Bankers Acceptances The at the most basic level, an MNC engages in the exporting or importing of products and these

transactions are more risky on an international level than on a purely domestic level because of lack of accurate information, and risk such as exchange rate risk and country risk. To help reduce risk and provide financing a myriad of options including banks acceptance (B/A) are available to facilitate large scale international commerce. Often, the single factor most likely to make or break an export sale is financingespecially for small and midsize exporters (Cite 1, ????, p. 5). Therefore, bankers acceptance is a critical financial assets that must be understood by the financial manager, banker, and investor; also, B/A has benefits for all parties which included the exporter, importer, and banks. Analysis of Bankers Acceptance B/A provides benefits to international trade and is composed of the importer, exporter, their respective local banks, and possibly money market investors. B/As are time drafts, drawn on and accepted by a bank, that instruct it to pay a designated party a certain sum of money at a specified time in the future (Cite 1, ????, p. 5.) The process begins with the importer ordering goods from an exporter and simultaneously requesting a local bank to provide a letter of credit (L/C). L/C is a written undertaking issued by a bank [] in which the bank obligates itself to make payment to the beneficiary [] within a prescribed time frame, and upon presentation of appropriate documents [] In issuing an L/C, the buyer's bank substitutes its credit standing for that of the buyer (Cite 2, ????, para. 3 and 4). Next the L/C is accepted by the exporters banks and thereby creates the B/A. Additionally, If the exporter does not want to wait until the specified date to receive payment, it can request that the bankers acceptance be sold in the money market (Text, 2010, p. 567). To provide incentive for investors to purchase this asset the

B/A is sold at a discount and then receives the full payment when the B/A matures, which is the yield to the investor. This process has benefits for the exporter, importer, and banks. Exporter B/A benefits the exporter by transferring risk, increasing sales, and providing quick repayment through money markets. The credit risk and repayment risk is almost eliminated because the importers banks assumes the responsibility of payment for the received products. The only credit concern is that of the guaranteeing bank. This benefits the exporter because it is often difficult to obtain accurate credit information. Flexibility is an advantage of acceptance financing: The trading firms need not assess the integrity of each other, and the various parties to the transaction might be located in different countries (Cite 3, ????, p. 2). This benefits the exporter because it is often difficult to obtain accurate credit information. The exporter benefits from the B/A because it allows the exporter to export without concern for the importers credit worthiness enabling it to penetrate new markets thus increasing sales (Madura, 2010). In addition, the exporter faces little exposure to political risk or to exchange controls imposed by a government because banks normally are allowed to meet their payment commitments even if controls are imposed (Text, 2010, p. 568). Since B/A are backed by the credit worthiness of a high quality bank it serves as an investment opportunity for money market fund investors. Bankers acceptances are marketable, short-term investment instruments which are traded actively by banks, brokers, and other institutional investors (Cite 4, ????, p. 13). This benefits the exporter because funds can be made available prior to the maturity of the B/A, which is accomplished by selling the B/A at a discount, thus reflecting the time value of money (Text, 2010). Importer

The importer benefits from the increased access to foreign markets, which occurs because it does not need to prove credit worthiness to the export only to the issuing bank. It is likely that the credit worthiness of the importer is already known or easily attainable by the local bank and therefore will be ready and willing to issue the B/A to the exporters bank. This will reduce the time and decrease the risk to the exporter which will enable the exporter to be willing to produce and ship the products because it will be reassured of payment. Additionally, by opening up foreign markets for supplies and finished goods the importer may be able to obtain all the benefits from imports such as reduced input costs and better quality products. This can allow the importer to gain a completive advantage over its domestic competition. Also, the importer is better informed when the goods are shipped and when they will be received; if the terms of the contract are not fulfilled by the export the payment will not be made. A B/A is typically issued with maturities between 30 and 180 days (Cite 1, ????). This provides buyers ample time to receive, warehouse, ship, and collect the proceeds from sales to third party customers, also enabling them to accumulate the funds necessary to pay the B/A at its maturity date. (Cite 2, ????, para 11). Also, B/As provide the importer with short term financing for its inventories at a lower cost than an otherwise similar loan. Banks The primary benefit the banks receive from the B/A is the commission that is charged by the banks. The commission charged by the bank reflects the credit worthiness of the customer (Madura, 2010). Therefore, the lower the credit worthiness of the customer the higher the potential return but higher risk. In addition to the commission the banks can benefit from the spread. When a bank creates, accepts, and sells the acceptance, it is actually using the investors money to finance the banks customer (Text, ????, p. 568). This enables the bank to create a

financial asset at one price and sell it at higher price; the differential between the buy and sell price is the spread, which is the profit earned by the bank.