, 90, or 180 days from date of quote
a. Outright rate—the rate at which a commercial customer
would purchase the currency
b. It has to be differentiated from the swap rate, which is the
method used by banks and other financial institutions to express
a forward exchange rate and is expressed in points
IV. Currency futures
a. Currencies are traded on futures’ market as “commodities”
(Chicago Mercantile Exchange in U.S.)
b. Currency options’ market:
i. U.S.-style option gives a company the right to exercise its
option at any time until the expiration date
ii. European-style option allows exercising of option only on
that date
V. Current options
c. Two types of options:
i. Call option is a right to buy, but not an obligation to buy
ii. Put option is a right to sell, but not an obligation to sell
iii. An option is priced by the “market” between companies

wanting to purchase options and speculators and other
companies who are selling options8-2-2 Types of Currencies
I. Floating currencies—foreign currencies whose value changes
(or can change) daily against other currencies
a. Countries most involved in world trade have floating
currencies
b. Some countries attempt to control the floating ability of their
currencies
II. Pegged currencies
a. Countries with very volatile currencies may try to peg their
currency to currency that is more stable
b. Pegging currency to a stable currency will make exchange
rate predictable
c. Country may replace currency with that of another country—
Panama and Ecuador adopted U.S. dollar or were involved in
dollarization of their economies
III. Floating currency blocs—European Monetary System
a. Countries may trade so much with each other that they
develop a currency bloc
b. European Monetary System (EMS) gave rise to the euro
c. Blocs can eventually develop into a fixed exchange rate
among all the internal currencies of involved countries.
8-3 Theories of Exchange Rate Determinations8-3-1 Purchasing
Power Parity
I. Theory holds that exchange rates should reflect the price
differences of all products. Big Mac Index should illustrate this
(Table 8-5).
II. This is essentially impossible to achieve and measure, given
disparity of goods and services purchased worldwide
III. Theory holds that exchange rates should reflect differences
in inflation rates between countries
IV. Mathematical illustrations:
Spot value of Currency F at time t in Country D_(1+ inflation

rate in Country D)t
Spot value of Currency F at time 0 in Country D = (1+
inflation rate in Country F)t
or
S(et) = (1 + infD)t
S(e0) (1 + infF)t8-3-2 Fisher Effect
I. Observation that a country’s nominal interest rate comprises
inflation rate in country and real interest rate borrowers are
paying
II. Such real interest rate is expected to be “uniform”
throughout the world
III. Mathematical representations:
(1 + real interest rate) × (1 + inflation rate) = 1 + nominal
interest rate
or
(1 + rir)(1 + inf) = 1 + nir or nir = inf + rir + (inf × rir) ≈
inf + rir8-3-3 International Fisher Effect
I. Observation that exchange rates reflect the differences
between nominal interest rates in different countries
II. It posits that, if nominal interest rates are higher in country
F than in country D, then country F’s currency should be
expected to decrease in value relative to country D’s currency
III. Conceptually, the expected spot rate reflects the fact that an
investor would get the same yield on an investment, whether it
is made in country D or country F
IV. Mathematical representations:
Spot value of Currency F at time (t+1) in country D
Spot value of Currency F at time t in country D =
(1 + nominal interest rate in country D)

(1 + nominal interest rate in country F)
or
S(et+1) = (1 + nirD)
S(et) (1 + nirF)8-3-4 Interest Rate Parity
I. This theory links the forward exchange rate of a foreign
currency to its spot rate, using the differences in nominal
interest rates between the foreign country and the domestic
country
II. The principle is that the forward exchange rate should be
expressed as a discount if the foreign country is experiencing
higher nominal interest rates than the domestic country, and
should reflect a premium if the foreign nominal interest rates
are lower
III. In other words, at time t, the forward exchange rate F {t +
1}(et) for delivering currency F n days from t—that is, at time t
+ 1—reflects the difference between the nominal interest rate in
Country D and the nominal interest rate in Country F, adjusted
for the length of n days
IV. Mathematical representations:
Fn(et) – S(et) × 360 = nirD – nirF
S(et)n8-3-5 Forward Rate as Unbiased Predictor of Spot Rate
I. This theory holds that forward exchange rates for
currencies are good predictors of the future spot exchange rates
of that currency
II. In other words, if the forward rate for a currency shows a
discount of 2 percent for a maturity date of n days, then the spot
rate in n days should be 2 percent lower than it is today
III. Conceptually, the relationship is that the forward exchange
rate of currency F at time t in Country D for delivery at time t +
1 is the expected (average) spot value of currency F at time t +
1 in Country D
IV. Mathematical representation:

Ft+1(et) = S(et+1) 8-3-6 Entire Predictive Model
I. The five relationships can be combined to understand how
each can be used to forecast expected spot exchange rates
II. See Figure 8-3 in text, page 282
8-4 Exchange Rate Forecasting8-4-1 Technical Forecasting
I. So-called technical forecasting methods are essentially all
based upon time-series analysis
a. Simple moving averages
b. Sophisticated ARIMA (auto-regressive integrated moving
average; also called Box-Jenkins) methods
c. Neural-network models which require dedicated software
packages and pretty powerful computers
d. Several possible sources on technical forecasting are listed in
this chapter’s bibliography
II. Technical forecasting is based on the premise that future
movements in the value of a currency are “mathematically”
linked to its past movements
III. Patterns are then duplicated with very recent data to
forecast the future exchange rates of the currency
IV. Such technical forecasts are valuable in determining the
possible variations of a currency’s exchange rate in the short-
run
V. In the long run, they tend to accumulate errors fairly quickly,
as they ignore the economic fundamentals of exchange rate
determination8-4-2 Fundamental Forecasting
I. Development of a causal model
a. Exchange rate of a specific currency is dependent variable
b. Expected inflation rates, nominal interest rates, forward
interest rates, and real interest rates as independent variables
c. Use of large multiple linear regression and analysis of
variance (ANOVA) techniques
II. Problem with causal models is:
a. Difficulty in accounting for all possible influences on a
currency’s exchange rate

b. Limiting inevitable collinearity of independent variables8-4-3
Market-Based Forecasting
I. Based on premise that “market knows best”
II. Market’s “wisdom” may be skewed by objectives of
speculators
III. Does not account for government interventions
8-5 Managing Transaction Exposure
I. Exposure to risk of using foreign country’s currency is called
transaction exposure
II. Transaction exposure can be retained by the firm or hedged
III. Transaction exposure strategy is dependent on:
a. Company’s forecast of exchange rate
b. Size of firm
c. Ability of firm to weather risk
d. Size of invoice
e. Company’s sophistication in international finance
IV. Usually better to hedge foreign exchange risk8-5-1 Risk
Retention
I. Large traders tend to retain their risks
II. Exporters/exporters with little exposure tend to retain their
risks
III. Some firms do not evaluate risks, so, rightly or wrongly,
they retain their risks8-5-2 Forward Market Hedges
I. Company sells forward a future receivable in a foreign
currency
II. Company purchases forward currency necessary to cover
foreign payment
III. Hedge means company knows how much it would collect or
pay8-5-3 Money Market Hedges
I. Use of banking system of the country of the currency in
which the receivable or the payable is going to be paid
II. Is effective since it allows the firm to use the exchange rate
as of the date of the transaction rather than speculate on the
value of the exchange rate at the date of payment

III. Minimizes the risks of currency fluctuations8-5-4 Options
Market Hedges
I. It is also possible to hedge a foreign currency fluctuation
risk with options. This is a yet more sophisticated alternative,
which is essentially equivalent to remaining unhedged
(retaining the risk), and to purchasing an insurance policy to
protect against unfavorable exchange rate fluctuations. If the
exchange rate turns unfavorably, the firm can exercise its
option—its insurance policy—and is covered. If the exchange
rate turns favorably, the firm can still benefit from this situation
by not exercising its option, albeit while losing the cost of the
option
II. This strategy involves purchasing put or call options, or
the option to sell or purchase certain currencies at a certain
exchange rate on (European-style options) or before (U.S.-style
options) a certain date. This agreed upon exchange rate is called
the strike price
III. Options are very expensive
IV. Options are only commonly traded for a limited number of
currencies
V. Amounts are not as flexible as in forward markets
VI. Some banks will write options that are tailored to their
customers’ needs
VII. For firms sophisticated in international trade, this strategy
has great potential
8-6 International Banking Institutions8-6-1 Central National
Banks
I. Central banks create and control monetary supply:
a. Through market operations
b. Through control of currency
II. Function as a check clearinghouse
III. In some countries, they also try to “manage” exchange rate
of the national currency and the national foreign exchange
reserves8-6-2 International Monetary Fund

I. Created in 1944 at the Bretton Woods Conference
II. Designed to oversee the fixed exchange rate system that
conference had started
III. With end of gold standard in 1971, IMF changed its focus to
helping countries manage balance of payments
IV. IMF lends money to countries that experience difficulties
with their balance of payments—loans usually accompanied by
conditions to which the country has to agree: inflation control
and money supply growth are often on the list
V. IMF is also curator of artificial currency called a “Special
Drawing Rights” (SDRs)
a. Designed to supplement the U.S. dollar in its role as the
international currency
b. SDR’s value is determined by a basket of four currencies
(U.S. dollar, European euro, British pound, and Japanese yen)
c. SDR not often used by businesses
d. Often used by governments to settle their debts with each
other
e. Also used in the settlement of disputes under the liability
conventions of ocean cargo shipping8-6-3 Bank for
International Settlements
I. Initially designed to handle Germany’s World War I
reparation payments
II. Evolved into major supporter of central banks (which make
up its membership)8-6-4 International Bank for Reconstruction
and Development—World Bank
I. Created in 1945 after Bretton Woods Conference
II. Designed to help countries rebuild their infrastructure after
World War II
III. Now finances large infrastructure projects8-6-5 Export-
Import Bank
I. Export-Import (Ex-Im) Bank is U.S. government agency
II. Makes loans to large exporters
III. Makes loan guarantees to banks financing exporters
IV. Makes political risk insurance policies available through
Foreign Credit Insurance Associations (FCIA)8-6-6 Society for

Worldwide Interbank Financial Telecommunication
I. SWIFT is bank-created agency to support Electronic Data
Interchange (EDI) network
II. Allows communication of letters of credit and miscellaneous
fund transfers
III. High security gives it same value as original paper
documents
8-7 Currency of Payment as a Marketing Tool
I. Flexibility is primarily important
II. Importer’s currency is generally preferred by importers,
and currency exchange risk can be hedged
Key terms
artificial currency
A currency that is not in circulation. After the euro was changed
into a circulating currency on January 1, 2002, the only
artificial currency left was the Special Drawing Rights of the
International Monetary Fund. Its value is determined by the
value of a basket of four currencies: the euro (approximately 34
percent of the SDRs value), the Japanese yen (approximately 11
percent), the U.S. dollar (approximately 44 percent), and the
British pound (approximately 11 percent).
Bank for International Settlements
The bank that advises central banks and provides a
clearinghouse for exchanges between central banks.
call options
A method used to speculate on the value of a currency in the
future. A firm can purchase options to buy (called call options)
or options to sell (called put options) a particular currency at a
particular price, called the strike price, on a given date. Since
the complexity of the options market is substantial, the reader is
advised to learn a lot more about this alternative before
venturing into the options market.

central bank
The entity that controls the money supply of a nation and
functions as a clearinghouse for inter-bank exchanges.
convertible currency
A currency that can be converted into another currency. A
convertible currency can be a hard currency (easy to convert) or
a soft currency (not so easy to convert), but it can be converted.
currency
The monetary unit used in a particular country for economic
transactions (e.g., the dollar in the United States, the British
pound in the United Kingdom, the euro in Europe, and the yen
in Japan).
currency bloc
A group of currencies whose values fluctuate in parallel
fashion. The currencies within the group have a fixed exchange
rate, but their exchange rates with currencies outside of the
group float.
currency futures
A method used to trade currencies; the value of a fixed quantity
of foreign currency for delivery at a fixed point in the future is
determined by market forces. These currencies are traded as are
other commodities’ futures. In the United States, they are traded
on the Chicago Mercantile Exchange.
currency options

direct quote
The value of a foreign currency expressed in units of the
domestic currency; for example, the euro was worth $1.4011 as
of May 25, 2009. Some currencies are traditionally expressed as
direct quotes.
dollarization
A phenomenon whereby other countries decide to adopt the U.S.
dollar as their circulating currency. Panama and Ecuador have
gone through a “dollarization” of their respective economies.
euro
As of July 2013, the common currency of seventeen of the 27
countries of the European Union, developed in the early 1990s
and placed in circulation on January 1, 2002. In July 2013,
Croatia was added to the European Union, for a total of 28
countries, and Latvia adopted the euro for a total of eighteen
countries using the euro.
Eurozone
The seventeen countries of Europe in which the euro is the
currency. Eighteen as of January 1, 2014.
Ex-Im Bank
An agency of the U.S. federal government that provides
financial assistance to U.S. exporters.
exchange rate risk
The risk represented by the fluctuation in exchange rates
between the time at which two companies entered into an
international contract and the time at which that contract is
paid.

Fisher effect
An economic theory that holds that the interest rates that
businesses and individuals pay to borrow money should be
uniform throughout the world and that the nominal interest rates
that they actually pay in a given country are composed of this
common interest rate and the inflation rate of that country.
floating currency
A currency whose value is determined by market forces. The
exchange rate of a floating currency varies frequently.
forward exchange rate
The exchange rate of a foreign currency for delivery in 30, 90,
or 180 days from the date of the quote.
forward market hedge
A financial technique designed to reduce exchange rate
fluctuation risks in which a business agrees to purchase (or sell)
a particular currency at a predetermined exchange rate at some
future time (generally 30, 60, 90, 180, or 360 days later).
hard currency
A currency that can easily be converted into another currency.
inconvertible currency
A currency that cannot be converted into another currency.
indirect quote
The value of a domestic currency expressed in units of a foreign
currency; for example, the dollar was worth 94.82 yen as of
May 25, 2009. Some currencies are traditionally expressed as
indirect quotes.

An economic theory that holds that the forward exchange rate
between two currencies should reflect the differences in the
interest rates in those two countries.
International Fisher effect
An economic theory that holds that the spot exchange rates
between two countries’ currencies should change in function of
the differences between these two countries’ nominal interest
rates.
International Monetary Fund
The international organization created in 1945 to oversee
exchange rates and develop an international system of
payments.
money market hedge
fluctuation risks. When a business has to make a payment at a
future date and is pursuing a money market hedge, it invests the
funds in an interest-bearing account abroad. The amount
invested is the amount it owes, discounted for the interest that it
will earn: At maturity, the business will have sufficient funds to
cover its obligations. In the case of a business anticipating a
collection, the technique calls for the business to borrow from a
bank abroad and reimburse the bank with the funds provided by
its creditor.
options market hedge
fluctuation risks in which a business purchases (or sells)
options in a particular currency. See currency options.
outright rate

or 180 days from the date of the quote. The outright rate is the
rate at which a commercial customer would purchase the
currency. It has to be differentiated from the swap rate, which is
the method used by banks and other financial institutions to
express a forward exchange rate.
pegged currency
A currency whose value is determined by a fixed exchange rate
with another, more widely traded currency. As the value of the
reference currency fluctuates, so does the value of the pegged
currency, but the exchange rate between the two remains
constant.
points
In a forward exchange rate, the difference between the outright
rate and the swap rate. Points are not fixed units; their value
depends on the way a currency is expressed, but is the smallest
decimal value in which that currency is traded. For example, the
indirect quote for the Japanese yen/U.S. $ exchange rate was
94.82 yen as of May 25, 2009. A “point” for this currency rate
is therefore worth 0.01 yen. The direct quote for the European
euro/U.S. $ exchange rate was $1.4011 on the same date; a
“point” for this currency is therefore worth U.S. $0.0001.
An economic theory that holds that exchange rates should
reflect the price differences of each and every product between
countries. The idea is that a set amount of money (regardless of
the currency in which it is expressed) would purchase the same
goods in any country of the world.
put options

risk retention
A risk management strategy in which a company elects to retain
a certain type of risk and decides not to insure that risk.
soft currency
A currency that cannot be easily converted into another
currency; either it is inconvertible, it is only convertible into
other soft currencies, or it has an exchange rate that differs
substantially between sales of the currency and purchases of the
currency.
Special Drawing Right (SDR)
An artificial currency (it does not circulate, see artificial
currency) of the International Monetary Fund. Its value is
determined by the value of a basket of four currencies: the euro
(approximately 34 percent of the SDR’s value), the Japanese
yen (approximately 11 percent), the U.S. dollar (approximately
44 percent), and the British pound (approximately 11 percent).
spot exchange rate
The exchange rate of a foreign currency for immediate delivery
(within 48 hours).
strike price

swap rate
or 180 days from the date of the quote. The swap rate is the
difference between the current spot rate and the rate at which a
commercial customer would purchase the currency. It is
expressed in points that must be subtracted or added to the spot
rate. The swap rate is the method used by banks and other
financial institutions to express a forward exchange rate. The
sum of the swap rate and the spot rate yields the outright rate,
which is the rate paid by a commercial customer for the
currency.
SWIFT- Society for Worldwide Interbank Financial
Telecommunication
An interbank electronic network for the secure transfer of funds
and documents.
term of sale
An element in a contract of sale that specifies the method of
payment to which an exporter and an importer have agreed.
Specifically, the term of sale will specify cash in advance, letter
of credit, documentary collection, open account, or TradeCard
transaction.
term of trade
An element in a contract of sale that specifies the
responsibilities of the exporter and of the importer.
Specifically, the term of trade will specify which activities must
be performed by the exporter and which by the importer, which
activities are paid by the exporter and which by the importer,
and where in the international transportation process the
transfer of responsibility for the merchandise takes place.
transaction exposure
The risk represented by the financial impact of fluctuations in
exchange rates in an international transaction. A small exposure

1Chapter 9Marketing 4220 International Sourcing, Logisti.docx

1Chapter 9Marketing 4220 International Sourcing, Logisti.docx

Recommended

Recommended

More Related Content

Similar to 1Chapter 9Marketing 4220 International Sourcing, Logisti.docx

Similar to 1Chapter 9Marketing 4220 International Sourcing, Logisti.docx (20)

More from felicidaddinwoodie

More from felicidaddinwoodie (20)

Recently uploaded

Recently uploaded (20)

1Chapter 9Marketing 4220 International Sourcing, Logisti.docx