International Corporate

Finance
Anshul Jain

Which BoP account ?

a. A German-based pension fund buys U.S.
government 30-year bonds for its investment portfolio.
b. Scandinavian Airlines System (SAS) buys jet fuel at
Newark Airport for its flight to Copenhagen.
c. Hong Kong students pay tuition to the University of
California, Berkeley.
d. The U.S. Air Force buys food in South Korea to
supply is air crews.
e. A Japanese auto company pays the salaries of its
executives working for its U.S. subsidiaries.
f. A U.S. tourist pays for a restaurant meal in Bangkok.
g. A Colombian citizen smuggles cocaine into the
United States, receives cash, and smuggles the dollars
back into Colombia.
h. A U.K. corporation purchases a euro-denominated

Which BoP account ?

a. A U.S. food chain imports wine from

Chile.
b. A U.S. resident purchases a eurodenominated bond from a German
company.
c. Singaporean parents pay for their
daughter to study at a U.S. university.
d. A U.S. university gives a tuition grant to
a foreign student from Singapore.
e. A British Company imports Spanish
oranges, paying with eurodollars on
deposit in London.

Which BoP account ?

g. A London-based insurance company buys U.S.

corporate bonds for its investment portfolio.
h. An American multinational enterprise buys
insurance from a London insurance broker.
i. A London insurance firm pays for losses incurred in
the United States because of an international terrorist
attack.
j. Cathay Pacific Airlines buys jet fuel at Los Angeles
International Airport so it can fly the return segment of
a flight back to Hong Kong. Hong Kong keeps its
balance of payments separate from those of the
Peoples Republic of China.
k. A California-based mutual fund buys shares of
stock on the Tokyo and London stock exchanges.
l. The U.S. army buys food for its troops in South Asia
from vendors in Thailand

Which BoP account ?

m. A Yale graduate gets a job with the International

Committee of the Red Cross working in Bosnia and is
paid in Swiss francs.
n. The Russian government hires a Dutch salvage firm
to raise a sunken submarine.
o. A Colombian drug cartel smuggles cocaine into the
United States, receives a suitcase of cash, and flies
back to Colombia with that cash.
p. The U.S. government pays the salary of a Foreign
Service Officer working in the U.S. embassy in Beirut.
q. A Norwegian shipping firm pays U.S. dollars to the
Egyptian government for passage of a ship through
the Suez Canal.
r. A German automobile firm pays the salary of its
executive working for a subsidiary in Detroit.

Which BoP account ?

s. An American tourist pays for a hotel in Paris with
his American Express card.
t. A French tourist from the provinces pays for a hotel
in Paris with his American Express card.
u. A U.S. professor goes abroad for a year and lives
on a Fulbright grant.

International Trade
Documenting an Export of
Lumber from Portland to
Yokohama.
List the steps involved in the export
of lumber from Portland, Oregon, to
Yokohama, Japan, using a confirmed
letter of credit, payment to be made
in 120 days.

1. Yokohama importer applies for a letter of credit (L/C) from its

Japanese bank.
2. Japanese bank issues an L/C in favor of the Yokohama importer
and sends the L/C to exporters Oregon bank, asking the Oregon
back to confirm (i.e., guarantee) the letter of credit.
3. Oregon bank confirms the L/C and advises Portland exporter of
the opening of the L/C.
4. Portland exporter ships the lumber to the Yokohama importer,
shipping on an order bill of lading made deliverable to itself; i.e.,
deliverable to the exporter itself so that the exporter retains legal
title to the merchandise at this stage of the transaction.
5. The Portland exporter draws a 120-day time draft against the
Yokohama bank in accordance with the terms of the L/C and
presents the draft, along with any required documents, to its own
Oregon bank.

6. The Oregon bank endorses (i.e., applies its own guarantee) to the 120-day
draft and forwards it, accompanied by the order bill of lading and any other
required documents, to the Japanese bank.
7. The Japanese bank accepts the time draft, which at this point becomes a
bankers acceptance, and returns the accepted time draft to the exporter. The
exporter may (1) hold the acceptance to maturity or (2) discount it in the
acceptance market. At this point, the Japanese bank has legal title to the lumber.
8. The Japanese bank retains the order bill of lading and other documents for the
moment. The Japanese bank collects the funds from the Yokohama importer, and
then gives the order bill of lading to the importer so the importer may obtain
both legal title and physical possession of the shipment of lumber. Several other
possibilities exist, depending on the security arrangements between the
Japanese bank and the Yokohama importer.
9. At maturity (120 days after the Japanese bank accepted the time draft), the
holder of the acceptance presents it to the Japanese bank. The holder might be
the exporter or it might be an investor in bankers acceptances. If the acceptance
is still held by the Portland exporter, that exporter presents it to its Oregon bank,
which in turn forwards it to the Japanese bank for collection. When the Oregon
bank receives funds, it credits the account of the Portland exporter.

Assume Nikken Microsystems has sold

Internet servers to Telecom Espaa for
700,000. Payment is due in 3 months and
will be made with a trade acceptance from
Telecom Espaa Acceptance. The acceptance
fee is 1.0% per annum of the face amount of
the note. This acceptance will be sold at a
4% per annum discount. What is the
annualized percentage all-in-cost in euros of
this method of trade financing?

NakatomiToyota buys its cars from Toyota Motors-USA, and

sells them to U.S. customers. One of its customers is
EcoHire, a car rental firm which buys cars from Nakatomi
Toyota at a wholesale price. Final payment is due to
Nakatomi Toyota in 6 months. EcoHire has bought
$200,000 worth of cars from Nakatomi, with a cash down
payment of $40,000 and the balance due in 6 months
without any interest charged as a sales incentive. Nakatomi
Toyota will have the EcoHire receivable accepted by
Alliance Acceptance for a 2% fee, and then sell it at a 3%
per annum discount to Wells Fargo Bank.
What is the annualized percentage all-in-cost to Nakatomi
Toyota?
What are Nakatomis net cash proceeds, including the cash
down payment?

Sunny Coast Enterprises has sold a combination of films

and DVDs to Hong Kong Media Incorporated for
US$100,000, with payment due in 6 months. Sunny
Coast Enterprises has the following alternatives for
financing this receivable: 1) Use its bank credit line.
Interest would be at the prime rate of 5% plus 150 basis
points per annum. Sunny Coast Enterprises would need
to maintain a compensating balance of 20% of the
loans face amount. No interest will be paid on the
compensating balance by the bank; or 2) Use its bank
credit line but purchase export credit insurance for a 1%
fee. Because of the reduced risk, the bank interest rate
would be reduced to 5% per annum without any points.
What are the annualized percentage all-in-costs of each
alternative?