Deck 20: International Trade Finance

Question 1

________ are documents included in a contract to ensure that specific quality, purity, or weight specifications are met.

A) Consular invoices
B) Insurance documents
C) Certificates of analysis
D) None of the above

Answer 1

Certificates of analysis

Question 2

Which of the following is NOT true regarding a letter of credit?

A) The importer and exporter agree on a transaction.
B) The importer applies to its local bank for the issuance of a letter of credit.
C) The exporter applies to its local bank for the issuance of a letter of credit.
D) The importer's bank cuts a sales contract based on its assessment of the creditworthiness of the importer.

Answer 2

The exporter applies to its local bank for the issuance of a letter of credit.

Question 3

Which of the following documents is NOT part of a system designed to protect both the importer and exporter from non-completion of trade?

A) letter of credit
B) draft
C) bill of lading
D) All of the above are important protective documents.

Answer 3

All of the above are important protective documents.

Question 4

A/An ________ letter of credit is an obligation only of the issuing bank whereas other banks honor a/an ________ letter of credit.

A) irrevocable; unconfirmed
B) revocable; confirmed
C) confirmed; irrevocable
D) unconfirmed; confirmed

Question 5

A signed ________ is issued by the exporter and contains a precise description of the merchandise.

A) packing list
B) bill of lading
C) commercial invoice
D) banker's acceptance

Question 6

A letter of credit is an agreement by the bank to pay against documents rather than the actual merchandise.

Question 7

A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of ________.

A) exporter's; portfolio risk
B) importer's; blocked foreign exchange
C) exporter's; blocked foreign exchange
D) none of the above

Question 8

A ________ is issued to the exporter by a common carrier transporting the merchandise.

A) commercial invoice
B) banker's acceptance
C) packing list
D) bill of lading

Question 9

A/An ________ letter of credit is intended to serve as a means of arranging payment, but not as a guarantee of payment.

A) irrevocable
B) revocable
C) confirmed
D) unconfirmed

Question 10

The exporter-importer relationship to a corporation of a foreign importer that has not previously conducted business with the firm would be an

A) unaffiliated known.
B) affiliated party.
C) unaffiliated unknown.
D) any of the above.

Question 11

Today, international trade is dominated by transactions between unaffiliated parties (known or unknown).

Question 12

________ is the risk that interest rates will change between signing the contract and payment for goods and services.

A) Currency risk
B) Risk of non-completion
C) Default risk
D) Portfolio risk

Question 13

________ may be required so that the contents of containers can be identified, either for customs purposes or for importer identification of the contents of separate containers.

A) Banker's acceptances
B) Commercial invoices
C) Consular invoices
D) Packing lists

Question 14

Which of the following relationships between importing and exporting parties would require the least detailed contract to conduct business?

A) affiliated party
B) unaffiliated unknown party
C) known unaffiliated party
D) domestic supplier

Question 15

The major advantage to the exporter of a letter of credit is that the exporter does not receive any funds until the documents have arrived at a local port or airfield.

Question 16

The risk of default on the part of the importer is present as soon as

A) a price quote is requested.
B) goods are shipped.
C) the export contract is signed.
D) goods are received.

Question 17

Polaris Corporation has made an agreement to ship goods to a foreign firm with whom they have not entered into a contract for three years. However, the firms have communicated regularly since the last sale three years ago. This is an example of an

A) unaffiliated known party transaction.
B) unaffiliated unknown party transaction.
C) affiliated party transaction.
D) none of the above.

Question 18

The draft is the instrument normally used in international commerce to

A) transfer product.
B) prove ownership.
C) transfer title.
D) initiate the sale.

Question 19

The primary advantage of a letter of credit is that it reduces risk.

Question 20

Because most international transactions are between affiliated parties, international transaction contracts are less complex, but the management of the total value of the MNE is more complex.

Question 21

The person or company to whom the draft or bill of exchange is addressed is the

A) drawee.
B) drawer.
C) maker.
D) originator.

Question 22

The person or company initiating the draft or bill of exchange is known as the

A) maker.
B) drawer.
C) originator.
D) any of the above.

Question 23

Which are NOT types of letter of credit?

A) insurable vs. noninsurable
B) confirmed vs. unconfirmed
C) revocable vs. irrevocable
D) None are letters of credit.

Question 24

The ________ is issued to the exporter by a common carrier transporting the merchandise.

A) bill of lading
B) draft
C) banker's acceptance
D) line of credit

Question 25

Which of the following is NOT a requirement for a draft to become a negotiable instrument?

A) It must be payable to order or to bearer.
B) It must be payable on demand or at a fixed or determinable future date.
C) It must be in writing and signed by the maker or drawer.
D) All of the above.

Question 26

Drafts that have been accepted by banks become

A) clean drafts.
B) nonmarketable.
C) banker's acceptances.
D) none of the above.

Question 27

A sight draft is payable on presentation to the drawee; a time draft allows a delay in payment.

Question 28

A straight bill of lading is most likely to be used under which of the following circumstances?

A) when the merchandise has not been paid for in advance
B) when the transaction is being financed by a bank
C) when the shipment is to an affiliate
D) none of the above

Question 29

________ drafts are unaccompanied by any other documents, and are usually used between MNEs and ________.

A) Clean; new trading partners
B) Documentary; their own affiliates
C) Clean; their own affiliates
D) None of the above

Question 30

Which of the following purposes is NOT served by the bill of lading?

A) It acts as a receipt.
B) It acts as a contract.
C) It acts as a document of title.
D) It acts as all of the above.

Question 31

An instrument issued by a bank, at the request of an importer, in which the bank promises to pay a beneficiary upon presentation of specified documents is a

A) time certificate of deposit.
B) time draft.
C) sight draft.
D) letter of credit.

Question 32

An exporter has just received a banker's acceptance created by an international transaction. If the banker's acceptance has a face value of $250,000 and the bank charges a commission of 1% per annum, how much will the exporter receive from the banker if the acceptance is held until maturity six months from today?

A) $250,000
B) $247,500
C) $248,750
D) $1,250

Question 33

The ________ is the instrument normally used to actually effect payment in international commerce.

A) banker's acceptance
B) bill of exchange
C) bill of lading
D) letter of credit

Question 34

Which of the following is NOT a factor in the discounting of a securitized export receivable?

A) The cost of credit insurance.
B) The historic collection risk of the importer.
C) The historic collection risk of the exporter.
D) The size of the financing and service fees.

Question 35

An exporter has just received a banker's acceptance created by an international transaction. If the banker's acceptance has a face value of $250,000, current rates on banker's acceptances are 6%, and the bank charges a commission of 1% per annum, how much will the exporter receive if he sells the acceptance in the secondary market six months prior to maturity?

A) $250,000
B) $244,000
C) $242,500
D) $241,250

Question 36

A fundamental problem of international trade is

A) authorities in the importing country may disallow the consular invoice.
B) authorities in the exporting country may refuse to issue a consular invoice.
C) buyer and seller may act in collusion.
D) buyer and seller may not completely trust each other.

Question 37

The letter of credit is designed to

A) allow the buyer to obtain title to the goods before they are received.
B) free the seller from concerns over the payment abilities of the buyer.
C) free the seller from any merchandise guarantees.
D) be issued by the bank at the request of an exporter.

Question 38

Most drafts in international trade are "clean."

Question 39

The disadvantages of a letter of credit to the importer include

A) the exporter's reduced line of credit as a result of the letter of credit.
B) the fee charged by the exporter's bank for accepting the letter of credit.
C) the fee charged by the importer's bank for issuing the letter of credit.
D) All of the above.

Question 40

A bill of exchange or draft drawn on a bank and commonly used to guarantee exporters that they will receive payment on goods delivered to importers is a/an

A) banker's acceptance.
B) clean draft.
C) bill of lading.
D) letter of credit.

Question 41

What is a banker's acceptance? How are they initiated? Why are they desirable for the exporter?

Question 42

The three parties to a letter of credit are

A) issuing bank, seller, and applicant.
B) importer, exporter, and shipping company.
C) notary public, importer, and importer's bank.
D) Ex-Im bank, commercial bank, and importer.

Question 43

An exporter who insists on cash or a letter of credit for foreign shipments is likely to lose orders to competitors from other countries that provide more favorable credit terms.

Question 44

When a confirmed letter of credit is used, the exporting firm gains because

A) the government in effect subsidizes shipping costs.
B) the time involved in shipping is generally reduced.
C) the firm can sell against the promise of a local bank rather than a firm.
D) the exporting firm is considered of higher risk.

Question 45

Explain what a letter of credit (L/C) is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade.

Question 46

Custom Granite Inc. has a Canadian receivables contract for $200,000 due in 270 days. The firm has been approached by a factoring firm that offers to purchase the receivables at a 12% per annum discount plus a 1% charge for a nonrecourse clause. What is the annualized percentage all-in-cost of this factoring alternative?

A) 14.82%
B) 13.00%
C) 12.00%
D) 9.09%

Question 47

Instruction 20.1:
Use the information to answer following question(s).
Jackson Automotive Inc. of California agrees to sell specialized automotive parts to Hidatsi of Korea. Because the two companies have never done business with each other, Jackson requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Jackson Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.
Refer to Instruction 20.1. What is the size of the commission Jackson Automotive will pay the bank for the banker's acceptance?

A) $7,000
B) $5,000
C) $12,000
D) $14,000

Question 48

Instruction 20.1:
Use the information to answer following question(s).
Jackson Automotive Inc. of California agrees to sell specialized automotive parts to Hidatsi of Korea. Because the two companies have never done business with each other, Jackson requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Jackson Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.
Refer to Instruction 20.1. ________ is an unsecured promissory note.

A) A banker's acceptance
B) An overdraft
C) A securitized loan
D) Commercial paper

Question 49

In the United States, the Foreign Credit Insurance Corporation

A) is a subsidiary of the Export-Import Bank.
B) provides letters of credit for U.S. importers.
C) provides letters of credit for U.S. exporters.
D) provides policies that protect U.S. exporters against default by foreign importers.

Question 50

The Export-Import Bank is an independent agency of the U.S. government established in 1934 to

A) ship money abroad.
B) import agricultural products during the recession.
C) facilitate and stimulate foreign trade of the United States.
D) none of the above.

Question 51

Instruction 20.1:
Use the information to answer following question(s).
Jackson Automotive Inc. of California agrees to sell specialized automotive parts to Hidatsi of Korea. Because the two companies have never done business with each other, Jackson requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Jackson Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.
Refer to Instruction 20.1. What is the total Jackson Automotive can expect to receive if the firm takes payment today?

A) $993,000
B) $995,000
C) $988,000
D) $996,000

Question 52

Instruction 20.1:
Use the information to answer following question(s).
Jackson Automotive Inc. of California agrees to sell specialized automotive parts to Hidatsi of Korea. Because the two companies have never done business with each other, Jackson requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Jackson Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.
Refer to Instruction 20.1. What is the size of the discount (not including the commission fee) Jackson must take for receiving the proceeds of the sale today rather than waiting for six months?

A) $7,000
B) $5,000
C) $12,000
D) $14.000

Question 53

In a letter of credit, the bank substitutes its credit for that of the importer and promises to pay if certain documents are submitted to the bank.

Question 54

The Foreign Credit Insurance Association is a branch of the U.S. federal government.

Question 55

A banker's acceptance is a ________ that has been accepted by a bank.

A) credit certificate
B) time draft
C) line of credit
D) bill of lading