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tInternational Trade Finance
A Pragmatic Approach

Tarsem Singh Bhogal Arun Kumar Trivedi

INTERNATIONAL TRADE FINANCE

International Trade Finance
A Pragmatic Approach

TARSEM SINGH BHOGAL ARUN KUMAR TRIVEDI

© Tarsem Singh Bhogal and Arun Kumar Trivedi 2008 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted saved without written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published in 2008 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–0–230–55378–1 hardback ISBN-10: 0–230–55378–8 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 17 16 15 14 13 12 11 10 09 08 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

Contents

List of Tables List of Figures Preface About the Authors Acknowledgements Glossary 1 International Trade and Inherent Risks Background of International Trade Exporters’ Risks Importers’ Risks Services Offered by Commercial Banks Finance for Exports Methods of Trade Cash on Delivery Advance Payment Open Account Collections Letters of Credit Methods of Payment/Settlement of Account

xii xiii xv xvii xviii xix 1 1 2 2 4 6 7 7 7 8 8 8 9

2

3

v

vi

CONTENTS

4

Foreign Exchange Rates Introduction Foreign Currency Transactions Bank’s Accounting System Foreign Exchange Market Exchange Rates Quotation Spot Exchange Rates Forward Exchange Rates Fixed Forward Exchange Rates Option Forward Exchange Rates How Exchange Rates are Determined Factors Influencing Exchange Rate Forward Exchange Rates Foreign Exchange Spot Transaction – Mechanism Forward Exchange Contract How the Forward Exchange Rate is Calculated Bills of Exchange, Collections, Purchasing and Discounting Definition of a Bill of Exchange Clauses on Bills of Exchange Types of Acceptances Endorsement of Bills of Exchange Collection of Bills Mechanism – Sight Bill for Collection Mechanism – Documentary Usance Bills for Collection Bills Purchased Bills Discounted Mechanism – Bills Discounted Bills Processing Cost (Indicatives) Documentary Letters of Credit Who Does What? Advantages and Disadvantages of Letters of Credit Letter of Credit – Mechanism Letter of Credit Contracts and Regulations Sale Contract Letters of Credit – Types Clean Letter of Credit Documentary Letter of Credit Circular or Traveller Letter of Credit Revocable Letter of Credit Irrevocable Letter of Credit

11 11 11 11 12 12 13 13 13 14 14 14 15 15 17 18 20 20 24 26 27 32 34 35 37 37 38 38 40 43 45 47 48 50 52 53 53 53 53 54

5

6

7

CONTENTS

vii

Irrevocable Confirmed Letter of Credit...
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