1.Intruduction to Futures Trading
Futures trading originated from forward contract,which were used by producers and buyers of agricultural commodities to protect themselves against seasonal price fluctuations.
Monday, August 27, 2007
Countertrade
Countertrade originates from barter (direct exchange of goods for goods),the oldest form of trade,and is characterized by the combination of export and import in international trade.It is a kind of reciprocal activity.Countertrade is an umbrella term that includes all of the variations of the exchange of goods for goods. Considered in its most fundamental and simple terms,it means,"If I buy from you, you must buy form me."With more and more countries active in this field in the past few decades,contertrade becomes more complex.
One thing that makes countertrade rather difficult to understand in the lack of agreement on a common terminology.Some of the terms may mean different things to different pepole,and some of the different terms may mean the same thing.Therefore,it is absolutely vital that the trader looks beyond the terminology to assess exactly what the proposal means by the term used.
The common reasons for countertrade are:
1.To create new export markets or promote export products
2.To acquire new technology or attract foreign investment
3.To balance trade for economic or political reason
In the following we will elaborate on four types of countertrade that are often used in our country's international trade.
1.Compensation Trade
There are full compensation and partial comsensation trade.
1).Full compensation
This is a barter-like arrangement where the goods exported are "paid for" by a countersupply of goods. The valud of the countertrade goods should be equal to that of the export goods,since the sale of the countertrade goods provides the hard currency to pay for the export.And for this same reason,the shipment dates should be closely linked.The exporter does not want to risk by dispatching his goods to the buyer,just against a mere promise by the buyer to provide countertrade goods at some time in the future.So the full compensation transactions are always framed in one single contract.
2)Partial Compensation
The same basic principals of full compensation apply for partial compensation,with an exception that part of the export is paid by cash.
2.Counterpurchase
In signing a counterpurchase contract,the exporter is required to undertake the purchase of goods from the importer's side. Although this undertaking may be negotiated and signed with the principal export contract,it is discharged separately.
In counterpurchase,the value of countertrade goods does not have to equal that of the export. The countertrade demand is often expressed as a percentage of the export contract.Separate contracts are signed for each side of the transaction. Usually the counterpurchase is only represented in the first instance by some sort of framework agreement.This merely sets out the conditions of the counterpurchase and may not make detailed reference to the purchase of specific countertrade goods.
Technically,separate stand-alone contracts for delivery and counterdelivery are signed.Each side of the transaction is settled separately in foreign exchange.Therefore,the timing for discharge of each transaction could differ within the agreed time limit.This is why counterpurchase is also called " parallel trade".
3.Switch Trade
Switch involves at least three parties,or even four or five parties.It is closely linked with the bilateral clearing agreement, a kind of basis for barter transactions between governments.
The clearing arrangements establish two-way flows of goods of agreed types between two countries."Clearing units" rather than foreign exchanges are used in the accounting of this kind of trade.In this way,the two countries can exchange their products without using their limited reserve of foreign exchanges.An overall limit is place on the value of trade in a period.As it is quite difficult to exchange goods for exactly same value,at the end of the period covered by the agreement,one country will be a creditor and the other will be debtor.Generally,a limit is placed on the imbalance on accounts.Each limit is often refered to as "the swing".If trade ceases because the swing limit is reached,the countries may look for other ways to balance the book.One such way to balance the books would be through a mechanism called "switch",i.e. "selling" the imbalance to a third part for hard currency.This is the role of a switch dealer.
The switch dealer will buy the imbalance "clearing units" at a discount.These clearing units are available only for the purchase of goods from debtor country.So,the switch dealer will arrange for the subsequent sale of these goods in a third country,where payment will be made in hard currency.The profit in these transaction will cover the dealer's commission.
A successful switch deal requires expertise and a lot of work,and therefore,the fees are quite high.Exporter must allow sufficient discount in the price to cover the switch dealer's fees.
4.Offset
Offset is a practice in which the seller has to undertake some sort of activity favorable to the importer in addition to the supply of the capital goods.Usually,the principal export goods are of a very high value,such as aircraft,power-station equipment,or an air defense system.To alleviate the heavy foreign exchange expenditure involved in purchase of this nature,the buyer usually insists that offset be applied.But recently,there is a growing trend for offset to be used to transactions of lower-level technologies,such as coal-mining machinery,railway engines and buses etc.
The buyer's requirements may be:
*Licensed production: The seller grants the buyer the authority to manufacture certain equipment,which according to possible parallel agreements may be:
incorporated in the capital goods being sold
bought by the license
sold to a third part
*Co-production:The seller may cooperate in industrial production under certain agreement.This may vary from a simple agreement to a joint venture.Output of the venture may be used in the same ways as listed under Licensed Production.
*Subcontractor production:The seller subcontracts the manafacture or assembly of certain goods,which could be used in the same way as mentioned above.
*Local infrastructure:The seller may be required to set up local establishments in the buyer's country,such as railway,a training school etc.
This is in no way a complete list of the various types of offset practices.Usually an offset package is a mixture of many types.With offset booming in more and more countries,new types of cooperation are coming into being.
One thing that makes countertrade rather difficult to understand in the lack of agreement on a common terminology.Some of the terms may mean different things to different pepole,and some of the different terms may mean the same thing.Therefore,it is absolutely vital that the trader looks beyond the terminology to assess exactly what the proposal means by the term used.
The common reasons for countertrade are:
1.To create new export markets or promote export products
2.To acquire new technology or attract foreign investment
3.To balance trade for economic or political reason
In the following we will elaborate on four types of countertrade that are often used in our country's international trade.
1.Compensation Trade
There are full compensation and partial comsensation trade.
1).Full compensation
This is a barter-like arrangement where the goods exported are "paid for" by a countersupply of goods. The valud of the countertrade goods should be equal to that of the export goods,since the sale of the countertrade goods provides the hard currency to pay for the export.And for this same reason,the shipment dates should be closely linked.The exporter does not want to risk by dispatching his goods to the buyer,just against a mere promise by the buyer to provide countertrade goods at some time in the future.So the full compensation transactions are always framed in one single contract.
2)Partial Compensation
The same basic principals of full compensation apply for partial compensation,with an exception that part of the export is paid by cash.
2.Counterpurchase
In signing a counterpurchase contract,the exporter is required to undertake the purchase of goods from the importer's side. Although this undertaking may be negotiated and signed with the principal export contract,it is discharged separately.
In counterpurchase,the value of countertrade goods does not have to equal that of the export. The countertrade demand is often expressed as a percentage of the export contract.Separate contracts are signed for each side of the transaction. Usually the counterpurchase is only represented in the first instance by some sort of framework agreement.This merely sets out the conditions of the counterpurchase and may not make detailed reference to the purchase of specific countertrade goods.
Technically,separate stand-alone contracts for delivery and counterdelivery are signed.Each side of the transaction is settled separately in foreign exchange.Therefore,the timing for discharge of each transaction could differ within the agreed time limit.This is why counterpurchase is also called " parallel trade".
3.Switch Trade
Switch involves at least three parties,or even four or five parties.It is closely linked with the bilateral clearing agreement, a kind of basis for barter transactions between governments.
The clearing arrangements establish two-way flows of goods of agreed types between two countries."Clearing units" rather than foreign exchanges are used in the accounting of this kind of trade.In this way,the two countries can exchange their products without using their limited reserve of foreign exchanges.An overall limit is place on the value of trade in a period.As it is quite difficult to exchange goods for exactly same value,at the end of the period covered by the agreement,one country will be a creditor and the other will be debtor.Generally,a limit is placed on the imbalance on accounts.Each limit is often refered to as "the swing".If trade ceases because the swing limit is reached,the countries may look for other ways to balance the book.One such way to balance the books would be through a mechanism called "switch",i.e. "selling" the imbalance to a third part for hard currency.This is the role of a switch dealer.
The switch dealer will buy the imbalance "clearing units" at a discount.These clearing units are available only for the purchase of goods from debtor country.So,the switch dealer will arrange for the subsequent sale of these goods in a third country,where payment will be made in hard currency.The profit in these transaction will cover the dealer's commission.
A successful switch deal requires expertise and a lot of work,and therefore,the fees are quite high.Exporter must allow sufficient discount in the price to cover the switch dealer's fees.
4.Offset
Offset is a practice in which the seller has to undertake some sort of activity favorable to the importer in addition to the supply of the capital goods.Usually,the principal export goods are of a very high value,such as aircraft,power-station equipment,or an air defense system.To alleviate the heavy foreign exchange expenditure involved in purchase of this nature,the buyer usually insists that offset be applied.But recently,there is a growing trend for offset to be used to transactions of lower-level technologies,such as coal-mining machinery,railway engines and buses etc.
The buyer's requirements may be:
*Licensed production: The seller grants the buyer the authority to manufacture certain equipment,which according to possible parallel agreements may be:
incorporated in the capital goods being sold
bought by the license
sold to a third part
*Co-production:The seller may cooperate in industrial production under certain agreement.This may vary from a simple agreement to a joint venture.Output of the venture may be used in the same ways as listed under Licensed Production.
*Subcontractor production:The seller subcontracts the manafacture or assembly of certain goods,which could be used in the same way as mentioned above.
*Local infrastructure:The seller may be required to set up local establishments in the buyer's country,such as railway,a training school etc.
This is in no way a complete list of the various types of offset practices.Usually an offset package is a mixture of many types.With offset booming in more and more countries,new types of cooperation are coming into being.
Thursday, August 23, 2007
Agent,Distribution and Consignment
Internaitonal trade forms refer to the common practices and channels between countries for the flow of commodities or serves.Every import or export is carries out through certain trade form.Besides the direct trade form discussed in this book so far,there are a few indirect ones commonly used in international trade as well.Some of the most commonly used ones are discussed in the last chapters.
1.Agent
And agent is a middleman who can act on behalf of a principal in specific matters. Many kinds of agent are active in international business nowadays,such as forwarding agents and clearing agents.What we will discuss here is selling agent.According to the power the pricipal has delegated to a selling agent,the agent may just introduce the potential customer to the principal or actually negotiates and concludes the contract between parties. They have the following characteristics:
*An agent can only operate within the marketing territory authorized by the principal.
*An agent does not carry stock.The goods are carried only as consignment inventory.Payment is based on delivery to the ultimate buyer.
*The principal (exporter) set the retail price,retains title and controls the goods
*The profit and risk of loss remains with the principal,unless the agent is a del credere one (保付代理）
*Agents are usually paid by commission.
According to the scope of their authority,agents can be divided into several kins:
(1)Indenting Agent
And indenting agent is the agent (exclusive or non-exclusive) appointed by a principal for marketing and promoting the products from the potential customers within the territory. He needs to solicit inquiries for the products from potential customers in the territory.He will transmit them back to the principal who will then decide whether to accep the particular inquiries,and upon what terms. Depending on the exact scope of his duties,the agent may or may not take part in the negotiation and conclusion of the contracts resulting from the inquiries.
(2) Factor
A factor is approved with the power to negotiate and conclude contracts in the territory no behalf of his principal.A factor may have a stock of the products,which will belong to the principal but will enable the factor to satisfy the contract that he negotiate.
(3) Del Credere Agent
A del credere agent is the agent who takes responsibiliey for credit risks. If the buyer he introduces fails to pay the principal or breaks the contract,it is the agent's resposibility to cover the loss. Usually,del credere agents charge a higher commission.
Responsibilities of the agent:
*Serve the principal as an agent on the terms of the agreement between them with all due and proper diligence.
*Maintain and provide necessary facilities at his own expense.
*Pass all marketing information to the principal.
*Comply with all laws and regulations in the territory.
*Keep confidential to the principal,not diclosing any useful information to any third party
*Not to act outside the territory.
Responsibilities of the principal:
*Supply to the agent free of charge a reasonable quantity of sales literature
*Supply necessary models or samples relating to the products
*Not submit offers nor effects sales in the territory without the agent's consent
*Responsibility to pay for the necessaryt expenses of the agent
*Pay commission to the agent in accordance with the agreement
2.Distrubution
Unlike agents, distributors buy goods for the principals on their own account and take title to them and resell them to their customers in their territory.Thus,there is no contractual relationship between the principal and the ultimate customers.Instead there are separate sets contracts:those between the principal and the distributor, and those between the distributor and the ultimate customers.The distributor takes his remuneration from the margin between the prices at which he buys the products and the prices at which he sells them to the customers.Since the distributor is an independent contractor,he assumes far more risks and obligations than an agent does:bad debts,advertising expenditure,warranty claims and maintenance,etc.Therefore,distributor generally enjoy more freedom and higher remuneration.
Two kinds of distributors are generally used (named):
*Sole or exclusive distributor
He is the only distributor in a territory.
*Non-exclusive distributor
There may be several non-exclusive distributors appointed by the principal or supplier in one territory.
Generaly undertaking by the distributor:
*Serve the principal diligently and faithfully during the continuance of the agreement in the territory.
*Not to do anything that may prevent the sale or interfere with the development of sales of the products in the territory,such as dealing with competing goods.
*Conform to all legislation rules and requirements existing in the territory
*Proper storage of the products
*Not to copy the procuct or any part of them for any other purpose
*Keep patent and trade mark notices
*Not to sell outside or export the product from the territory unless there is consent of the principal
*Provide the principal with sales report periodically
General undertaking by the principal:
*Refer all inquiries received from the territory to the distributor.
*Sell the products to the distributor with the lowest price charged at that time to any export customers of the principal
*Reserve the right to improve or modify the products with prior notice
3.Consignment
1.Agent
And agent is a middleman who can act on behalf of a principal in specific matters. Many kinds of agent are active in international business nowadays,such as forwarding agents and clearing agents.What we will discuss here is selling agent.According to the power the pricipal has delegated to a selling agent,the agent may just introduce the potential customer to the principal or actually negotiates and concludes the contract between parties. They have the following characteristics:
*An agent can only operate within the marketing territory authorized by the principal.
*An agent does not carry stock.The goods are carried only as consignment inventory.Payment is based on delivery to the ultimate buyer.
*The principal (exporter) set the retail price,retains title and controls the goods
*The profit and risk of loss remains with the principal,unless the agent is a del credere one (保付代理）
*Agents are usually paid by commission.
According to the scope of their authority,agents can be divided into several kins:
(1)Indenting Agent
And indenting agent is the agent (exclusive or non-exclusive) appointed by a principal for marketing and promoting the products from the potential customers within the territory. He needs to solicit inquiries for the products from potential customers in the territory.He will transmit them back to the principal who will then decide whether to accep the particular inquiries,and upon what terms. Depending on the exact scope of his duties,the agent may or may not take part in the negotiation and conclusion of the contracts resulting from the inquiries.
(2) Factor
A factor is approved with the power to negotiate and conclude contracts in the territory no behalf of his principal.A factor may have a stock of the products,which will belong to the principal but will enable the factor to satisfy the contract that he negotiate.
(3) Del Credere Agent
A del credere agent is the agent who takes responsibiliey for credit risks. If the buyer he introduces fails to pay the principal or breaks the contract,it is the agent's resposibility to cover the loss. Usually,del credere agents charge a higher commission.
Responsibilities of the agent:
*Serve the principal as an agent on the terms of the agreement between them with all due and proper diligence.
*Maintain and provide necessary facilities at his own expense.
*Pass all marketing information to the principal.
*Comply with all laws and regulations in the territory.
*Keep confidential to the principal,not diclosing any useful information to any third party
*Not to act outside the territory.
Responsibilities of the principal:
*Supply to the agent free of charge a reasonable quantity of sales literature
*Supply necessary models or samples relating to the products
*Not submit offers nor effects sales in the territory without the agent's consent
*Responsibility to pay for the necessaryt expenses of the agent
*Pay commission to the agent in accordance with the agreement
2.Distrubution
Unlike agents, distributors buy goods for the principals on their own account and take title to them and resell them to their customers in their territory.Thus,there is no contractual relationship between the principal and the ultimate customers.Instead there are separate sets contracts:those between the principal and the distributor, and those between the distributor and the ultimate customers.The distributor takes his remuneration from the margin between the prices at which he buys the products and the prices at which he sells them to the customers.Since the distributor is an independent contractor,he assumes far more risks and obligations than an agent does:bad debts,advertising expenditure,warranty claims and maintenance,etc.Therefore,distributor generally enjoy more freedom and higher remuneration.
Two kinds of distributors are generally used (named):
*Sole or exclusive distributor
He is the only distributor in a territory.
*Non-exclusive distributor
There may be several non-exclusive distributors appointed by the principal or supplier in one territory.
Generaly undertaking by the distributor:
*Serve the principal diligently and faithfully during the continuance of the agreement in the territory.
*Not to do anything that may prevent the sale or interfere with the development of sales of the products in the territory,such as dealing with competing goods.
*Conform to all legislation rules and requirements existing in the territory
*Proper storage of the products
*Not to copy the procuct or any part of them for any other purpose
*Keep patent and trade mark notices
*Not to sell outside or export the product from the territory unless there is consent of the principal
*Provide the principal with sales report periodically
General undertaking by the principal:
*Refer all inquiries received from the territory to the distributor.
*Sell the products to the distributor with the lowest price charged at that time to any export customers of the principal
*Reserve the right to improve or modify the products with prior notice
3.Consignment
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