Deck 15: International Trade Finance

Question 1

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

Answer 1

exporter's; blocked foreign exchange

Question 2

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

Answer 2

revocable

Question 3

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

Answer 3

unaffiliated unknown party

Question 4

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.

Question 5

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 6

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 7

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

Question 8

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 9

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 10

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 11

________ 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 12

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

Question 13

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

Question 14

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 15

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 16

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 17

The main disadvantage of the Letter of Credit (L/C) is

A) L/C reduces counterparty and foreign exchange risk.
B) L/C can serve as collateral for pre-export financing vehicle.
C) L/C can entail significant bank fees and reduce borrowing line of credit.
D) All of the above

Question 18

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 19

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 20

________ 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 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

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

Question 23

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 24

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 25

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.

Question 26

________ 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 27

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

Question 28

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 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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 38

Most drafts in international trade are "clean."

Question 39

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 40

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 41

What is the trade dilemma and how is the dilemma generally solved?

Question 42

Use the information to answer the 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 15.1. 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 43

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 44

Drafts that have been accepted by banks become

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

Question 45

In a typical forfaiting agreement the importer and exporter agree between themselves on a series of imports to be paid for over a period of time, typically three to five years.

Question 46

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

Question 47

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 48

By obtaining export credit insurance

A) the importer insures additional costs for the L/C.
B) the exporter transfers high portion of the nonpayment risk to a government agency such as Eximbank.
C) the exporter is selling its receivables to The Berne Union.
D) the importer is selling its payables to The Berne Union.

Question 49

The nature of the relationship between the exporter and the importer is critical to understanding the methods for import-export financing utilized in industry. Provide an overview of the three categories of relationships: unaffiliated unknown, unaffiliated known, and affiliated.

Question 50

Use the information to answer the 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 15.1. 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 51

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 52

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 53

The essence of forfaiting is the non-recourse sale by an exporter of bank-guaranteed promissory notes, bills of exchange, or similar documents received from an importer in another country.

Question 54

A Firm sells its 90 days receivables through recourse base factoring thus

A) it avoids the costs of determining counterparty creditworthiness.
B) increases political and FX risk.
C) receives cash proceeds at lower cost compared to standard credit line.
D) accepts the risk that not all receivables will be collected.

Question 55

Use the information to answer the 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 15.1. 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 56

Commercial Paper as unsecured promissory notes

A) is available to any domestic or foreign company.
B) usually yields higher costs than factoring instruments.
C) is a form of long term financing used for large transactions.
D) None of the above

Question 57

________ is a French term meaning to forfeit or surrender a right.

A) Parfait
B) Forfait
C) Mon Dieu
D) Je ne sais pas

Question 58

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 59

Use the information to answer the 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 15.1. ________ is an unsecured promissory note.

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

Question 60

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 61

Forfaiting is a complicated process. The author describes the procedure through a seven part process. Please describe the forfaiting process.

Question 62

Define and describe the process of factoring. When might this process be attractive to firms?

Question 63

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

Question 64

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 65

What is the Import-Export Bank and how can it aid in export financing?