International Marketing Practices

consent of both parties, while a revocable letter of credit allows for change at any time without warning. A revocable letter of credit holds significantly more risk for the exporter, so it is advised that exporting companies work with an irrevocable letter of credit [38]. There are four parties involved in the preparation of a letter of credit: two banks and two businesses [38]. The full process is outlined in Figure 14, which includes the issuance, payment, and settlement of a letter of credit, as follows. (1) The importing and exporting firms first establish a sales contract. (2) The importer opens a letter of credit, and (3) the issuing bank forwards the letter of credit to the paying bank and, ultimately, (4) the exporting firm. (5) The seller then ships goods to the buyer and (6) exchanges shipping documents with the paying bank. (7) The paying bank exchanges the shipment documents with the issuing bank, (8) who forwards them onto the buyer. (9) The paying bank then receives payment and (10) forward funds onto the seller.

Figure 14. Financing using a letter of credit, derived from [23, 38, 200].

Foreign Exchange Rates Foreign exchange rates quantify the value of international currencies in relation to the U.S. dollar, affecting the price of American goods sold in foreign markets [201]. However, fluctuations in exchange rates (Figure 15) present an additional risk to export transactions, especially when there is a long delay between the purchase and delivery of goods [1], potentially causing significant losses to the exporter [21]. The easiest way to avoid the effects of exchange rate fluctuations is to require payment in U.S. dollars, effectively pushing the risk onto the buyer, who also needs to exchange currency to make payments. This practice, however, may affect your

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