Question

ANSWER THREE QUESTIONS OF YOUR CHOICE

1. A COPPER EXPORT TRADING FIRM HAS REGULAR SHIPMENTS FROM MOZAMBIQUE TO KUWAIT. GOODS ARE LOADED AT TERMINAL ONTO BULK CARRIERS AT THE PORT OF BEIRA, MOZAMBIQUE. ANSWER THE FOLLOWING QUESTIONS 1) TERMS OF SALE; 2) MODE OF TRANSPORT; 3) INSURANCE OBIGATIONS 4) EXPORT/ IMPORT COUNTRY OBLIGATIONS; 5) SELLER'S RISK/COSTS.

2. ONCE YOU DECIDE TO GET INVOLVED IN EXPORT/IMPORT BUSINESS, YOU WOULD LIKE SOME ADVICE ON THE FOLLOWING:
   a) SHOULD I SET UP THE BUSINESS AS AN AGENT OR DISTRIBUTOR ?
   b) SHOULD I USE FOB OR CIF AS PRICE QUOTATION WHEN I EXPORT OR IMPORT THE MERCHANDISE?
   c) SHOULD I SIGN A CONTRACT WITH THE BUYER/SELLER OR CONCLUDE AN ORAL AGREEMENT?
   
   PROVIDE THE BEST ADVICE TO THE FIRM BASED ON THE ABOVE INFORMATION.
   

3. PEOPLE IN POOR COUNTRIES ARE MORE ENTREPRENEURIAL THAN PEOPLE IN RICH COUNTRIES. DO YOU AGREE? COMMENT.

4. COMPARE THE ADVANTAGES AND DISADVANTAGES OF USING A BRANCH OFFICE TO SELL GOODS OVERSEAS COMPARED TO THAT OF A SUBSIDIARY AS A SALES COMPANY.

5. DISCUSS TWO MAJOR RISKS IN FOREIGN TRADE AND HOW TO MANAGE THEM.

6. WHEN DOES RISK AND TITLE PASS FROM SELLER TO BUYER IN A) FOB CONTRACTS, B) CIF CONTRACTS   C) FAS CONTRACTS.

Answer 1

FOB stands for Free On Board a term widely used in International trade. In fact this is a term used to indicate whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping. FOB Origin or sometimes FOB Shipping Point is a condition which means the buyer is at risk and takes the ownership of the goods the moment the seller ships the goods. Here the purchaser pays the shipping charges from the factory or store and gains ownership of the goods as soon as it leaves its point of origin. "FOB destination" is another condition which deals with that the seller retains the risk of loss until the goods reach to the buyer. For international trade there are mainly two sets of rules one INCOTERMS published by International Chamber of Commerce and another is UCC or Uniform Commercial Code applicable in USA. Thus it is important to mention which rules are being followed. So in the FOB case the title passes to buyer the moment it leaves the point of origin in FOB Origin case and in FOB Destination when it reaches to the buyer.

CIF or Cost, insurance and freight is a trade term where the seller s required to arrange for the carriage of goods by sea to the destination, and the buyer is provided with the documents to obtain the delivery of the goods from the carrier. the buyers get the title of goods the moment documents related to the sale and shipment are received.

FAS Free alongside is a term used in international trade contracts that indicates that the seller is responsible for arranging for the goods purchased to be delivered to a particular port in order to be ready for transfer to a waiting vessel for shipment. It may be Ex Ship , Ex Quay or Ex Work . In first two conditions the seller is responsible to deliver the goods to a port or a specified wharf while in the third the buyer is taking delivery form the office /production unit or factory (place of business) of the seller. The moment delivery is made the title of goods passes on to the buyers.

International trade is full of risks. Broadly these risks can be divided into following categories

1. Commercial risks 2. Political risks 3. Legal risks 4. Cargo Risks 5. Credit risks 6.Currency rate fluctuations risks. etc

CREDIT RISK: the business is mostly done on credit now a days. Thus the goods sold on credit any risks involved in realizing the sale proceeds are known as credit risks. It may be due to inability of the buyers to pay on the due date or it may be any political or otherwise like outbreak of war, civil war, coup affecting the situations leading to the conditions that the payments made by the 'buyer do not reach the seller . Whatever the reason may be, if funds are not received, sufferer is, finally, exporter. Credit risk has become most serious risk because of big changes in political and economic conditions, all over . to over come such a big risk , credit risk insurance is of immense help to the exporters as well as banks acting as financier to the exporters. There are more than 40+ organizations covering the credit risk, all the world over. ECGC or Export Credit Guarantee Corporation of India Limited covers auch risks in India . This is a Government enterprise, under the administrative control of the Ministry of Commerce. four Types of risks are covered by ECGC

1.Standard Policies 2. Specific Policies   3. Financial Guarantee 4. Special Schemes

Various types of risks are covered under these categories to protect the interests of Indian exporters. these risks may be due to insolvency war or political instability but do not cover any thing illegal like confiscation by authority because of violation of any rule of land.

Foreign Exchange Fluctuations Risks

If the seller has invoiced in the buyer's currency, he may be subjected to risk of foreign currency exchange fluctuations. If the foreign currency depreciates in terms of domestic currency, exporter will receive lesser amount or vice versa. In the same circumstances, if the domestic currency depreciates, exporter stands to gain. But If the export, bill is purchased or negotiated under letter of credit facility and the foreign currency undergoes fluctuation, the bank will bear the risk. But the exchange rate on the date of receipt of foreign currency will be given to the exporter if the exporter has sent the bill for collection. The , exporter stands a chance to lose or gain, depending on the trend in fluctuation during the collection time and lodging the bill for collection.

There will be no foreign exchange risk in case the invoice is made in domestic currency. In such a case, the importer face the risks of foreign exchange fluctuation. Otherwise Hedging is best practice to safeguard the losses due to currency rate fluctuations.

            An entrepreneur can be defined as someone who develops his own business model, arranges the necessary physical and human capital to start and to operationalize it and is responsible for its success or failure. This responsibility of success or failure is in fact risk bearing capacity and makes it the entrepreneur different from manager. An entrepreneur has few basic characters like creativity, leadership quality, visualizations and risk bearing capacity with some game changing ideas.

Up to certain extent it is true that poor countries can have better entrepreneurs than the rich countries. there are marked differences in all walks of life in poor and rich or developed countries. It may be economical educational political availability of resources and opportunities etc are always short of required level. and invention is always made out of needs and necessities. The people of poor or underdeveloped countries always try to do some innovative so that they could progress in a better way but within their limited resources. They try hard and use the available resources with best possible manner so that less wastage and more return which help them to grow. even if a comparison is made within a developed country it is found that less resourceful entrepreneur succeeds better way in comparison to a more resourceful one as the first one puts in all attentions for the success and he seldom deviates from his objective. Steve Jobs from App is the best example who succeeded despite all odds.