LOGISTICS MAN2020D

REVISION AREAS FOR THE FINAL EXAMINATION

1. There are several modes of entry into an international market available to an

Exporter. Explain "Indirect Exports" and discuss the available methods of
entry under Indirect Export? Explain each different method using an
example. Critically analyze the advantages/disadvantages posed to the actual
manufacturer of the goods using each Indirect Export method.
Some firms are unwilling to directly and actively export as they would consider any foreign sale
as a difficult sale
Accordingly they would prefer to concentrate on domestic markets and ignore any market
opportunities beyond their domestic market in other countries.
Under this banner of Indirect Exporting several alternatives are possible, from the lowest level
of involvement to somewhat moderate interest.
Export Trading Company (ETC)
In the case where a company is unwilling to undertake any of the activities of marketing abroad,
the use of an export trading company is the simplest solution.
ETC is an intermediary that will purchase the goods in the exporting country domestically, and
resell them to a customer (importer) in a foreign country.
Sometimes, dominant ETCs are very large firms with local offices in numerous countries, and
accordingly ETCs take title of the goods in the exporting country, making this transaction a
domestic transaction for the exporter and transfer title to the importer in the importing
country making that transaction a domestic transaction as well.
As far as either of the parties dealing with the ETC is concerned, the product is seemingly
handled by a domestic company, its foreign origin is not a concern for the buyer, and its sale
abroad is not an issue for the seller.
Take an example & explain
Advantages / Disadvantages The use of an ETC makes great sense for the novice exporter or
the company unwilling to dabble in the complexities of an occasional international transaction.
However, should the company decide to become more involved in the long run, choosing an
ETC is a poor strategy, as the customers abroad are not the customer of the exporter but of the
ETC, and may not be known to the exporter. It is unlikely that the ETC will share the client
information if it is no longer profiting from its efforts at developing the market for the exporters
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products. It is equally unlikely that the exporter could benefit from the goodwill created by the
ETC with its foreign customers as well.

Export Management Company (EMC)

An Export Management Company (EMC) functions as an external export sales department,
which represents your product along with various other non-competitive manufacturers.
Furthermore they could be a domestic or a foreign company that works in the capacity of a sales
agent as well as a distributor for those exporters that are domestic. Specifically refers to
international business.
EMC is an independent firm, which acts as the exclusive export sales department for
noncompeting manufacturers, and is working hard to develop a successful export business to a
client. EMCs usually have a formal agreement with manufacturers to manage their exports.
EMCs can represent all of a manufacturers product line, or only some part of it. According to
clients needs, the EMC generally receives exclusive rights to sell in all foreign markets, but not
always.
Moreover, they act as a consulting company that acts as an outsourced export division for other
firms, enabling these firms to take advantage of the consulting company's specialized experience
and knowledge in the field of exports. Export management consultants typically do not hold title
to exported goods, making money instead from commissions paid on each export. Export
Management Company allows your business to achieve attractive long term sales and earnings
with far less upfront costs than you would incur going it alone. EMCs have long established sales
network abroad. And sometimes established foreign sales and warehousing subsidiaries as well.
Most commonly EMC appoint export agents, or representative, and networks of exclusive
distributors and dealers in each foreign market.
Take an example & explain
Advantages / Disadvantages The use of an EMC makes great sense for the novice exporter, by
working with an EMC and by at least partially managing its foreign client accounts, a firm gains
substantial insight, which would become quite valuable should the company decide to become
further involved in export sales. In practice, though because the EMC is a small firm and has
valuable contacts abroad, it is often absorbed and transformed in to the export department of the
exporter. This allows the form to capitalize on the talent of the personnel of the EMC and the
goodwill it generated abroad.

Piggy-backing
Eg: A customer of a firm enters a foreign market by setting up a manufacturing facility
The customer informs its suppliers that they will need to supply parts/raw materials for the newly
formed manufacturing facility in the foreign country
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Therefore, suppliers end up selling their product abroad piggy backing refer below

2. What are Incoterms and why they are used? Identify and explain the
Incoterm which is most- importer friendly; and the incoterm which is leastimporter friendly? Justify your answer with an example. Critically analyze the
advantages and the disadvantages posed to the importer in each incoterm.
Or the question will ask to explain and define CIF, CFR (C&F) or FOB too. Be
ready!
The Incoterms rules or International Commercial Terms (Incoterms) are a series of pre-defined
commercial terms published by the International Chamber of Commerce (ICC). They are widely
used in International commercial transactions or procurement processes.
A series of three-letter trade terms related to common contractual sales practices, the Incoterms
rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the
transportation and delivery of goods. The Incoterms rules are accepted by governments, legal
authorities, and practitioners worldwide for the interpretation of most commonly used terms in
international trade.

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They are intended to reduce or remove altogether uncertainties arising from different
interpretation of the rules in different countries. As such they are regularly incorporated into
sales contracts worldwide.

What are Incoterms used for? Incoterms provide a common set of rules to clarify
responsibilities of sellers and buyers for the delivery of goods under sales contracts. They define
the transportation costs and responsibilities associated with the delivery of goods between buyers
(importers) and sellers (exporters) and reflect modern-day transportation practices. Incoterms
significantly reduce misunderstandings among traders and thereby minimize trade disputes and
litigation.
Incoterms establish the transfer of legal responsibility from the seller to the buyer at named point
in case of:
Damage or loss
Delivery period
Incoterm which is most friendly to the EXPORTER (aka Incoterm which is the least friendly to
the IMPORTER) = EXW (EX-WORKS)

Seller delivers when it places the goods at the disposal of buyer at the sellers premises or
another named place (i.e. factory, warehouse, etc.)

Seller does not need to load the goods on any collecting vehicle, nor does it need to clear
the goods for export, where such clearance is applicable

Seller has no obligation to load goods, even if better-suited to do so

If seller does load goods, it does so at buyers expense and risk

Buyer bears all risk of loss from time seller places goods at buyers disposal

This term can be used across all modes of transport.

Incoterm which is most friendly to the IMPORTRR (aka Incoterm which is the least friendly to
the EXPORTER) = DDP (Delivered Duty Paid)

The seller fulfills his obligation to deliver when the goods have been made available
at the named place in the country of importation

The seller has to bear all costs and risks involved in bringing the goods thereto
(including duties, taxes and other official charges payable upon importation) as well
as the costs and risks of carrying out customs formalities

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Whilst the EXW term represents the minimum obligation for the seller, DDP
represents the sellers maximum obligation

DDP term should not be used if the seller is unable directly or indirectly lo obtain
import licenses in the destination country

This term can be used across all modes of transport.

**Study the following incoterms as well

FREE ON BOARD (FOB)
The seller must load themselves the goods on board the vessel nominated by the buyer.
Cost and risk are divided when the goods are actually on board of the vessel (this rule is
new!). The seller must clear the goods for export.

The buyer must instruct the seller the details of the vessel and the port where the goods
are to be loaded, and there is no reference to, or provision for, the use of a carrier or
forwarder.

Seller fulfills his obligation to deliver when the goods are on-board the vessel at the
named port of loading

This means that the buyer has to bear all costs and risks of loss of or damage to the goods
from that point

The FOB term requires the seller to clear the goods for export at the origin

This term can only be used for sea or inland waterway transport

The risk is passed to the buyer (importer) as soon as the goods are on-board the vessel

The term is applicable for maritime and inland waterway transport only. Which means we
cannot use FOB for Air shipments Major mistake by traders

COST & FREIGHT (CFR) also referred to as C&F

The seller must pay the costs and freight required in bringing the goods to the named port
of destination.

The risk of loss or damage is transferred from seller to buyer when the goods pass over
the ship's rail in the port of shipment.

The seller is required to clear the goods for export. This term should only be used for sea
or inland waterway transport.

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Seller delivers the goods on board the vessel or procures the goods already so delivered

The risk of loss of or damage to the goods passes when the goods are on-board the vessel

The seller must contract for and pay the costs and freight necessary to bring the goods to
the named port of destination

PROBABLE QUESTION -- Which of the Incoterms include a requirement of

insurance by the exporter. Explain which risks are not covered and how an
importer can still protect against them. Critically discuss
COST, INSURANCE & FREIGHT (CIF)
A shorthand term for signifying that the price invoiced or quoted by a seller includes
insurance and all other charges up to the named port of destination.

The seller must pay the costs, INSURANCE and freight required in bringing the goods to
the named port of destination.

The risk of loss of or damage to the goods passes when the goods are on-board the vessel.
Delivery is done when the Seller delivers the goods on board the vessel

The seller must contract for and pay the costs and freight necessary to bring the goods to
the named port of destination

The seller is required to clear the goods for export.

While the seller is responsible for insuring the shipment, this obligation only extends to
the minimum level of insurance coverage.

If the buyer desires additional insurance, such extra coverage will have to be arranged by
the buyer.

This term should only be used for sea or inland waterway

CARRIAGE & INSURANCE PAID TO (CIP)

A commercial term indicating that the seller delivers the goods to a carrier or to another
person nominated by the seller, at a place mutually agreed upon by the buyer and seller,
and that the seller pays the freight and insurance charges to transport the goods to the
specified destination.

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Carriage and Insurance Paid to (CIP) means that although the seller pays for freight and
insurance, the risk of damage or loss to the goods being transported is transferred from
the seller to the buyer as soon as the goods have been delivered to the carrier.

While the seller is responsible for insuring the shipment, this obligation only extends to
the minimum level of insurance coverage.

If the buyer desires additional insurance, such extra coverage will have to be arranged by
the buyer.

CIP can be used across all modes of transport.

3. Incoterms (Delivery Terms) and Sales contracts

The Incoterms rules or International Commercial Terms are a series of pre-defined
commercial terms published by the International Chamber of Commerce (ICC). They are
widely used in International commercial transactions or procurement processes. A series of
three-letter trade terms related to common contractual sales practices, the Incoterms rules are
intended primarily to clearly communicate the tasks, costs, and risks associated with the
transportation and delivery of goods. The Incoterms rules are accepted by governments, legal
authorities, and practitioners worldwide for the interpretation of most commonly used terms
in international trade. They are intended to reduce or remove altogether uncertainties arising
from different interpretation of the rules in different countries. As such they are regularly
incorporated into sales contracts worldwide

Incoterms are all the rage right now because the International Chamber of Commerce issued
its latest version called Incoterms 2010. Incoterms are shorthand in international sales
contracts, namely risk of loss and responsibility for delivery. If the merchandise is lost at sea,
for example, who bears the loss? Where are you supposed to deliver the merchandise to?
Who is handling export and customs clearance, and things like that. These issues are
important, but they are seldom litigated because Incoterms do not deal with the transfer of
title of the goods. They do not deal with who owns the goods or issues like whether the
goods are conforming or whether you even get paid. These issues are dealt with by the sales
contract, which can and should include Incoterms if you have them.
Incoterms are also not law. They are not treaty. They are conventions or suggestions. You are
allowed and encouraged, when you do use them, to modify them and supplement them to suit
your particular transaction.
Lets see how Incoterms actually were litigated in a 2002 court case out of the federal district
court, Southern District of New York. The case is St. Paul Guardian Insurance Company. vs.
Neurod Medical Systems. A US company bought medical equipment from a German
manufacturer. The parties agreed on an ocean shipment, but the medical equipment was
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damaged during the ocean voyage. The insurance company paid the US purchaser $285,000
because of the damages, and as subrogee, the insurance company sued the German producer
to recover that amount. The German company said it did not owe the money because this was
a CIF shipment, which placed the risk of loss on the buyer. The insurance company argued,
incorrectly, that the German supplier had to pay because the German company still owned
the medical equipment when it was damaged. The Court warned against confusing risk of
loss with title. Incoterms only deal with risk of loss, not title. You can own a shipment and,
depending on the Incoterms you choose, the risk of loss is on the other party, as was the case
here. The court concluded that the insurance company didnt have a case and dismissed the
lawsuit.
The biggest problem with Incoterms is that people confuse them with ownership rights.
Incoterms can provide a false sense of security that all the important issues in an international
sale have been dealt with,
Often parties dont even use Incoterms as intended or even at all. Thus, we can say that when
a contract between foreign seller/ exporter and the importer of record specifies that foreign
seller/exporter pays for freight and insurance, and if those charges are set out separately in
the invoice and elsewhere to CBP's satisfaction, then the importer of record can deduct those
charges and make sure it doesnt pay duty on them regardless of what the Incoterms say.

4. Why is it more difficult and riskier to collect receivables from a foreign

purchase? Describe and illustrate the mechanism of a letter of credit
(Documentary Credit), from the exchange of the proforma invoice to the final
payment. Critically analyze the advantages and disadvantages of using a
letter of credit.
Study Characteristics of international payment issues page 136 of the core text book
Credit Information
o Much less information available on creditworthiness of a customer in a foreign
market compared to domestic market;
o Information not readily available
Lack of Personal Contact
o Mostly conducted through phone, email, skype etc.
o Can misunderstand each other
Difficult & expensive collections
o There are few firms offering international collection services
o Can be very expensive
o In some cases, foreign debt collectors will damage the image of the exporter
No easy legal recourse
o There is NO court with jurisdiction over international commercial disputes.
o ruling by a court in the exporters country cannot be easily enforced in the
importers country
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o Common misconception International Court in Hague = only arbitrates disputes

between government, not corporations
Higher litigation Costs
o Seeking a ruling against an importer in the importers country is time consuming,
& requires the hiring of foreign law specialists = EXPENSIVE
o Can take years (common in Asian countries)
Mistrust
o Perception that the importer is well aware of all above factors and knows that the
exporter is unlikely to aggressively pursue an uncollected foreign receivable
o This creates a distrust on the exporter

Risks in international trade study page 139 of the core text book
Country Risk
o The probability of not getting paid by a certain buyer as the buyers country does
not have funds to pay the debt (insufficient FOREX reserves) or because the
buyer is not legally allowed to pay the debt (political embargo)
o Some political, some strictly economic
o Political unrest / Strikes
o Volatility in policy changes, tariff changes where the importer will refuse
delivery
o In a country with a perceived high country risk, the exporter will prefer a term of
payment that is more secure. i.e. Cash in Advance
Commercial Risk
o The probability of not getting paid by a certain buyer as this buyer does not have
the sufficient funds to pay the debt, or the buyer refuses to pay the debt
o Can be obtained through various Credit Rating agencies, Factoring firms,
accounting firms, insurance companies etc.
o These could be reliable and unbiased, though they tend to be conservative in their
evaluations.
Exposure
o The risk of non-payment is the probability of not getting paid or of getting paid
late
o For a Small Exporter USD 50,000/- could be a big hit financially
o For a Large Exporter USD 50,000/- could be a comparatively smaller financial hit

LETTER OF CREDIT (L/C)

A letter of credit is a document from a bank guaranteeing that a seller will receive payment in
full as long as certain delivery conditions have been met. In the event that the buyer is unable to
make payment on the purchase, the bank will cover the outstanding amount.
The creditworthiness of the bank is replaced for the creditworthiness of the importer
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 Documents are the critical elements to an L/C

The bank is under no obligation to pay if the documents do not conform to the L/C
requirements, even though the delivery has been made.
Similarly, the bank is obligated to pay if the documents are in order, even though the
merchandise is not fit for sale
Typically the documents requested will include a Commercial invoice + Packing list, a
transport document such as a Bill of Lading / Airway bill, Certificate of Origin, an
insurance document.

MECHANISM OF THE L/C ---Study well and draw it on your answer sheet so it
will be easier for you to explain it in your answer.

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Advantages and disadvantages of Letter of Credit?

For the Exporter/Seller:
Upon presentation of the specified documents (in strict conformance) the Buyer/Exporter
is guaranteed payment (the exception is if the Issuing Bank folds)
Eliminates risk of the buyer canceling the order and therefore reduces production risk
Makes it easier for the Buyer/Exporter to secure order/production financing-pre-export
financing
Easier to secure receivable financing (in case where the L/C is not payable At Sight)
Buyer cannot refuse payment by raising a complaint about the goods. Any complaints
must be settled between the Buyer and Seller outside of the L/C.
For The Importer/Buyer
In most cases the Importer/Buyer avoids partial pre-payments or deposits
Helps reduce the risk of non-performance of the Exporter/Seller. If the Exporter/Seller
doesn't ship the goods they don't get paid.
Certainty that payment will only be make to the Exporter/Seller upon presentation of
documents in strict compliance with the L/C evidencing the shipment of goods.
Documents are received quickly, expediting customs clearance and ultimate delivery
Makes structuring an advantageous payment schedule easy
Importer/Buyer will receive timely delivery or the goods because the L/C terms dictate
latest acceptable shipment date.
the bank is obligated to pay the seller if the documents are in order, even though the
merchandise is not fit for sale VERY IMPORTANT

Probably Ancillary question How can an importer mitigate the risk of

receiving merchandise not fit for sale?
Through Preshipment Inspection Certificates
There could be fraudulent shippers/ suppliers who could ship goods of inferior quality to the
buyers abroad. Under a Letter of Credit, if the documents are in order, the bank is obligated to
pay the seller, even though the merchandise is not fit for sale
Above explanation left importers into a serious source of fraud risk such as non-delivery, goods
received with inferior quality etc... Pre-shipment inspection, also called preshipment inspection
or PSI, is a part of supply chain management and an important and reliable quality control
method for checking goods' quality while clients buy from the suppliers. Place of inspection can
be set either in the country of origin (at the time of loading) or in the country of destination (at
the time of unloading or at the warehouses where the imported goods are received).

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Main objective of the inspection certificate is to satisfy the importer or the government body that
the goods are in conformity with the indicated specifications on the sales contract or proforma
invoice.

Inspections are important tools to reduce trade risks and avoid fraud.
Shipment of low quality goods prevented.
Non-delivery fraud with fake bill of lading or any other transport document prevented.

STUDY DOCUMENTARY COLLECTION too

A documentary collection is a process, in which the seller instructs his bank to forward
documents related to the export of goods to the buyer's bank with a request to present these
documents to the buyer for payment, indicating when and on what conditions these documents
can be released to the buyer.
Exporter asks a bank located in the Importers country to safeguard the exporters
interests.
The exporter asks the bank not to release the shipping documents (specifically the B/L or
AWB which is the title to the goods) until the importer pays at sight, or sign a financial
document promising to pay at a later date.
o Sight Draft (D/P)
o Time Draft (D/A)
This allows the exporter, should the importer decide not to take delivery of the goods, to
have them shipped back to the exporting country
If above occurs, the then Exporter lose only the costs of shipping.
The buyer may obtain possession of goods and clear them through customs, if the buyer
has the shipping documents (original bill of lading, certificate of origin, etc.)
The process starts with the Exporter sending the Shipping documents to its own bank,
which acts as a conduit for sending the documents to the importers bank
The exporters bank is an intermediary and has no responsibility in the process but the
safe transmittal of the documents.
A Draft (Bill of Exchange) is a legal document in the importing country in which the
importer officially recognizes a commercial debt towards the exporter
This makes it much easier to collect a payment if the importer decides not to honor its
commitment as it is now a domestic issue, rather than an international one
If the importer defaults its commitment, the importer can have serious consequences
Instruction letter a document sent by an exporter to a presenting bank in which the
exporter spells out its instructions regarding how it expects the presenting bank to handle
the shipping documents and how it expects the bank to handle an importer that does not
accept the draft sent.

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Sight Draft (D/P)

The exporter can request the presenting bank to release the documents only upon
payment of the invoice by the importer
Such a transaction is called Documents Against Payment (D/P) or a Sight Draft
In this case, the exporter retains the title to the goods, embodied in the B/L or AWB until
payment is made and then the B/L or AWB is given to the importer

Time Draft (D/A)

The exporter may want to grant credit terms to the importer but still want some means to
ensure it will be paid
In that case, the exporter requests the importers bank to exchange the shipping
documents against a Time Draft
Such a transaction is called Documents Against Acceptance (D/A) or a Time Draft
Importer has to sign a document (bill of exchange) assuring that it will pay within the
agreed time period (usually 30,60, or 90 days)

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5. What are the principle differences between an agent and a distributor?

(Direct Exporting Techniques)
An agent is someone who acts on your behalf. Although an agent may arrange a sale, the sale
contract will be between you and the customer. An agent may be either an employee or selfemployed
A distributor is a customer of yours. The distributor then sells the product on to the distributors
own customers.
Agents are often preferable for making high value, complex or bespoke sales. You will also need
to use an agent if you want to sell a service you must deliver. Distributors, such as wholesalers,
are often used for making lower value sales of relatively straightforward products.

The Agent
An agent does not have to buy the product or service from the supplier (or principal) and
does not have title to (or own) the goods or service.
The role of the agent is to find customers for their principal in return for a commission
payment on any sales they arrange.
Once the agent has effected an introduction, the supplier/principal will then sell the
goods/services direct to the consumer.
An Agent does not accept financial liability.

The Distributor (or The Re-Seller)

Purchases products from a UK exporter/supplier and therefore has title to the goods
purchased.
The distributor then sells the goods on to the final customers having added his profit to
the price.
The selling prices and terms of sale are determined by the distributor.*
Buys/sells on own account in defined region

Which is better an agent or a distributor?

It depends on the circumstances and what you are trying to achieve. Considerations
include:
What agents or distributors there are with access to your target customers.
What your existing operations are and how the new intermediary can fit with them. For
example, if you want to keep an existing sales operation, you will need an intermediary
who is happy to work alongside that.
What rights and responsibilities you want to be included in your agreement with the agent
or distributor.
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How closely you want to be involved in the sales process. It can be easier to have more
control over how an agent handles sales.
What type of relationship you want to have with the end user. Using a distributor may
distance you from the ultimate customer.

6. What two different types of ocean cargo services are there? Explain each
type of service in detail.

Liner
Tramp

Liner Service is a service that operates within a schedule and has a fixed port rotation with
published dates of calls at the advertised ports.. A liner service generally fulfills the schedule
unless in cases where a call at one of the ports has been unduly delayed due to natural or manmad causes..
Example : The UK/NWC continent service of MSC which has a fixed weekly schedule calling
the South African ports of Durban, Cape Town and Port Elizabeth and carrying cargo to the
UK/NWC ports of Felixstowe, Antwerp, Hamburg, Le Havre and Rotterdam..
A Tramp Service or tramper on the other hand is a ship that has no fixed routing or itinerary or
schedule and is available at short notice (or fixture) to load any cargo from any port to any port..
Example : A ship that arrives at Durban from Korea to discharge cargo might carry some other
cargo from Durban to the Oakland in the West Coast of USA which in an entirely different
direction.. From Oakland say for example it could carry some cargo and go to Bremerhaven..
One of the main differences between Liner and Tramp would be;

LINER SERVICES BILL OF LADING

TRAMP SERVICES CHARTER PARTY

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7. Currency of Payment- Managing Transaction Risks

A firm's economic exposure to the exchange rate is the impact on net cash flow effects of a
change in the exchange rate. It consists of the combination of transaction exposure and operating
exposure. Having determined whether the firm should hedge its exposure, this note will discuss
the various things that a firm can do to reduce its economic exposure.

Forward Market Hedges

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

A Company agrees to purchase (or sell) a particular currency from a bank at a

predetermined exchange rate at some future time

Generally 30, 60, 90, 180 or 360 days later

Example
A Sri Lankan firm is importing a machine from a US Firm for USD 100,000/ The machine is delivered on 1st Jan 2014, and payment is expected in USD on 31st Jan
2014 (30 days credit from the Supplier)
On 1st Jan 2014, this amount was equivalent to LKR 13,080,000/- (Spot rate on 1st Jan
2014 - USD/LKR 130.80)
On 1st Jan 2014, Sri Lankan firm (importer) wants to know how much it will spend on the
machine and can use a forward hedge by entering in to a contract with a Sri Lankan bank
from which it promises to purchase USD 100,000 on 31st Jan 2014, at a predetermined
(forward) exchange rate of USD/LKR 130.85
On 31st Jan 2014, Sri Lankan importer hands over LKR 13,085,000/ On 31st Jan 2014, Sri Lankan importer hands over LKR 13,085,000/ If the actual Spot Rate on 31st Jan 2014 is higher than the agreed forward rate back in 1st
Jan 2014 -- Actual Spot Rate on 31st Jan 2014 USD/LKR: 135.00
If the Sri Lankan importer did not hedge, they should have actually paid LKR
13,500,000/ Anticipated Loss if the importer did not hedge LKR 415,000/ If the actual Spot Rate on 31st Jan 2014 is lower than the agreed forward rate back in 1st
Jan 2014 -- Actual Spot Rate on 31st Jan 2014 USD/LKR: 128.00
If the Sri Lankan importer did not hedge, they should have actually paid LKR
12,800,000/ Anticipated Profit if the importer did not hedge LKR 285,000/-

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Money Market Hedge

A financial technique designed to reduce exchange rate fluctuation risks in which a
business invests funds in an interest-bearing account abroad or borrows funds from a
bank abroad
Example
On 1st Jan 2014, a Sri Lankan Importer purchases raw materials from an exporter located
in Australia, which asks to be paid in AUD
The amount of the invoice is AUD 1,040,000/- payable on 31st December 2014
The Sri Lankan importer can eliminate its exposure to exchange rate fluctuations by
using a money market hedge.
Sri Lankan Importer can invest a sum in an Australian Bank that will mature to AUD
1,040,000/- on 31st Dec 2014
Assuming an annual interest rate of 4% in Australia, the Sri Lankan Importer would have
to invest AUD 1,000,000/- to cover its obligation on 31st Dec 2014
On 1st Jan 2014, the Sri Lankan importer converts LKR 121,866,020.77 (AUD/LKR
121.87) in to AUD 1,000,000/ The Sri Lankan importer is unconcerned about the spot exchange rate of the AUD/LKR
on 31st Dec 2014

Options Market Hedges

A financial technique designed to reduce the exchange rate fluctuation risks in which a
business purchases (or sells) options in a particular currency
Put or Call Options
If the exchange rate turns unfavorable the firm can exercise its Option its insurance
policy and will be covered against risks
If the exchange rate turns favorable, the firm can still benefit from this situation by NOT
exercising its Option, even though it will lose the cost of the option
Example
A Shipper in USA sells a large machine to a buyer in UK and agrees to be paid in GBP
The invoice for GBP 1,000,000/- is issued on 10th December 2013, but is not payable
until 10th March 2014
The US seller can minimize its currency fluctuation risk by using an option hedge on 10th
Dec 2013 by purchasing a Put Option the right to sell GBP 1,000,000/- on 10th March
2014 at an agreed-upon exchange rate of GBP/USD 1.3615
If the Spot Rate on 10th March 2014, is lower than GBP/USD 1.3615 then the US Seller
will exercise its Option and sell the currency at that price.
If the Spot Rate on 10th March 2014, is higher than GBP/USD 1.3615 then the US Seller
will cancel the Option and will sell the currency at the Spot market rate
Because the exchange rate on 10th March 2014 is GBP/USD 1.3842 the US company
sells the British Pounds (GBP) without using its option
The US company still incurs the cost of the Option which is approximately 1.25% of
the contract amount, or about USD 17,018.75

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However, the above cost is offset by the fact that it sells its British Pounds (GBP) for
USD 22,700 more than it had anticipated.
Accordingly, the net profits on this financial transaction would be USD 5,681.25

8. Pro-forma invoice & Commercial Invoice. Differences.

One of the common questions arises in a business terms is the difference between pro forma
invoice and invoice. What is pro forma invoice, What is commercial invoice and what is the
difference between commercial invoice and pro forma invoice.
Let us discuss when the pro-forma invoice is issued and when invoice is issued.
Once after agreeing the terms of contract of sale, the buyer has to issue a purchase order or Letter
of Credit. Just before this process, the seller has to send a pro-forma invoice to buyer,
mentioning complete details of agreement of sale.
Normally, purchase order or Letter of credit is opened on the basis of this pro-forma invoice sent
by the seller.
So, we can treat pro-forma invoice as a document of commitment to sell the goods to the buyer
as per the terms and conditions agreed between both in person, over telephone, by fax, email or
any other mode of communication. In other words, we can treat the pro-forma invoice as a
confirmed purchase order from the seller, although the official purchase order has to be issued
by the buyer. The pro-forma invoice is issued before sales takes place.
Once after receiving pro-forma invoice from the supplier, the buyer sends a purchase
order or opens a letter of credit to the supplier. As per agreed date of shipment, the seller
arranges to ship the goods. The seller issues commercial invoice at this point of time. Invoice is a
prime document of sale in any business. We can call as commercial invoice. Invoice and
commercial invoice is same.
Commercial invoice is used to record accounts receivable for the seller and accounts payable
for the buyer. The content of commercial invoice is almost same as pro-forma invoice. However,
the final sale price may vary with the pro-forma invoice, as pro-forma invoice is issued prior to
actual sale takes place.
In conclusion, a commercial invoice is designed to provide customs officials with enough
information to determine appropriate import duties and to determine the eligibility of the
merchandise to be shipped into the country. A commercial invoice is a true invoice. A pro forma
invoice is not a true invoice; nothing has been billed by the exporting business and the importing
business has no financial obligation. The pro forma invoice is typically only used when a
financial transaction has not yet taken place. It may include a description of merchandise and list
its value to indicate a commitment of a future transaction between the importer and the exporter.

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9. Customs Export Entry / Export Customs Declaration

A customs entry is a formal declaration of specific information on the imported merchandise
entering the country; this form is typically prepared by a customs broker (vs. the actual importer)
and submitted to customs.
Declaration of information on imported or exported goods, prepared by a customs broker on a
prescribed form called entry Form or duty entry Form, and submitted to the customs. It states the
customs classification number, country of origin, description, quantity, and CIF value of the
goods, and the estimated amount of duty to be paid. If upon examination by a customs officer the
entry is verified as a correct or 'perfect entry,' the goods in question are released (on payment of
duty and other charges, if any) to the importer, or are allowed to be exported.

10. Multimodal Transport (AKA Intermodal Transport)

Combination of two or more modes of movement of goods, such as air, road, rail, or sea. Also
called combined transport.
Multimodal transport refers to a combination of at least two means of transport. This results in an
integrated transport chain where the strength of each alternative is utilized. Main characteristics
of multimodal transportation are transshipment terminals that allow efficient cargo handling
between short-distance and long-distance traffic as well as application of standardized and
reusable loading units. However, combined freight transport can be organized in different ways.
In general, trucks cover short distances between the loading area and the transshipment point
respectively between the place of arrival and the recipient. Long-distance haulage is conducted
by other means of transport such as train, ship or even plane.

Regarding combined container transport, standardized loading units are transshipped along
different means of transport. In doing so, various combinations of land, water, and air
transportation are applied in practice.
Intermodal freight transport / Multimodal transport involves the transportation of freight in
an intermodal container or vehicle, using multiple modes of transportation (rail, ship, and truck),
without any handling of the freight itself when changing modes. The method reduces cargo
handling, and so improves security, reduces damage and loss, and allows freight to be
transported faster. Reduced costs over road trucking is the key benefit for intracontinental use.
This may be offset by reduced timings for road transport over shorter distances.
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11. Land Bridges

The term landbridge or land bridge is commonly used in the intermodal freight transport sector
in reference to a containerized oceanfreight shipment that travels across a large body of land for
a significant part of the trip, en route to its final destination; Of which the land portion of the trip
is referred to as the "landbridge" and the mode of transport used is rail transport. There are three
applications for the term.

Land bridge - An intermodal container shipped by ocean vessel from country A to country
B, land bridges across an entire body of land/country/continent, en route. For example, a
container shipment from China to Germany, is loaded onto a ship in China, unloads at a Los
Angeles (California) port and travels via rail transport to a New York/New Jersey port, and
loads on a ship for Hamburg.

Mini Land bridge - An intermodal container shipped by ocean vessel from country A to
country B, passes across a large portion of land in either country A or B. For example, a
container shipment from China to New York (New York), is loaded onto a ship in China,
unloads at a Los Angeles (California) port and travels via rail transport to New York (New
York), the final destination.

Micro Land bridge - An intermodal container shipped by ocean vessel from country A to
country B, passes across a large portion of land to reach an interior inland destination. For
example, a container shipment from China to Denver (Colorado), is loaded onto a ship in
China, unloads at a Los Angeles (California) port and travels via rail transport to Denver
(Colorado), the final destination.

The term reverse landbridge refers to a micro land bridge from an east coast port (as opposed to a
west coast port in the previous examples) to an inland destination.

12. Insurance against unforeseen risks in international logistics

Whether you are buying or selling goods from or to the international market, there is always a
risk that they may be delayed, damaged or lost in transit. Most people in the supply chain who
facilitate the movement of goods operate under conditions limiting their liability in cases of loss,

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damage or delay. Traders should therefore insure their goods against loss, damage or delay in
transit.
Ocean cargo insurance is concerned primarily with international commerce. Basically, anyone
who has an insurable interest in a cargo shipment (i.e., anyone who would suffer a loss if the
cargo were damaged or destroyed or who would benefit from the safe arrival of the cargo) has a
need for an ocean cargo policy. The cargo insurance policy indemnifies the exporter or importer
in the event of loss or damage to goods due to a peril insured against while at risk under the
policy. Historically, each voyage of an ocean-going vessel is a joint venture of the shipowner and
all the cargo owners. Centuries of tradition, trade practices, maritime and international
commercial law affect the interests of the international trader.
Cargo insurance protection is an aid to commercial negotiations. It allows traders to proceed with
confidence in the knowledge that each party to the transaction is properly protected. In most
cases the cost of marine insurance is nominal when compared with the value of the goods and the
freight cost. The marine cargo insurance policy can be designed to meet the individual needs of
the exporter or importer in an international transaction.
Institute Cargo Clause C covers loss or damage due to
Fire and Explosion, Stranding, Sinking, Capsizing, Overturning of a Lorry or train, collision,
discharge at a port of distress, total loss of vehicle, general average sacrifice and jettison.
Institute Cargo Clause B covers loss or damage as per Cargo Clause C plus
Washing Overboard, Sea, Lake, River, Water damage and Total Loss of package during
loading/unloading
Institute Cargo Clause A covers loss or damage as per Cargo Clause B plus
Rainwater damage, malicious damage, breakage, partial loss, shortage, pilerage and theft.
What is NOT covered by any of these Institute Cargo clauses isWilful misconduct of the
Assured, Ordinary leakage/loss in weight, unsuitable packing, inherent vice, delay,
insolvency/financial default, unseaworthiness/unfitness of craft, vessel or container, war capture
seizure and problems relating to strikes, riots and terrorism.

Insurance Coverage will not be granted where the loss incurred is

due to unsuitable packing of goods being shipped.

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