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Global Financing And Exchange Rate Mechanisms Paper How It Is Used In Global Financing Operations, And Its Importance In Managing Risks.

791 words - 3 pages

Countertrade PAGE \* MERGEFORMAT 5
CountertradeUniversity of Phoenix3Introduction 3Countertrade 3Offset 4Buyback 4Tolling 4Counterpurchase 4Switch Trading 5Barter 5Pros and Cons 5Conclusion IntroductionThe conventional means of conducting international sales may not always be possible. Conventional means of payment might be difficult, costly or even nonexistent. A government might restrict its currency convertibility in order to preserve its foreign exchange reserves. Countertrade is a common solution for these payment problems.CountertradeCountertrade is a term used to cover a wide range of reciprocal trade. Barter is the best-known example and others such as offset, buyback and switch trading have been developed to meet the needs of the world economy. These trade methods involve the exchange of goods or services in order to finance purchases rather than using cash. Reasons for countertrade include the ability to overcome currency inconvertibility, the elimination of excess inventory without value loss and to enhance a buyer's desire to purchase a product or service.OffsetGovernments that have a need to make a major purchase of military goods mostly use offset. Two forms of offset exist, direct and indirect. Direct offset is where the supplier agrees to use materials or components from the importing country in the finished product. Indirect offset occurs when the supplier is required to enter into a long-term industrial investment in the importing country not related to the supplied product. "The overall objective of offset, either direct or indirect, in the defense sector is generally to promote import substitution and to minimize the balance of payments deficit for military purchases by developing an indigenous industrial defense capability."(Richardson, 2005, para 4)BuybackIn buyback the supplier provides capital goods such as a plant or equipment and agrees to be paid back by the output of this equipment. This form of countertrade is the most common with exports of manufacturing plants, mining equipment and similar orders.TollingManufacturers in some countries sometimes cannot provide service to customers because they do not have the foreign exchange to purchase raw materials from other countries. In tolling an exporter will provide the raw material and then purchases the capacity of the factory in another country to turn the raw materials into finished goods. A customer then pays the supplier in cash for these finished products.CounterpurchaseCounterpurchase is two distinct sales contracts between two countries. For example, country A will purchase goods from country B then country B will purchase...

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