international trade credit , business and finance homework help

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Explain why so many international transactions require international trade credit
facilitated by commercial banks.
International transactions are conducted on a day to day basis today, with billions worth of
products and services being exchanged for money. International transactions however differ from
other transactions due to the wider divide between those involved. The difference coming in not
only due to the geographical distance from the others but also due to the different policies, trade
tariff and even currencies in the different countries across the world. The most delicate part is
where these differences are reconciled so as to enable smooth transaction. The different countries
also suggest that those taking part in the trade would have to trust foreign people to conclude
transactions as required, whether delivering or making payments. This necessitates the need for
an intermediary.
Commercial banks act as intermediaries between the exporters and importers; they reconcile
currencies, provide financing where needed, provide information to the parties involved and
make trade transactions on behalf of the parties involved.
Reconciliation of currencies
Commercial banks deal in foreign exchange; international transactions may involve different
currencies, and the commercial banks are important in converting the foreign currencies
involved. It is therefore easier when the currencies are reconciled such that there are no barriers
when trading. This would be a challenge if commercial banks were not in existence.

Provision of financing
International transactions rely on credit; traders have to trust that those they conduct business
with will hold up their end of the deal. To minimize the risk and improve confidence of firms in
taking part in international trade, commercial banks may be used in ensuring legitimacy of firms,
such as by issuing Letters of Credit. They are also useful in issuing loans to firms in need of
such, as well as guarantees for firms to take part in international transactions.
Provision of information
International trade credit works on information relayed to both parties, as to the terms of trade,
such as payment mode, amount of good or service, timeline for delivery and credit offered. Most
international traders would therefore require a facilitator to relay information concerning any
transactions made.
Make trade transactions
International trade transactions may not be made physically. Commercial banks may be crucial
in providing advance payments where needed, keeping of records of transactions made, as well
as hosting the transactions where any payment is made through the banks.

International transactions are generally more protected and less risky with the involvement of
international trade credit. The trade credit allows more firms to take part in it and reduce the risks
involved in trading with foreign firms and individuals. It creates a safer place for business
growth. It also encourages more investors and business-people to take part in the international
trade, as they witness the success of their predecessors.

Does borrowing a portfolio of currencies offer any possible advantages over the borrowing
of a single foreign currency? If a firm borrows a portfolio of currencies, what
characteristics of the currencies would be desirable from a borrowing firm’s perspective?
Firms borrow debts to perform different tasks that they lack the capacity to such as to restock on
products, to expand the business or even to produce other products. These debts are borrowed
either internally or externally. Internally, they may borrow from individuals or other corporations
such as commercial banks. Externally, firms borrow foreign currencies. They borrow from one
or more foreign currencies, as a way of acquiring needed funds for the businesses. Borrowing a
portfolio of currencies may be advantageous though it also has some risks involved.
Risk reduction
Different currencies have different rates, thus when rates are high in one country, they may be
lower in a another. This is beneficial to one that borrows from different foreign currencies, as an
increase in rate or value of one currency would only affect that particular loan and not the whole
debt in general. This may minimize losses, and maximizes on profits where applicable,
depending on the rates of the day.
Creation of links
Borrowing from multiple currencies results in creation of links for the borrowing firm in the
different countries. Every new country where one boprrows becomes a potential investment, and
one can easily expand to those areas. A firm may also utilize the relationship formed with the
lenders to get credit opportunities from other firms around, as they will have backing from the
lenders, especially if the lenders are commercial banks. Borrowing from a single currency limits
a firm from creating more links, and diversifying their business.

Generation of capital
Borrowing of a portfolio of currencies may be done and the debt used to invest in assets that may
then be used in generating returns. This would be beneficial especially when the assets are in the
different countries and if the products are sold in different countries.

A borrowing firm requires being well conversant with a currency before borrowing it....


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