Investment Risk: the New Dimension of Policy

After the sharpest upheaval of the post-war period, the world's industrial countries are struggling, so far with mixed success, to get back on the path of balanced, non-inflationary growth^ The United States has probably been the most successful. After a strong burst of growth in output and employment, many observers foresee a sharp slowing in the rale of advance. The shortfall in the recovery to dale is easy to identify — a lack of private investment; and its cause — a failure of confidence. The uncertainty that plagues the investment commitment process today is embodied in investment calculations in the form of higher risk premiums and prevents a normal package of capital projects from meeting acceptable financial criteria.

The evidence of debilitalingly high-risk premiums is widespread and disturbing. Even in the United Stales, Iwo years removed from the low of Ihe cycle, planl and equipmenl inveslmenl is falling far shorl of what has typically prevailed at this stage of the business cycle. The shorl-falls appear to be concentrated in longlived investments, particularly those for which profit expeclalions are especially skewed towards the later years of the inveslment: 8, 10, 15 years in the future. Worst hit arc investments where high-risk premiums, acting heavily to discount expected future profit, make Ihe presenl value of Ihose prospective profits minimal.

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Short-lived assets, those with rapid rates of cash re-| turn, seem closer to normal levels of commitment at this stage of the business recovery. But long-lived assets, particularly those related to major construction projects which typically do not repay their investment costs for many years are still lagging badly.

The bias against long-lived assets is evidenced by new_;orders for fabricated structural steel, a measure of the most durable of investment assets. After plummeting sharply] from the autumn into the spring, orders for fabricated struc- i tural steel have recovered only about one quarter of their decline during the pasl two years.

The rise in investment risk over the pasl decade is also clearly reflected in the American stock markets, where price/earning ratios have fallen to the lowest levels in two decades, largely as a consequence of the increased discount rate imposed on expected earnings growth. One would expect that the market value for existing assets (that is stock prices) would parallel the expected market prices, or present value of contemplated new capital projects. Instead, real investment parallels with a lag the ratio of stock prices to an index of the replacement cost of plant and equipment. The latter is a good proxy of the relation between the prospective market value of new investment and the cost of producing that investment. Translated into rate of return equivalents, the larger the ratio, the greater the prospective rate of return implied.

While the causes' of this high-degree of investment risk vary from country to country, at root is a profound uncertainty of the shape of the future economic environment in which new facilities might be functioning. Although many reasons could be cited, first, and by far the most important is inflation — the fear of an increasing rate in the years ahead, and the instability that would follow it. An inflation ary environment makes calculation of the rate of return on investment more uncertain. Even if overall profits advance

in line with the rate of inflation, the dispersion of profits among business tends to increase as the rate of inflation climbs. The risk of loss rises or, at best, the attainment of profits becomes more elusive.

Thus, a much higher rate of discount is applied to inflation
generated profits than to those accruing from normal busi
ness operations. ->

A second, although somewhat smaller, contributor to higher risk premiums is escalating business regulation. Since the rise of concern over health and environment the regulatory process has mushroomed. Regulatory changes have directly increased the cost of new facilities in a major way. However, far worse for capital investment decision-making is the fact that regulations may, indeed will, change in future, but trrar way that is unknowable at present. This, rather than known costs, has engendered uncertainly and hesilalion among businessmen.

Adapted from "The Economist".

Using the words in brackets, explain the. meaning of the following terms:

1. trade cycle (the level of business activity, regular oscillations in, over a period of years)

2. the low of the trade cycle (low level of business activity, slow growth in output and employment, a period of)

3. inveslmenl (real capilal goods, expenditure on)

4. long-lived inveslment (in 8, 10, 15 year time profits are
expecled, inveslmenl for which)

5. rale of relurn (nel profit after depreciation, average capi
tal invested in a business, as a percentage of)

6. discount rate (to discount bills, percentage at which, the
officially announced, a country's central bank, is pre
pared)

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Investment Risk: the New Dimension of Policy - student2.ru

Choose the word or phrase in brackets that would best sub -stitutefor the word or phrase in bold print in the following sentences:

1. After the sharpest upheaval of the post-war period the

world's industrial countries are struggling to get back on the path of balanced, non-inflationary growth, (disruption, revolution, violent changes) (budgetary, deflationary, financial)

2. Many observers foresee a sharp slowing in the rate of ad
vance.

(acceleration, development, achievement)

3. The evidence of debilitatingly high-risk premiums is wide-

spread and disturbing.

(discouragingly, proportionally, extremely)

(well-known, causing concern, important)

4. The shortfalls appear to be concentrated in long-lived
investments.

(commitments, surpluses, deficits) (non-productive, modernization, long-term)

5. Short-lived assets seem closer to normal levels of com
mitment at this stage of business recovery.

(cash,, liquid, unmarketable) (liability, performance, engagement) (reaction, revival, cycle)

6. Long-lived assets are still lagging badly.

(are close to normal levels of commitment, haven't reached the expected levels of commitment, have exceeded the expected levels of commitment)

7. One would expect that the market value for existing as
sets would parallel the expected market prices,
(long-term assets, stocks and shares, capital assets)
(contrast, compare, match)

8. The latter is a good proxy of the relation between the
prospective market value of new investment and the cosl
of producing that investment.

(alternate, synonym, substitution)

9. The larger the ratio, the greater the prospective rate of
return.

(secured profit, surplus profit, profitability)

10. Even if overall profits advance in line with the rate of
inflation, the dispersion of profits among business tends
to increase as the rate of inflation climbs.

(lag, diminish, increase proportionally) ^J(accumulation, scattering, dimension)

11. Since the rise of concern over health and environment,
the regulatory process has mushroomed.

(anxiety, care, interest) (legislation, formality, lawfulness)

III

Choose the right answer:

1. The United States has probably been the most successful
in:

a) reaching the peak of the business cycle,

b) recovering from the low point of the business cycle.

2. The shortfall in the recovery to date is due to:

a) a lack of private investment,

b) a lack of incentives. , ^

3. In the U.S. plant and equipment investments:

a) are typical for this stage of the business cycle,

b) arc smaller than could be expected at this stage of the
business cycle.

4. High-risk premiums included in investment calculations:

a) discount prospective profits,

b) enlarge expected future profits.

5. The bias against long-lived assets is evidenced by:

a) a sharp increase in orders for fabricated structural steel,

b) a slow recovery in orders for fabricated structural steel.

6. In the American stock market price/earnings ratios:

a) have fallen to the lowest in two decades,

b) have remained stable for the last 20 years.

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7. Real investment parallels:

a) the expected market prices,

h) the ratio of existing assets to an index of the replacement cost.

8. The larger the relation between the future market value
of new investment and the cost of its production:

a) the greater the prospective rate of return,

b) the more uncertain the prospective rate of return.

9. A profound uncertainty of the shape of the future eco
nomic environment is caused by:

a) an increasing rate of inflation,

b) an incalculable rate of return.

10. Inflation makes calculation of investment profitability:

a) more difficult,

b) more uncertain.

11. Business regulation will change in the future:

a) in a way that is unknowable at present,

b) in a way that is predicted by scientists today.

Say what is true and what is false. Correct the false sentences:

1. The world's industrial countries are struggling with con
siderable success to return to balanced, non-inflalionary
growth.

2. Higher-risk premiums included in investment calculations
prevent average capital projects from satisfying accept
able financial criteria.

3. High-risk premiums discount heavily expected future prof
its on present long-lived investments.

4. Long-lived assets return more quickly to normal levels of
commitment during the period of business recovery.

5. The rise of price/earnings ratios in American slock mar
kets was a consequence of the increased discount rate
imposed on expected earnings growth.

6. The market value of slock prices parallels the present value of contemplated new capital projects.

Complete the following sentences:

1. Many observers foresee.......

2. The slow recovery is due lo.... caused in turn by........

3. The uncertainty of investment commitments is visible in

4. High-risk premiums prevent........

5. The rise in the investment risk is also reflected in.......

6. At present in the American stock markets real investment

parallels .......

I. The larger the relation between the fulure market value
of new investment and the cost of ils construction, the
greater .........

8. The fear of an increasing inflation rate is......

9. Inflation makes calculation of the rate of return on......

10. With the rate of inflation growing, the risk of loss......

II. Business regulations concerning health and environment
increase directly.........

12. It is difficult to foresee......

Answer Ше following questions:

1. What was the economic situation of industrial countries in

the mid sevenlies?

2. What was the slow rate of recovery due to?

3. What made a normal package of capital projects Unaccept
able financially?

4. Considering the situation in the United Slates, which types
of investment fall shortest of the expected level at Ihis
stage of business recovery? What arc the reasons?

5. Which types of assets are closer to normal levels of com
mitment at that stage of business recovery and why?

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149

6. What is the best measure of the most durable investment
assets?

7. How did the American stock markets react to the rise in
investment risk?

8. What is the relationship between the prospective value of
new investment and the cost of producing it?

9. What are the most important reasons of this high-degree
of investment risk?

10. What are the economic consequences of the climbing in
flation rate?

11. What has caused the escalation of business regulations?

12. Which is the worst factor for capital investment decision
making?

Part Two

Unit One Methods of Payment

Active Vocabulary:

payment in advance open account Bill of Exchange

Documentary Letter of Credit

cash with order

cash on delivery

remit

integrity consignment

— авансовый платеж

— открытый счет

— переводной вексель,
тратта

— товарный аккредитив;
документарный аккре
дитив

— 1) платежное поручение
2) предъявительская
тратта

— оплата наличными в
момент поставки,
наложенный платеж

— переводить, перечислять
деньги

— целостность

— 1) консигнация
2) партия груза

TEXT

Head the text carefully concentrating on its contents and terminology:

Compared to selling in the domestic market, selling abroad can create extra problems. Delivery generally lakes longer and payment for goods correspondingly can take more time. So exporters need to take extra care in ensuring that prospective customers are reliable payers and that payment is received as quickly as possible.

In the first and in the last analysis, payment for exports depends on the conditions outlined in the commercial contract with a foreign buyer. As explained previously, there arc internationally accepted terms designed to avoid confusion about cost and price.

The way exporters choose to be paid depends on a number of factors: the usual contract terms adopted in an overseas buyer's country, what competitors may be offering, how quickly funds are needed, the life of the product, market and exchange regulations, the availability of foreign currency to the buyers, and, of course, whether the cost of any credit can be afforded by the buyer or the exporter.

There are four basic methods of payment providing varying degrees of security for the exporter:

1) payment in advance,

2) open account,

3) Bills of Exchange,

4) Documentary Letter of Credit.

I. Payment in advance.

Clearly the best possible method of payment for the exporter is payment in advance. Cash with order (CWO) avoids any risks on small orders with new buyers and may even be asked for before production begins. However, this form of payment is extremely rare in exporting since it means thai

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an overseas buyer is extending credit to an exporter — when the opposite procedure is the normal method of trade.

Variations in this form of payment are cash on delivery (COD) where small value goods are sent by Post Office parcel post and are released only after payment of the invoice plus COD charges.

2. Open account.

An exporter receives the greatest security of payment from cash with order or from cash on delivery. At the other extreme payment on open account offers the least security to an exporter. The goods and accompanying documents are sent directly to an overseas buyer who has agreed to pay within a certain period after the invoice dale — usually not more then 180 days. The buyer undertakes to remit money to the exporter by an agreed method.

The open account method of payment is increasingly popular within the EEC because it is simple and straightforward. 70 per cent of UK exports are paid for under open account terms. It saves money and procedural difficulties but the risk to the exporter is obviously greater. It is only successful if an exporter trusts the business integrity and ability of an overseas buyer, something that has probably been established through a sustained period of trading. /

A variation of open account payments the consignment account where an exporter supplies an overseas buyer in order that stocks are built in quantities sufficient to cover continual demand. The exporter retains ownership of the goods until they are sold, or for an agreed period of time, after which the buyer remits the agreed price to the exporter.

However, a large proportion of export contracts cannot be settled by payment in advance or by open account, particularly with sales outside the EEC. So, parallel with the development of international trade throughout the world, the trading community has developed methods of payments which involve the transfer of documents for exported goods using

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the international banking system — with the aim of speedily settling export transactions at minimum risk to exporters and to overseas buyers.

I Comprehension. Answer the followi?ig questions:

1. Why does selling abroad create extra problems as com
pared to selling in the domestic market?

2. What helps to avoid misunderstandings in payment for
exports?

3. What factors does the choice of a method of payment de
pend on?

4. Which method of payment provides the best/greatest se
curity for the exporter?

5. Why is payment in advance of order not frequently used
in exporting?

6. Which method of payment offers the least security to an
exporter?

7. If the open account method offers so little security to an
exporter, why is it becoming more and more popular?

8. When does an exporter agree to deliver goods on open
account?

9. How does the consignment account operate?

10. Besides payment in advance and by open account, what
other methods of payment has the trading community
worked out?

Comprehension. Complete the following sentences on the
basis of the information given in the text:
1- The method of payment you adopt for each customer de
pends on many factors, such as.......

&• The use of Incolcrms in commercial contracts helps

•>• The choice of the method of payment is important as each
of them provides...

Active vocabulary: bill of exchange payment on presentation payment on demand bearer a bill drawn on ...

4. Cash with order is highly satisfactory from the exporter's
point of-view, but the least....

5. Extending credit to an exporter by a foreign buyer is a

6. It is quite safe to send small value goods by COD post as
the goods are.....

7. If you know your foreign customer well and have no rea
son to doubt his credibility, you may...

8. Under the open account agreement, the delivery of goods
is not.....

9. If you supply a foreign buyer with stocks of your product
for payment after he has sold them, the goods..

10. You can speedily settle export transactions at minimum
risk using.....

Ill

Test. Fil in the missing words:

The method of obtaining payment of an export order is usually a matter ... negotiation ... the exporter and his buyer and will in many instances be governed ... the exporter's knowledge of the buyer andjlje-buyer's financial standing. In deciding the terms ... payment to negotiate, the exporter may perhaps wish the degree ... security he obtains, the speed ... remittance and any additional costs involved.

In rare cases an exporter is able to persuade his buyer to pay 100 per cent of the ... value before ... take place. II is quite common, however, for the buyer to make an ... pay ment of a percentage of the contract value upon ... of the contract with the balance being... by one of the agreed methods.

Where the exporter has complete faith in the buyer he may be willing to trade on an ... account basis. This usually means_rthat the buyer receives the ..., lakes ... of the goods and thereafter makes ... to the exporter in accordance with previously agreed ....

Unit Two

Bill of Exchange (B/E)

- переводной вексель,
тратта

платеж по предъявлению

- платеж по требованию

- предъявитель, держатель

- вексель, выставленный на

settlement — заключение сделки

sight draft —1) вексель на предъявителя

term draft tenor of the bill due date

2) тратта на предъявителя

— срочная тратта

— срок векселя

' — срок погашения

кредитного обязательства; срок платежа

acceptance

— 1) принятие, акцепт,
согласие на оплату

face of the bill forward a bill collecting bank clean bill

2) акцептование векселя

— номинал векселя

— отправлять, посылать
вексель

— банк-инкассатор

— недокументированный
вексель

cash againts documents — платеж наличными против

документов

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promissory note direct collection reshipment recoup delay default

— простои вексель; долговое
обязательство

— 1) прямая инкассация

2) прямой денежный сбор

notary notice of dishonour

— перегрузка, перевалка

— задержка окупаемости

— невыполнение обяза
тельств;
неуплата

— нотариус

— 1) уведомление о неакцеп
товании векселя

2) уведомление о неуплате
векселя _:

TEXT

Read the text below concentrating on its contents and ter minology:

An exporter can send a bill of exchange for the value of the invoice of goods for export through the banking system for payment by an overseas buyer on presentation. A bill of exchange is legally defined as "an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to which it is addressed lo pay on demand or at a fixed or determinablc future time a certain sum of money, to or to the order of a specified person, or to the bearer".

In other words an exporter prepares a bill of exchange which is drawn on an overseas buyer, or even on a third party as designated in the export contract, for the sum agreed at settlement.

The bill is called a sight draft if it is made out payable at sight i.e. "on demand". If it is payable "at a fixed or deter minable future time" it is called a term draft, because the

buyer is receiving a period of credit, known as the tenor of the bill. The buyer signs an agreement to pay on the due date by writing an acceptance across the face of the bill.

By using a bill of exchange with other shipping documents through the banking system, an exporter can ensure greater control of the goods, because until the bill is paid or accepted by the overseas buyer the goods cannot be released. Conversely, the buyer docs not have lo pay or agree to pay by some agreed dale until delivery of the goods from the exporter.

An exporter can pass a bill of exchange lo a bank in the UK. The UK bank forwards the bill to its overseas branch or to a correspondent bank in an overseas buyer's country. This bank, known as the collecting bank, presents the bill to whomever it is drawn upon, for immediate payment if il is a sigh I draft, or for acceptance if il is a term draft. This^procedure is known as a clean bill collection because there are no shipping documents required. Clean bill collections have become more popular, parlicularly in some European counlries where Ihe method is also used in internal Irade. Also such collodions provide more security than open account lerms if Iherc is some doubt aboul a buyer's financial slalus.

However, il is more likely lhat bills are used in a documentary collection method of payrnenl. In Ihis case, an exporter sends the bill lo Ihe buyer Ihrough Ihe banking syslem wilh Ihe shipping documents, including Ihe documenl of tille lo the goods, i.e. an original bill of lading. The bank Ihen releases the documents on payment or acceptance of the bill by the overseas buyer.

An exporler can even use the banking system for a cash againsl documenls (CAD) colleclion. In Ihis case only Ihe shipping documenls are senl and Ihe exporler instructs the bank to release them only after payment by the overseas buyer. This method is used in some European counlries whose buyers often prefer CAD lo a sighl draft if the cx-

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porter insists on a documentary collection for settlement о the export contract.

In all the methods of payment using a bill of exchange, ; promissory note can be used as an alternative. This is issued by a buyer who promises to pay an exporter a certain amouni of money within a specified time.

It is even possible to send the documents and bill of exchange directly to an overseas buyer's bank, by-passing the UK hank. This system of direct collection is widely supported by US banks, but it dispenses with the help of the UK bank whose aid can be invaluable if something goes wrong in the collection. For example, there could be excessive shipping delays so that a buyer may refuse to accept or pay a draft on presentation. In this situation the UK bank can act as the exporter's agent by arranging the warehousing of the goods or their reshipmenl, or even disposing of them at auction to recoup any outlay.

An overseas buyer may deliberately default on a term bill or just go bankrupt. In either case the UK bank can arrange legal action or act on instructions to initiate protests, i.e. engage a notary public in the buyer's country to deliver a "notice of dishonour" to the defaulter, thus preparing a likely settlement in favour of the exporter if matter have to go to court.

Comprehension.Complete the following on the basis of the infonnation given in the text:

1. An exporter draws a bill of exchange on a foreign buyer
means...... for........

2. The bill is called a sight draft if it is payable....

3. The bill is called a term draft if it is payable....

4. The tenor of the bill is......

5. To accept the bill means to.....

6 A term draft does not have to be paid at sighl but at.....

7. The goods cannot be released to a foreign buyer until the
bill .......

8. The foreign buyer does not have to pay or accept the bill
until the goods ......

9. A clean bill collection means that.....

10..................................................................... A documentary bill collection means that , the most

important of which is ...

11.Under a documentary bill collection the bank. on........

12.The foreign buyer cannot get hold of the goods unless he
.... or .......

13. If the exporter insists on immediate payment he.....

14. A promissory note is issued by ..... who in this way guar
antees ......

15. A direct collection means that.....

16. The system of direct collection is supported by.. , but

it involves a certain risk particularly when there is....

17. If the buyer refuses to accept or pay a draft on presenta-

tion, the exporter's bank ......

18. To protest a draft means to ......

Explain the following terms and give your own examples: Account Bill Cash

Collection Dale Default Draft Note Notice Payment Settlement

Ill

By adding appropriate suffixes (-er, -or, -ее) if possible form a list of terms you already know from business and general economics indicating: a) a person who does a certain activity, b) a person to whom this activity is directed (if such a term exists):

1. Accept a) b)

2. Bear a) b)

3. Credit a) b)

4. Debt a) b)

5. Default a) b)

6. Draw a) b)

7. Employ a) b)

8. Pay a) b)

9. Trust a) b)

10. Work a) b)

Studying a Bill of Exchange. Examine the legal definition of a bill of exchange and the enclosed sample copy and find out:

a) how you express an unconditional order in written En
glish,

b) who the drawer in this case is,

c) who the drawee is and who the bill drawn on is,

d) who signed the bill on behalf of the drawer,

e) what the drawee should do when he is presented with the
bill,

f) how much he should pay,

g) at what time he should pay,

h) who the drawee should pay the above mentioned sum to. г

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Ihc terms of the credit revocable/irrevocable cancel amend advise a letter of credit advising bank confirming bank issuing bank \ compatible with ... reimburse debit

Test.Fill in the missing words:

The bill of exchange is often used as a means of.. pay
ment particularly for goods exported. The importer might,

for example, ask to..... delivery of goods before paying for

them. The exporter, on the other hand, will probably not

wish to...... his control over the goods before obtain ing..

or a legal undertaking from the.... to pay on a given future

date. By use of the international.... system, a document of

title and a bill of..... , the needs of both parlies may be sat
isfied.

The exporter might...... a bill exchange on the buyer and

pass it with the ...... documents and ..... instructions to a

bank in the buyer's country, which would ...... Ihe bill of

exchange to the buyer for immediate payment in the case of a