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Export Finance
Export finance refers to any form of financial
export transactions. To make sales to foreign
customers, traders need export financing.
Export financing generally includes loans,
loan guarantees, and export credit insurance.
Export financing provides exporters who
have orders from customers abroad with the
necessary financial banking to provide their
overseas customers with the most favorable
and competitive international trade finance
credit terms.
Methods of Export Finance
1. Pre-shipment finance
2. Post-shipment finance

Pre Shipment finance

Pre shipment finance is given for working capital for
purchase of raw material, processing, packing,
transportation, warehousing etc, of the goods meant
for export.
Importance of Pre shipment finance
1.To purchase raw material
2. To assemble the goods in case of merchant exporters.
3. To store the goods in suitable warehouse till the goods
are shipped.
4. To pay for packaging, marking and labeling of goods.
5. To pay for pre shipment charges.
6. To import or purchase from the domestic
market heavy machinery and other capital
goods to produce export goods.
7. To pay for export documentation expenses.

Methods of pre shipment finance

1. Packing credit
2. Packing credit against incentives receivables
from the government.
3. Advance payment
Packing credit
Packing credit granted by a bank to enable an
exporter to pack the goods meant for exports.
It includes loan or advance or credit granted by
a bank to an exporter for financing raw
materials, supplies, etc for processing or
manufacture of the goods as well as for the
purchase of packaging and packing materials to
pack the goods and ready for shipment to
foreign country.
Packing credit is granted on the basis of a
confirmed export order or letter of credit
opened by an importer in favor of exporter.
Packing credit against incentives
receivables from the government.
It is the advance against incentives from the
government for the post shipment stage.
Similarly when the value of the materials to be
produced for the execution of the order is more
than the FOB (Free on Board) value of the export
order then the banks may grant packing credit
against the merchant of incentives available
from the government.
These advances are granted for 90days
maximum period.
Repayment are against the export bill and the
amount of incentives received from the
Advance against cheques/drafts received as advance payment.
The banks may grant advance to the exporters at
the concessional rates of interest by the Reserve
bank against the proceeds to be realized by the
cheques or drafts received as advance payment
towards an export order.

It is a kind of accommodation granted by the bank to

the exporter for the transit period stipulated by the
foreign exchange dealers for collection of the cheque
or draft or till date of realization of the proceeds
which ever is earlier.
Post-Shipment Finance
Post shipment finance is provided for bridging the
gap between the shipment of goods realization of
export proceeds.
The process is later done by the banks by
purchasing or negotiating the export documents
or by extending advance against export bills
accepted on collection basis.
The commercial banks provides the financing
facility to the exporters for this purpose is called
Post shipment finance.
Importance of Post Shipment Finance
To pay to agents/ Distributors and others for their
To pay for advertisement.
To pay for customs and shipping agents.
To pay towards export duty.
To pay towards tax if any.
To pay for freight and other shipping expenses.
Methods of Post Shipment Finance
Negotiation of export documents drawn under
Purchase of export documents drawn under
export order.
Advance against export bills sent on collection.
Advance against goods sent on consignment
Advance against Undrawn balance
Advance against retention Money
Negotiation of export documents drawn
under L/C
The negotiation of export documents drawn
under the irrevocable letters of credit only.
Purchase of export documents drawn
under export order.
Purchase or discount facilities in respect of
export bills drawn under confirmed export order
are generally granted to the customers who
enjoys bill purchase/ discounting limits from the
Advance against export bills sent on
The export bills are sent by the bank on
collection basis as against their
Advance against goods sent on
consignment basis
when the goods are exported on consignment
basis at the risk of the exporter for sale and
eventual remittance of sale proceeds to him by
the agent bank may finance against such
transaction subject to the customer enjoying
specific limit to that effect.
Advance against Undrawn balance
Bills are not to be drawn for the full invoice value
of the goods, a small part undrawn for payment
after adjustment due to difference in rates,
weight, quality etc., to be ascertained after
approval and inspection of the goods.
Advance against retention Money
Advance against retention money is payable
with in one year from the date of shipment at a
concession rate of interest up to 90 days.
Advance against claims of duty drawback
Duty drawback is permitted against Customs
and Central excise Duty Drawback Rules 1995.
Duty draw back available for specific goods
added for manufacturing or imported materials,
Exported have to submit the shipping bill
presented by the exporter at the time of making
shipment of goods.
FOREX Foreign Exchange
The foreign exchange market provides the
physical and institutional structure through
which the money of one country is exchanged
for that of another country, the rate of exchange
between currencies is determined, and foreign
exchange transactions are physically completed.
A foreign exchange transaction is an agreement
between a buyer and a seller that a fixed
amount of one currency will be delivered for
some other currency at a specified rate, e.g.,
spot, forward, and swap transactions or other
kinds of currency derivatives
Geographical Extent of the
Foreign Exchange Market
The foreign exchange market spans the globe,
with prices moving and currencies trading
somewhere every hour of every business day.
Many large international banks operate foreign
exchange trading rooms in each major
geographic trading center in order to serve
important commercial customers on a 24-hour-
a-day basis
Banks engaged in foreign exchange trading are
connected by highly sophisticated
telecommunications system
Reuters, Telerate, and Bloomberg are the leading
suppliers of foreign exchange rate information systems
Functions of the Foreign Exchange
The foreign exchange market is the
mechanism by which participants can:
transfer purchasing power between countries
facilitate the international trade
minimize exposure to the risks of exchange rate
Market Participants
The foreign exchange market consists of two tiers:
Interbank or wholesale markets
The size for each contract is multiples of 1 million US$ or the
equivalent value in other currencies
Client or retail markets
There is a specific amount for each transaction, which is relatively
smaller than the size in the wholesale market
The number of transactions in the retail market is far larger than
that in the wholesale market
Four broad categories of participants operate within
these two tiers:
Bank and nonbank foreign exchange dealers
Individuals and firms
Speculators and arbitragers
Central banks and treasuries
Market Participants: Bank and
Nonbank Foreign Exchange Dealers
Banks and a few nonbank foreign exchange
dealers operate in both the interbank and
client markets
Their profits are from buying foreign exchange
at a bid price and reselling it at a slightly
higher ask price (or offer price)
Competition among dealers narrows the spread
between bid and offer and thus contributes to
making the foreign exchange market efficient
Dealers in the foreign exchange department of
large international banks often function as
market makers in the interbank market
Market Participants: Bank and
Nonbank Foreign Exchange Dealers
Market makers stand willing at all times to buy and
sell those currencies in which they specialize and thus
maintain an inventory position in those currencies
(therefore, they provide the liquidity for the markets
of those currencies)
Currency trading is quite profitable for commercial
and investment banks. Many of the major currency-
trading banks in the U.S. derive between 10% to 20%
on average of their annual net income from currency
Small- to medium-size banks are likely to participate
but not be market makers in the interbank market, so
they buy from and sell to larger banks to offset retail
transactions with their own customers
Market Participants: Individuals and
Individuals (such as tourists) and firms (such
as importers, exporters, and MNEs) use the
foreign exchange market to facilitate execution
of commercial or investment transactions
They do not intend to make profit in the
foreign exchange market. Their use of the
foreign exchange market is only for their
underlying commercial or investment purpose
Sometimes, individuals and firms use the
exchange market to hedge foreign exchange
risk of their investment or incomes in foreign
Transactions in the Interbank
Foreign exchange transactions in the interbank
market can be executed on a spot, forward, or
swap basis
A spot currency transaction in the interbank
market is the purchase of foreign exchange, with
delivery and payment between banks to take
place, normally, on the second following business
day, i.e., the T+2 rule
The date of settlement (for delivery and payment) is
referred to as the value date
On the other hand, however, a spot currency transaction
between a bank and it commercial customers (in the retail
market) would not necessarily involve a wait of two days
for settlement
Transactions in the Interbank
An outright forward transaction (usually
called foreign exchange forward or FX
forward) requires delivery a specified
amount of one currency for a specified
amount of another currency at a future
value date
The exchange rate is established at the
time of the agreement, i.e., today but
payment and delivery are not required until
Transactions in the Interbank
In interbank markets, forward exchange
rates are usually quoted for value dates of
1, 2, 3, 6, and 12 months
Buying FX forward and selling FX
forward describe the same transaction
(the only difference is the order in which
currencies are referenced)
A FX forward contract to deliver dollars for Euros
in six months is buying Euros forward with dollars
or selling dollars forward for Euros
Transactions in the Interbank
A foreign exchange swap transaction
(FX swap) in the interbank market is the
simultaneous purchase and sale of a given
amount of foreign exchange for two
different value dates with the same
Transactions in the Interbank
In addition to traditional spot, forward, or swap
foreign exchange transactions, there are new types
of transactions, e.g., non deliverable forwards
Non deliverable forwards (NDF)
Created in the early 1990s, NDF is now a relatively
common derivative in the interbank market
Similar to traditional FX forward contracts, except that they
are cash-settled (in domestic currency) and the foreign
currency being sold forward or bought forward is not
delivered physically on the maturity date
The profit or loss of the NDF at the time of the maturity
date is calculated by taking the difference between the
agreed forward exchange rate and the spot exchange rate
at that time point, for an agreed notional amount of funds
Foreign Exchange Rates and
A foreign exchange rate is the price of one
currency expressed in terms of another currency
1. One foreign dollar expressed in terms of domestic dollars
2. One domestic dollar expressed in terms of foreign dollars
A foreign exchange quotation (or quote) is an
announced rate of willingness to buy or sell
foreign currencies
In the retail market (including newspapers or
foreign exchange booths at airports), quotes are
often given as the domestic currency price of the
foreign currency, i.e., one foreign dollar = S
domestic dollars
Foreign Exchange Rates and
Most foreign exchange transactions involve the
US dollar
Therefore, professional dealers and brokers in the
interbank markets may state foreign exchange
quotations in one of two ways:
1. European terms: The foreign currency price of one
dollar (from the viewpoints of non-U.S. nations)
For example, the exchange rate between US dollars and the
Swiss franc is stated as SF1.6000/$
European terms is a generic name. SF1.6000/$ ( 110.00/$)
is also called Swiss terms (Japanese terms)
2. American terms: The dollar price of a unit of foreign
currency (from the viewpoint of the U.S.)
The exchange rate between US dollars and the Swiss franc
can also be stated as $0.6250/SF
Foreign Exchange Rates and
Since 1978, in order to facilitate worldwide
currency trading through telecommunications,
most foreign currencies in the world are
stated in European terms except two
important currencies
The two important exceptions are quotes for the
Euro and U.K. pound sterling, which are both
normally quoted in American terms
Although most foreign currencies are quoted in
European terms for spot transactions, American
terms are utilized in quoting rates for most
foreign currency options and futures
Foreign Exchange Rates and
Foreign exchange quotes are also described as either
direct or indirect
A direct quote is a home currency price of a unit of
foreign currency
$0.6250/SF and $0.009091/ are direct quotes for Americans
An indirect quote is a foreign currency price of a unit
of home currency
SF1.600/$ and 110.00/$ are indirect quotes for Americans
In this pair of definitions, the home or base country of
the currencies being discussed is critical
The form of the quote depends on what the speaker
regards as the home country
For example, SF1.600/$ is a direct quotation in Switzerland as
well as a indirect quotation in the U.S.
Foreign Exchange Rates and
Since the interbank currency market is a
dealer market, where dealers purchase
foreign currencies for their own accounts and
sell them later at a higher price for a profit,
interbank quotations are given as a bid and
ask (also referred to as offer)
A bid is the price (i.e., exchange rate) in one
currency at which a dealer will buy another
An ask is the price (i.e., exchange rate) at which a
dealer will sell the other currency
Dealers bid (or buy) at one price and ask (or sell) at
a slightly higher price such that they can make
profit between the buying and selling transactions
Foreign Exchange Rates and
Forward exchange rates are typically
quoted in terms of points
A point is the last digit of a quotation. Most
currencies against the US$ (in European terms)
are expressed to four decimal points, so a point
is equal to 0.0001
However, some currencies, such as the Japanese
yen, are quoted only to two decimal points. For
these currencies, a point is equal to 0.01
In addition, a forward quotation is
expressed as the difference between the
forward and the spot exchange rates
The Export Import Bank of India was set up on 1 St
Jan1982 to take international operations of the
financial assistance to exporters and importers
and to function as the principal financial
institution for coordinating the working of other
institutions engaged in financing of exports and
imports of goods and services.
EXIM bank provides refinance facilities to the
commercial banks and financial institutions
against their export-import financing activities.
Functions of EXIM bank
Financing of exports and imports of goods and
services not only in INDIA but also of third world
Financing of exports and imports of machinery and
equipment on lease basis.
Financing of join ventures in foreign countries
Providing loans to Indian parties to enable them to
contribute to the share capital of join ventures in
foreign countries.
Undertaking limited merchant banking functions
such as underwriting of stocks, shares, bonds of
companies engaged in export or import
Provide technical, administrative and financial
assistance to parties in connection with export and
Export Pricing
Factors Influencing Export Price
1. Cost
2. Market Condition
3. Competition
4. Legal/ Political Influence
5. Company policies and marketing mix
The basic categories of cost incurred to serve
domestic and export customers are the same.
Ex-Raw material, components parts selling,
shipping overheads.
Market Condition:
Market Condition is demand of the product, estimated by the
manager by attempting demand schedule for the product.
Estimating the number of customers who will buy at several
level of price.

Under conditions approximating pure competition price is set in
the market place.
Under conditions of monopolistic the seller has some discretion to
vary the product quality promotional efforts and channel
policies in order to adapt the price of the total product.

Legal/Political influence:
The manager charges with determining prices must consider the
legal and political situations as they exist and as they differ
from country to country. Legal and political factors act primarily
to restrict the freedom of a company to set prices strictly on the
basis of economic considerations.
Company policies and Marketing Mix:
Export pricing is influenced by past and current
corporate philosophy, organization and
managerial policies. All long run and short run
decisions should be recognized as interrelated
and interdependent, but some decisions must
be made first and must serve as a basic for
making subsequent decisions.
Export Pricing Approaches
Cost-Based Pricing
Market Oriented Pricing
Competitive Pricing
Marginal cost pricing
Other Pricing Approaches

Cost-Based Pricing:
It is known as cost plus pricing, it includes a certain
percentage of profit margins on the sum total of
full cost of production. Marketing cost and an
allocation of the overheads.
{Price= (Fixed cost + Variable cost + Overheads +
Marketing cost) + Specified percentage of the Total
Market Oriented Pricing:
The pricing concept is flexible policy in the sense
that it allows the prices to be changed in
accordance with the changes in market
conditions. The product may be priced high
when demand conditions are very good and
price may be lowered when the market is
sluggish if that helps in increasing sales.
Competitive pricing:
Important ways of following competitors are
1. Setting the price at the same level as that of
the competitors.
2. Setting the price below that of the
3. Pricing high than that of the competitors.
Marginal Cost Pricing:
To evaluate the profitability of new orders in the
firms with excess capacity. The relevant cost
considered for pricing is the variable cost, the
fixed cost is excluded from the calculation of the
cost of the product.
Other Pricing Approaches:
1. Negotiated pricing
2. Customer determined Price
3. Break-Even Price
4. Creative Pricing
Forms of Export Pricing
Sliding-Down the Demand curve
Skimming the market
Penetration Pricing
Pre-emptive pricing
Extinction Pricing
Probe Pricing
Differential Trade Margins Pricing
Market Pricing
Transfer Pricing
Trial Pricing
Flexible Pricing
INCO Terms
International Commercial Terms(INCO Terms) is
a universally recognized set of differentiations of
international trade terms such as free on board,
cost and freight and cost insurance and freight
developed by the International chamber of
Commerce (ICC).
It Defines the trade responsibilities and liabilities
between the buyer and the seller. It is
invaluable and cost saving tool.
Types if INCO terms
Free on Board (FOB)
FCA (Free Carrier)
Free Alongside ship (FAS)
Cost And Freight (CFR)
Cost, Insurance and Freight (CIF)
Carriage Paid to (CPT)
Carriage and Insurance paid to (CIP)
Delivered at frontier (DAF)
Delivered Ex Ship (DES)
Deliver Ex Quay(DEQ)
Delivered Duty Paid (DDP)
Delivered Duty Unpaid (DDU)