Question

Variation in the price of agricultural and non-agricultural commodities is determined over time, by demand-supply dynamics. The last two decades have seen a significant increase in the volume of international trade and business due to globalisation and liberalisation sweeping across the world. This has led to rapid and unpredictable variations in financial assets prices, interest rates and exchange rates, and subsequently, to exposing Multi-National Corporations to financial risk. As a result, financial markets have experienced rapid variations in interest and exchange rates and stock market prices, thus exposing the corporate world to a state of growing financial risk. We can hedge the risk of price variations in stocks, bonds, commodities, currencies, interest rates, market indices etc. Given this context please conduct the necessary research and answer the following questions.

1)      How is a country's economic well-being enhanced through free international trade in goods and services? Provide and discuss two relevant examples specific to your jurisdiction. (10marks)

2)      Outline and discuss two methods of payments in international trade and two (2 ) methods of financing international trade for a selected Multi National Corporation in your jurisdiction

3)      Define and discuss two (2) similarities and two (2) differences between a futures contract and a forward contract. When would the use of one be preferred over the other?   

Answer 1

ANSWER 1 :

As per David Ricardo, with free universal exchange, it is commonly gainful for two nations to each represent considerable authority in the creation of the merchandise that it can deliver moderately most effectively and the exchange those products. Thusly, the two nations can build their consolidated creation, which permits the two nations to devour a greater amount of the two merchandise. This contention stays legitimate regardless of whether a nation can create the two products more productively than the other nation. Universal exchange is anything but a 'zero-sum'game in which one nation benefits to the detriment of another nation. Or maybe, global exchange could be an 'expanding total' game at which all players become victors.

For example, India has been negotiating trade agreements with the EU and Australia for several years.

ANSWER 2 :

To succeed in today’s global marketplace and win sales against foreign competitors, exporters must offer their customers attractive sales terms supported by the appropriate payment methods. Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer. Here we are discussing 2 payment methods :

1. Cash-in-Advance :
With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. For international sales, wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. With the advancement of the Internet, escrow services are becoming another cash-in-advance option for small export transactions. However, requiring payment in advance is the least attractive option for the buyer, because it creates unfavorable cash flow. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms.

2. Letters of Credit :
Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. The buyer establishes credit and pays his or her bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank. An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised.

ANSWER 3 :

The fundamental contrasts among forward and fates contract are referenced underneath:

• An understanding between gatherings to purchase and sell the hidden resource at a specific cost on a future date is a forward agreement. A future agreement is a coupling contract whereby the gatherings consent to purchase and sell the benefit at a fixed cost and a future indicated date.
• The conditions of a forward agreement are haggled among purchaser and vender. Thus it is adjustable. Then again, a prospects contract is a normalized one where the conditions identifying with amount, date, and conveyance are normalized.
• Forward agreements are exchanged Over the Counter (OTC), for example there is no auxiliary market for such agreements. Then again, a Futures contract is exchanged on a sorted out protections trade.
• With regards to settlement, forward agreements choose a development date. When contrasted with the future agreement which is set apart to advertise regularly, for example the benefit or misfortunes are settled day by day.

SIMILARITIES between future and forward contract :

They are both 2-party private agreements to buy something of significant worth at a future time or during a future period, by and large a budgetary resource, for example, stocks, items, or money.

As a rule the benefit fundamental a forward or alternative isn't started up yet is fairly a fungible resource — in this way, for instance, a choice to buy portions of AT&T doesn't recognize the offer declaration being referred to, yet rather the class of offers and the guarantor; a forward agreement to buy 1 million barrels of Brent Crude (an evaluation of crude oil) doesn't determine the barrels being referred to, the well, or even the maker of the oil, only the evaluation and amount.

In spite of the fact that they are called contracts, and contain contract language, the two advances and choices are much of the time thought about protections: instruments that have their own worth, can be facilitated and moved, and that experience freedom, settlement, and protections enrollment forms. All things considered, they would be controlled in the US by the SEC, FINRA, and different other administrative and private controllers. This doesn't need to be the situation, as two gatherings could employ their own legal advisors and custom-draft a 1-to-1 private forward or alternative. Be that as it may, it is typically the situation.