Chapter 13 Multimodal Transportation Multimodal Transportation Truck Transportation Rail Transportation Intermodal Transportation Freight Forwarders Project Cargo Other Means of Transportation Truck Transportation In many parts of the world, trucking is a vital way of shipping internationally. In some areas of the world, it represents 100 percent of the international traffic. In others, it is a lower percentage, but trucking is still a significant part of the international traffic volume. Importantly, though, trucking is almost always the mode of transportation for the “first mile” and the “last mile” of a shipment’s itinerary. Truck Transportation The critical issues for a shipper using truck transportation are the many different national rules and regulations that govern truck transportation. These rules influence: The weight that can be placed in the truck The hours that the truck can operate The size of the equipment that can be used The number of hours a driver may work The training that a driver must have These differences make for very different trucking practices from country to country. A European truck is limited to an overall length. The tractor is compact to allow for maximum trailer size. North American trucks are limited by the size of the trailer, with no constraints on the size of the tractor. Australian trucks have fewer limitations on the number of trailers, leading to the concept of “road-trains.” North American trailers are carried over long distances by “piggy-back” trains. In Switzerland, regulations do not allow international trucks to cross the country. They are transported by piggy-back trains from one border to the other. In India, congested roads encourage truckers to use piggy-back trains on some routes. In many developing countries, the maximum weight capacities of trucks are routinely exceeded. Rail Transportation Rail transportation is also an important mode of transportation for international shipments, although it is mostly a domestic mode for the United States. Nevertheless, a significant amount of cargo moves by rail in the U.S. In 2012, more than 40 percent of all ton-miles shipped long-distance in the U.S. was shipped by rail. Rail transport has an approximate 18 percent market share for international cargo movements in the European Union when measured in FTKs. Rail Transportation Rail transportation is dominated by three issues: The ownership of the railroad, which can be private (the United States) or public (most of the remainder of the world). The infrastructure, such as issues of gauge (width of the tracks), electrification, curves, maintenance, and so on, which dictates the types of goods shipped and the speed at which they are delivered. The relationship between passenger traffic and merchandise traffic, and which has priority over the other. In the U.S., merchandise traffic has priority, in many other countries, it’s passenger traffic that has priority. ...

1. Chapter 13
Multimodal Transportation
Multimodal Transportation
Truck Transportation
Rail Transportation
Intermodal Transportation
Freight Forwarders
Project Cargo
Other Means of Transportation
Truck Transportation
In many parts of the world, trucking is a vital way of shipping
internationally.
In some areas of the world, it represents 100 percent of the
international traffic.
In others, it is a lower percentage, but trucking is still a
significant part of the international traffic volume.
Importantly, though, trucking is almost always the mode of
transportation for the “first mile” and the “last mile” of a
shipment’s itinerary.
Truck Transportation
The critical issues for a shipper using truck transportation are
the many different national rules and regulations that govern
truck transportation. These rules influence:
The weight that can be placed in the truck
The hours that the truck can operate

2. The size of the equipment that can be used
The number of hours a driver may work
The training that a driver must have
These differences make for very different trucking practices
from country to country.
A European truck is limited to an overall length. The tractor is
compact to allow for maximum trailer size.
North American trucks are limited by the size of the trailer,
with no constraints on the size of the tractor.
Australian trucks have fewer limitations on the number of
trailers, leading to the concept of “road-trains.”
North American trailers are carried over long distances by
“piggy-back” trains.
In Switzerland, regulations do not allow international trucks to
cross the country. They are transported by piggy-back trains
from one border to the other.
In India, congested roads encourage truckers to use piggy-back

3. trains on some routes.
In many developing countries, the maximum weight capacities
of trucks are routinely exceeded.
Rail Transportation
Rail transportation is also an important mode of transportation
for international shipments, although it is mostly a domestic
mode for the United States.
Nevertheless, a significant amount of cargo moves by rail in the
U.S. In 2012, more than 40 percent of all ton-miles shipped
long-distance in the U.S. was shipped by rail.
Rail transport has an approximate 18 percent market share for
international cargo movements in the European Union when
measured in FTKs.
Rail Transportation
Rail transportation is dominated by three issues:
The ownership of the railroad, which can be private (the United
States) or public (most of the remainder of the world).
The infrastructure, such as issues of gauge (width of the tracks),
electrification, curves, maintenance, and so on, which dictates
the types of goods shipped and the speed at which they are
delivered.
The relationship between passenger traffic and merchandise
traffic, and which has priority over the other. In the U.S.,
merchandise traffic has priority, in many other countries, it’s
passenger traffic that has priority.

4. Traditional railcars tend to be specialized. General merchandise
is transported in boxcars.
European trains carry containers in single stack because of the
overhead electric lines.
North-American trains carry containers in double stacks.
Intermodal Transportation
A shipment that takes more than one mean of transportation
from its departure to its point of destination, using only one bill
of lading, is said to be intermodal or multimodal.
Another term used for the same concept is co-modality.
International intermodal transportation is strongly linked to the
creation of the container, which is ideally suited to be shipped
by truck, train, or ship, and can be easily transferred from one
mode of transportation to another.
The modern container was invented by Malcom McLean.
The most common containers are the 40-foot high-cube
container, on the right, and the 20-foot container, on the left.
Oversize goods can be shipped in an extended-length container
(45-foot long in this case).

5. Goods that need a controlled-temperature environment are
shipped in refrigerated containers, or “reefers.”
Goods that cannot fit through the doors of a traditional
container are shipped in an “open-top” container, that is
eventually covered with a tarpaulin.
Containers can also hold dry bulk goods, such as plastics, grain,
or fertilizer.
Liquids travel in liquid-bulk containers.
Oversize cargo is shipped on a “flat rack” container.
Containers are held by lash bars onto the deck of a ship.
Containers are also held by twist locks onto a ship’s deck, on
top of each other, or on a truck’s chassis.
Under deck, containers are loaded into holds, and held in place
with the help of slides.

6. Air cargo containers are less standardized and are not meant to
be used in intermodal transport.
Intermodal Transport
The increased importance of containerization in intermodal
transport has created new transportation models, such as land
bridges and intermodal yards.
Land Bridge
For goods that are shipped from Asia to Europe, it is often more
economical to ship goods by ocean to the West Coast of North
American, unload the containers, transport them by rail to the
East Coast before shipping them by ocean to Europe. The more
costly alternative is to ship the goods through the Panama
Canal.
Intermodal Terminal / Dry port
A location where containerized goods change means of
transportation.
An intermodal yard transfers containers from trucks to trains, or
vice-versa. Here, a container stacker performs that task.
Liability Conventions
The liability conventions governing land transportation and
intermodal transportation are still governed by the liability
conventions that are in place for each mode of transportation,
and each country.
The Rotterdam Rules, a new liability convention (2009) that
limits carriers’ liability to SDR 875 per package or SDR 4 per
kilogram, was designed specifically for intermodal shipments:

7. It is likely to be adopted by most countries by 2020.
Freight Forwarders
Because international transportation is so complex, many
shippers rely on freight forwarders to handle their international
shipments.
Freight forwarders arrange all aspects of transportation and
paperwork for a shipper, from following the exporting country’s
requirements to clearing Customs in the importing country.
Freight forwarders are essentially travel agents for freight.
Project Cargo
Project cargo is a type of cargo that requires more advance
planning because of its size, weight, or volume.
Shippers need to take into account the cargo’s dimensions and
weight, in order to determine whether it will fit under bridges,
inside tunnels, and around curves. Many project cargo
shipments can take months to plan thoroughly, and often require
specialized knowledge.
Shippers also have to account for the special permits that the
cargo will need.
Because of their length and unusual shape, wind turbine blades
are “project cargo,” necessitating careful transportation
planning.
Project cargo can be unusually large, necessitating specialized

8. ships, called heavy-lift ships.
Other Means of Transportation
Pipelines
Pipelines can be used for the transport of liquid cargo
(petroleum oil, refined oil products, water), and gasses
(generally natural gas), as well as coal, in the form of slurry, a
mix of powdered coal and water. Pipelines are essential to the
transport of energy products.
Barges
Barges are flat-bottomed boats, are designed to carry cargo on
rivers and canals. Some are self-propelled and others are
designed to be pushed or pulled. In the United States, barges
carry mostly bulk cargo (grain, coal, minerals), but in Europe
and China, they also carry containers, automobiles, and other
general cargo.
The Russia-European Union gas pipeline.
In the United States, barges are often moved in groups, pushed
by a tugboat and carry bulk commodities.
In Europe, barges are generally self-propelled and can also
carry general cargo or containers.

9. Barges are also used for bulk cargo. Here is one in China.
Chapter 11
Ocean Transportation
Ocean Transportation
Types of Service
Size of Vessels
Types of Vessels
Flag
Liability Conventions
Non-Vessel-Operating Common Carriers
Security
Types of Service
Ocean cargo moves under one of two types of services:
Liner Service
A service provided by a ship that operates on a regular
schedule, traveling from a group of ports to another group of
ports.
Tramp Service
A service provided by a ship that does not operate on a regular
schedule and is available to be chartered for any voyage, from
any port to any port.
Vessel Measurements (Weight)
Deadweight Tonnage

10. The total carrying capacity of ship, measured in long tons or
metric tonnes, and is determined as the difference in water
displacement when the ship is empty and when it is fully
loaded.
Cargo Deadweight Tonnage
Obtained by subtracting the weight of the bunker, crew-related
items and stores for a specific voyage. It is the actual cargo
capacity of a ship for a given voyage.
It is the measure of greatest interest to shippers, as it is the
theoretical carrying capacity of a ship.
Vessel Measurements (Volume)
Gross Tonnage
The total volume of a ship’s carrying capacity, measured as the
space available below deck, and expressed in tons, which are in
this case hundreds of cubic feet.
Gross Registered Tonnage (GRT)
Gross Tonnage calculated a specific way, generally for the
purpose of determining the fee that a ship will pay to use a
canal (Panama GRT, or Suez GRT).
Net Tonnage
Obtained by subtracting the volume occupied by the engine
room and the space necessary for the operation of the ship (crew
quarters, bridge, ...etc.) from the gross tonnage.
Plimsoll Mark & Load Lines
The Load Lines indicate how heavily a ship can be loaded.
The Plimsoll Mark shows the Classification Society of the ship.
TF: tropical fresh water — F: fresh water — T: tropical line
S: summer line —W: winter line — WNA: winter North Atlantic
line.

11. Size of Vessels
Multiple categories of vessels exist:
Panamax
A ship of the maximum size that can enter the locks of the
Panama Canal. The locks are 110 feet wide, 1000 feet long.
Post-Panamax
A ship that is too large to enter the locks of the Panama Canal.
Handy Size
A ship in the 10,000 to 50,000 dead-weight ton range.
Size of Vessels
Suez-Max
A ship roughly 150,000 dead-weight tons, the maximum size
that can fit through the Suez Canal.
Cape-Size
A large dry-bulk carriers of a capacity greater than 80,000 dead-
weight tons. The term relates to the ships that originally could
not fit through the Suez Canal and had to go around Africa by
way of the Cape of Good Hope.
Aframax
A large oil carrier of a capacity between 80 and 120,000 dead-
weight tons. Named after the Average Freight Rate Assessment
system.
Size of Vessels
Very Large Crude Carrier (VLCC)
An oil tanker of up to 300,000 dead-weight tonnage.
Ultra-Large Crude Carrier (ULCC)

12. An oil tanker of more than 300,000 dead-weight tonnage.
Very Large Ore Carrier (VLOC)
A very large ore carrier, of more than 200,000 dead-weight
tonnage.
Ultra Large Ore Carrier (VLOC)
A very large ore carrier, of more than 300,000 dead-weight
tonnage.
Types of Cargo
Ocean cargo is generally divided into four categories:
Wet bulk—liquid cargo that is loaded directly into the hold of a
ship
Dry bulk—dry cargo that is loaded directly into the hold of a
ship; although dry, it takes the shape of the hold. Grain, for
example.
Breakbulk—cargo that is packaged (bales, boxes, drums, crates,
pallets) but not containerized. Vehicles are also considered
break-bulk cargo.
Containers—Cargo that is placed in containers before it is
loaded onto a ship. Cargo containers are metallic boxes that are
8.5 x 8 x 20 or 8.5 x 8 x 40 feet.
20-foot and 40-foot containers aboard a ship
Volume of Ocean Cargo, by Type
In millions of tons. Source: Review of Maritime Transport
2016.

13. Vessel Capacity, by Type
In millions of DWTs. Source: Review of Maritime Transport
2016.
Volume of Containerized Cargo
In millions of TEUs. Source: Review of Maritime Transport
2016.
Types of Ships
Container Ships
Roll-On/Roll-Off Ships
Break-Bulk Ships
Combination Ships
Crude Carriers
Product and Chemical Carriers
Dry-Bulk Carriers
Gas Carriers
A Panamax container ship in the Miraflores Locks on the
Panama Canal
A post-Panamax container ship with 16 containers abreast.
Containers being loaded below deck, using slides.

14. Containers lashed aboard a containership.
A Roll-on/Roll-off ship.
A general cargo (breakbulk) ship.
A combination ship.
A very large crude carrier (VLCC).
A chemical or product carrier.
A dry-bulk carrier.
A liquefied natural gas carrier.
Flag
According to international convention, every ship must be
registered in a specific country and fly that country’s flag.

15. The country in which a ship is registered determines:
The laws that are applicable onboard the ship (the ship is an
extension of the country’s territory)
The taxes that the ship owners will pay
The regulations that are followed onboard the ship, and their
corresponding costs.
In most instances, ship owners have the ability to choose the
flag that their ship will fly.
Flag Choice
Ship owners tend to choose flags that have low costs and few
regulations. Such flags are called flags of convenience.
The countries that are considered to have “flags of
convenience” are:
Panama
Liberia
as well as a handful of other small countries.
Not all countries that allow ships from any nationality to fly
their flag are “flags of convenience.” Most just have either an
open registry or a secondary registry which are just convenient
to ship owners.
Fleet by Flag of RegistryCountryNumber of VesselsTotal DWT
(in 000s)Panama8,153334,368Liberia3,185206,351Marshall
Islands2,943200,069Hong
Kong2,515161,787Singapore3,607127,193Malta2,10194,992Bah
amas1,45079,541China4.05275,568Greece1,38673,568Cyprus1,
05333,313
Liability Conventions
Hague Rules

16. A 1924 convention that limits carriers’ liability to $500 per
package. This is the convention followed by the United States
and U.S. carriers.
It also allows carriers to invoke seventeen defenses to avoid
liability.
Hague-Visby Rules
A 1968 liability convention that limits carriers’ liability to
SDR 667 per package or SDR 2 per kilogram, whichever is
higher. This is the convention followed by most countries.
Liability Conventions
Hamburg Rules
A 1978 convention that limits carriers’ liability to SDR 835 per
package or SDR 2.50 per kilogram, whichever is higher. It also
eliminates most of the “defenses” a carrier could use to
discharge itself of liability. This convention has been ratified by
few countries, none of which are large trading countries.
Rotterdam Rules
A new liability convention (2009) that limits carriers’ liability
to SDR 875 per package or SDR 4 per kilogram, eliminates most
of the “defenses,” and that is likely to become the most
commonly adopted convention by 2020.
Non-Vessel-Operating Common Carriers
Non-Vessel-Operating Common Carriers (NVOCC) are shipping
companies that do not own or operate their own ships.
They operate by purchasing space on a ship on a given voyage
and then selling this space to companies that need to ship cargo.
Sometimes, the NVOCC has only one container onboard a ship
and consolidates multiple shippers’ cargo in that container.

17. Security
Security concerns in ocean cargo shipments are dominated by
two types of requirements. In the United States, those
requirements are implemented by Customs and Border
Protection (CBP).
Pre-shipment notifications
In the U.S., it is called the Importer Security Filing
(10+2 rule). All cargo manifests must be sent to
CBP at least 24 hours before the cargo is to arrive
in the U.S.
Pre-shipment inspections
In the U.S., it is called the Container Security
Initiative (CSI). CBP inspectors, located in foreign
ports, inspect cargo before it is loaded on ships
bound for the U.S.
Some Freight Charges
ARB
Arbitrary Charge (Cleaning Fee)
BAF or FAF
Bunker adjustment factor, or Fuel Adjustment Factor
(Surcharge)
CAF

18. Currency Adjustment Factor
CY/CY
Container Yard to Container Yard
CFS/CY
Container Freight Stations to Container Yard movement of
Cargo
Chassis Charge
Charge for a truck chassis in the port of departure or destination
THC
Terminal Handling charge, or Container Yard Charge

19. Chapter 9
International Documents
International Documents
Documentation Requirements
Invoices
Export Documents
Import Documents
Transportation Documents
Documents as a Marketing Tool
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.

20. 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 Incoterm s® rule of the transaction
Details on the costs of domestic transportation, loading,
insurance, etc., so as 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
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

21. forms.
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
An Export License from the Timber Board in 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

22. It is the always the responsibility of the exporter to insure that
the goods can be legally exported from the United States.
U.S. Export Controls—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 agency 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.
U.S. Export Controls—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.
U.S. Export Controls—Country
The U.S. government considers some countries “friendly” and
others “unfriendly.”

23. 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.
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.”
Export Electronic Information
The Export Electronic Information (EEI) declaration to the U.S.
Customs and Border Protection is a data-collection process used
to tabulate what products are exported from the United States,
and to which countries they are exported. It is required for all
shipments worth $2,500 or more per item.
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 EEI
declaration for shipments to Canada but it is required for
shipments to the U.S. Virgin Islands, Puerto Rico, and Guam.

24. 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.
Export Taxes and 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.
Import Documents
Importing Country’s
Regulations
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

25. Certificate of Analysis
Certificate of Certification
Other Certificates
Origin of the Goods
Certificate of Origin
A Certificate of Origin is a document provided by the exporter’s
chamber of commerce that attests that 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.
A Certificate of
Origin from
Ghana
China Certificate of
Origin (Certificate of Manufacture) for Costa Rica-China FTA
Inspection of the Goods
Certificate of Inspection
A Certificate of Inspection is a document provided by an
independent inspection company that attests that the goods
conform to the description contained in the invoice provided by
the exporter.

26. 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.
A Certificate of Inspection from China
A Certificate of Analysis from
Vietnam
A Phyto-Sanitary Certificate from
Indonesia
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

27. it can be sold freely in the exporting country.
Some importers use this certificate as a guarantee of quality
if they are worried that the exporter will ship sub-standard
goods.
A Certificate of Certification from Germany
A Certificate of Free Sale from Greece
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 that it then uses as
needed.
A Certificate of
Insurance from
Taiwan
Other Import Documents
Consular Invoice

28. 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.
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.

29. 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.
Bill of Lading as a Receipt for the 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.
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:

30. 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.
Types of Bills 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 Incoterm
s® rule used.
An Ocean Bill of Lading from the United States
An Air Waybill from Malaysia
Charter Party
A charter party is a type of contract of carriage between a

31. 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.
Aircraft Leases (I)
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.
Aircraft Leases (II)
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

32. because it does not cover fuel.
Packing List and 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.
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.
Dangerous Goods
Shipments of dangerous goods are regulated by the International
Maritime Organization’s International Maritime Dangerous
Goods Code, the International Civil Aviation Transport

33. 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.
Electronic Data Interchange (EDI)
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.
Electronic Data Interchange (EDI)
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
EDIFACT 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.

34. Document Preparation as a
Marketing Tool (I)
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
of the documents are 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.
Document Preparation as a
Marketing Tool (II)
.
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.
Chapter 12
International Air Transportation

35. International Air Transportation
Types of Service
Types of Aircraft
International Regulations
Freight Tariffs
Environmental Issues
Security
Types of Service
Cargo can travel by air under one of five different types of
services:
Airmail Services
The origin of air freight, air mail services still account for a
small percentage of all shipments.
Express air services
Express air services guarantee a pre-determined delivery date;
the service is called “time-definite delivery,” generally the next
day or overnight. Examples include FedEx, UPS, DHL.
Types of Service
Scheduled Airfreight Services
Air freight is transported by airlines that operate on a regular
schedule between two cities.
The airline can operate a passenger aircraft, in which case the
cargo is placed in the belly of the airplane, or a freighter, in
which case the cargo is placed on the main deck of the aircraft.
On rare occasions, the freight and the passengers share space on
the main deck, in an aircraft called a “combi,” or combination
aircraft.
Regulations restrict the type of cargo that is allowed to be
shipped on passenger aircraft.

36. Types of Service
Charter Airfreight Services
Charter services do not operate on a regular schedule and
depend on demand. they fulfill emergency shipments of large
parts, or operate on seasonal traffic, such as wine, flowers, or
fruits.
Leased Airfreight Services
Freight can also travel in leased aircraft. Leases are contracts
between the owner of the aircraft and the user, and can take
multiple forms.
Leased aircraft are used by carriers to reduce their capital costs,
and to satisfy short-term demand fluctuations (end-of-year
volume increases).
Top Cargo AirlinesTop Ten Cargo Airlines (2015) in millions of
FTKs1FedEx 15,7992Emirates12,1573UPS
Airlines10,8074Cathay Pacific Airways9,9355Korean Air Lines
7,7616Qatar
Airways7,6607Lufthansa6,8888Cargolux6,3099Singapore
Airlines 6,08310Air China5,718
Source: IATA World Air Transport Statistics
Top Cargo AirportsTop Fifteen Cargo Airports (2015) in ‘000s
of tonnes loaded1Hong Kong
HKG4,4222MemphisMEM4,2913ShanghaiPVG3,2744Anchorag
eANC2,6245Incheon/SeoulICN2,5966DubaiDXB2,5067Louisvil
leSDF2,3518TokyoNRT2,1229FrankfurtFRA2,07610TaipeiTPE2
,02511MiamiMIA2,00512Los AngelesLAX1,93213Beijing
PEK1,89014SingaporeSIN1,88715 ParisCDG1,861
Source: ACI World Air Traffic

37. Types of Leases
Wet Lease
A lease agreement in which the owner of the aircraft provides
the airplane, insurance, maintenance, fuel and a flight crew. The
lessee has to cover all other costs, such as airport fees.
Dry Lease
A lease agreement in which the owner of the aircraft provides
only the airplane to the lessee, who is responsible for all other
costs.
ACMI Lease
The owner of the aircraft provides the airplane, crew,
maintenance, and insurance to the lessee. The lessee has to
cover all other costs, such as fuel and airport fees.
Types of Aircrafts
Passenger Aircrafts
Freighters
Combi Aircrafts
Quick-Change Aircrafts
A passenger aircraft, such as the Airbus 380 is designed to carry
passengers on the main deck(s) of the aircraft.
A passenger aircraft carries freight in its belly, on the lower
deck (Airbus 330).
A cargo aircraft carries cargo on the main deck. Here a Boeing

38. 747F.
A cargo aircraft carries cargo on the main deck. The roller deck
of an Airbus 300F.
A cargo aircraft (Boeing 747F) can be loaded through its nose.
A passenger-to-freighter aircraft conversion (Boeing 737)
loaded through a side door.
A combi aircraft carries both cargo and passengers on the main
deck.
A combi aircraft carries both cargo and passengers on the main
deck.
A quick-change aircraft uses seat pallets on the main deck.
Types of Aircraft
Some charter aircrafts are hired to transport goods that cannot
be shipped through traditional airfreighters:
The goods do not fit into a regular freighter because there are
too heavy and/or too large.

39. Goods need to be delivered to a location not serviced by regular
routes.
Goods need to be delivered to an airport where the runway is
sub-standard, or the cargo handling facilities are poor.
Several aircraft have been designed to service these specific
needs.
The Antonov 124 Ruslan handles project cargo.
The Antonov 225 Mriya handles project cargo.
The Airbus Beluga carries aircraft cargo.
The Boeing Dreamlifter carries aircraft cargo.
International Air Regulations
International Air Transport Association
The International Air Transport Association (IATA) works with
governments and airlines to ensure that goods move around the
world as easily as if they were traveling domestically.
International Civil Aviation Organization
The International Civil Aviation Organization (ICAO), an
agency of the United Nations, designs and implements standards
for international civil aviation practices regarding safety,
security, and other operational issues.

40. International Air Regulations
International aviation operates under the principle that every
country has complete and exclusive sovereignty over its
airspace.
No scheduled international air service may operate over or into
the territory of a country without specific authorization.
Recent developments, such as open-skies agreements, have
relaxed those restrictions. Under open skies agreements, air
carriers from one country are allowed to serve any of the other
country’s airports.
Freight Tariffs
The tariff structure on international air cargo is much simpler
than that used by the ocean cargo industry. It is based on the
weight and volume of the cargo.
Airlines will calculate the freight charge two ways:
The weight of a shipment
The volume weight of the shipment, also called “dimensional
weight,” that is calculated based upon the dimensions of a
shipment.
The airline will then charge the higher of the two prices.
Environmental Issues
Because of their heavy reliance on fossil fuels, airlines and
aircraft manufacturers have been active in reducing the carbon
footprint of the industry. IATA and ICAO have been involved in
those efforts as well.
Progress on noise reduction has also been made in the last two
decades. Still, some airports close at night to reduce the impact

41. of air traffic on the populations living near airports. This affects
cargo transport substantially, since most of the airfreighter
traffic takes place at night. Some freight traffic is therefore
diverted to secondary airports.
Air Cargo Security
Security concerns in the air freight industry are dominated by
requirements similar to the ones put in place by the
Transportation Safety Administration as well as Customs and
Border Protection in the United States.
Advanced Manifest Rule: All cargo manifests must be sent to
CBP at least four hours before the cargo is to arrive in the U.S.
Certified Cargo Screening Program: All cargo shipped on
passenger aircraft must be 100-percent inspected prior to being
loaded. Inspections must be conducted by Certified Cargo
Screening Facilities.
8-14Chapter 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.

42. 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

43. 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

44. 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

45. 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:

46. 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 +

47. 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

48. 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

49. 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

50. 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

51. 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

52. 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
A method used to speculate on the value of a currency in the
future. A firm can purchase options to buy (called call options)

53. 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.
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

54. 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

55. 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.
Interest Rate Parity
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
A financial technique designed to reduce exchange rate
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
A financial technique designed to reduce exchange rate
fluctuation risks in which a business purchases (or sells)

56. options in a particular currency. See currency options.
outright rate
The exchange rate of a foreign currency for delivery in 30, 90,
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.
Purchasing Power Parity
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

57. 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.
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
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

58. 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.
swap rate
The exchange rate of a foreign currency for delivery in 30, 90,
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.

59. transaction exposure
The risk represented by the financial impact of fluctuations in
exchange rates in an international transaction. A small exposure
means that the firm is likely to be largely unaffected by a
change in exchange rates, because the amount of the transaction
is small relative to the company’s size.
World Bank
The bank that was created at Bretton-Woods in 1944 and
finances large-scale infrastructure projects in the
world.PowerPoint SLIDES – STUDY THEM – PRINT THEM
OUT !
· Definitions (1 slide)
· Currency of Quote (9 slides)
· Currency Exchange Rates (12 slides)
· Exchange Rate Determination (9 slides)
· Exchange Rate Forecasting (2 slides)
· Managing Transaction Exposure (19 slides)
· International Banking Institutions (3 slides)
· Currency of Payment as a Marketing Tool (1 slide)
Additional Resources
Baker, James C., International Finance: Management, Markets,
and Institutions, 1998, Prentice-Hall, Upper Saddle River, New
Jersey.
Eiteman, David K., Arthur I. Stonehill, and Michael H. Moffett,
Multinational Business Finance, 2006, 11th Edition, Addison-
Wesley Publishing Company, Reading, Massachusetts.
Madura, Jeff, International Financial Management, 10th Edition,
2009, South-Western, Cengage Learning, Cincinnati, Ohio.
Shapiro, Alan C., Multinational Financial Management, 2009,
Ninth Edition, Wiley, Hoboken, New Jersey.

60. Edwards, Franklin R. and Cindy W. Ma, Futures and Options,
1992, McGraw-Hill, Inc., New York, New York.
Two excellent Web resources:
Exchange rates,
http://www.bankofcanada.ca/en/rates/exchform.html.
Economic Research, Federal Reserve Bank of St. Louis,
http://research.stlouisfed.org.
Chapter 8
Managing Transaction Risks
Managing Transaction Risks
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
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

61. 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.
Sales Contract’s 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.
Currency Convertibility
Hard Currency
A currency that can easily be converted to another currency
Convertible Currency

62. 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

63. 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.
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.
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.
The Special Status of the Euro

64. 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.
The Euro Banknotes and Coins
Euro-Dollar Exchange Rate
2001-2017
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 $1.1229/€, on June 1, 2017. This is the preferred
way of quoting the euro, the British pound, and the Australian
dollar.
Indirect Quotation
The value of the domestic currency expressed in units of foreign
currency.
For example, the indirect quotation for the yen against the U.S.
dollar was ¥111.10/$ on June 1, 2017. Most currencies are
expressed as indirect quotations: the Canadian dollar, the Swiss

65. franc, and the Japanese yen, for example.
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
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.

66. Forward Exchange Rate
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 like
The Wall Street Journal or Financial Times.
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.
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.

67. 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.
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.
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 03/01/201_. It pays U.S. $2,000 for that option.
Two scenarios can take place on 03/01/201_:
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.
Types of Currencies (I)

68. 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, more widely traded currency. For example, the
value of the
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.
Types of Currencies (II)
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.
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

69. Forward Exchange Rate
Purchasing Power Parity
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.
The Big Mac IndexCountryLocal CurrencyU.S. $
EquivalentPercentage of U.S. priceUnited StatesUSD
5.06$5.06100%BrazilBRL 16.50$5.12101%BritainGBP
3.09$3.7374%Euro AreaEUR 3.88$4.0680%JapanJPY
380$3.2664%MexicoMXN 49.00$2.2344%PhilippinesPHP
133$2.6853%RussiaRUB 130$2.1543%South AfricaZAR
26.42$1.8937%SwedenSEK 48.00 $5.26104%SwitzerlandCHF
6.50 $6.35125%UkraineUAH 42.00$1.5431%
The Economist.
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 and that the
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:

70. Nominal interest rate = real interest rate + inflation rate
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.
Interest Rate Parity
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.
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.

71. 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.
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
Exchange Rate Forecasting (I)
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

72. rates, nominal interest rates, forward interest rates, and real
interest rates as the independent variables.
Exchange Rate Forecasting (II)
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.
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.
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.

73. 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.
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.
Forward Market Hedging
(for an Exporter)
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, 201_ (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, 201_ (U.S.
$1.2661/€), the firm would bill the customer for € 157,965.00.
However, as of March 1, 201_, the 90-day forward exchange

74. 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.
Forward Market Hedging
(for an Exporter)
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, 201_, 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, 201_.
Forward Market Hedging
(for an Importer)
A German firm is purchasing a machine from a British firm for
£250,000.00. The machine is delivered on April 4, 201_, and
payment is expected (in pounds) on July 6, 201_.
On April 4, 201_, 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, 201_, the pound was expected to rise in
value, and the 90-day forward exchange rate with the euro was
€ 1.1220/£.
Forward Market Hedging
(for an Importer)

75. 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, 201_, 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, 201_, 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, 201_.
Money Market Hedging
(for an Exporter)
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, 201_, with a payment
date of March 15, 201_. The transaction amount is
¥12,115,545.00, because the exchange rate on January 16, 201_,
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, 201_)
of ¥12,115,545.00 on March 15, 201_.
Money Market Hedging
(for an Exporter)
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, 201_, the Swiss firm pays the bank back, using
the payment of ¥12,115,545.00 made by its customer.

76. Money Market Hedging
(for an Exporter)
On January 16, 201_, 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, 201_ 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, 201_.
Money Market Hedging
(for an Importer)
On May 2, 201_, 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, 201_.
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, 201_.
Money Market Hedging
(for an Importer)
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,
201_.
On May 2, 201_, the Danish firm then converts DKr
80,288,498.36 into Australian dollars (the exchange rate is
A$0.2444/DKr on May 2, 201_).
The Danish firm is unconcerned about the spot exchange rate of
the Australian dollar on November 1, 201_.

77. Options Market Hedging
(for an Exporter)
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, 201_, but is not payable until March 10, 201_.
The exporting firm can minimize its currency fluctuation risk by
using an option hedge; on December 10, 201_, it purchases a
put option—the right to sell £1,000,000 on March 10, 201_—at
an agreed-upon exchange rate of U.S. $1.3615/£.
Options Market Hedging
(for an Exporter)
If the spot exchange rate on March 10, 201_, 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.
Options Market Hedging
(for an Exporter)
Because the exchange rate on March 10, 201_, 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.

78. Options Market Hedging
(for an Importer)
A company located in Spain purchases a plant located in
Canada. The contract is signed on June 28, 201_, and the firm
has agreed to make three installment payments of
Can$1,000,000 each on December 28, 201_, March 28, 201_,
and June 28, 201_ (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, 201_
Can$1.7081/ € for March 28, 201_, and
Can$1.7452/ € for June 28, 201_.
Options Market Hedging
(for an Importer)
Because the spot exchange rate for the Canadian dollar was
Can$1.7316/ € on December 28, 201_, 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, 201_, 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.
Options Market Hedging
(for an Importer)
As for its future June 28, 201_ 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

79. 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.
International Banking Institutions
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.
International Banking Institutions
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.

80. International Banking Institutions
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
Telecommunication 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.
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.
Elect to quote in the importer’s currency and minimize the risk
of exchange rate fluctuation with a money market hedge.
Elect to quote in the importer’s currency and minimize the
risk of exchange rate fluctuation with an options market
hedge.
9-14Chapter 9: International Commercial Documents
Chapter 9: International Commercial Documents9-13
Chapter 9

81. 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
international trade.
3 Identify the basic functions of import documents in
international trade.
4 Identify the basic functions of transportation documents in
international trade.
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

82. 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

83. 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