Deck 22: International Trade Finance

Question 1

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.

Answer 1

A letter of credit (L/C)is a bank's conditional promise to pay issued by a bank at the request of an importer. The primary advantage of an L/C is the reduction in risk. This reduction in risk makes it easier for the exporter to sell goods to the importer because it no longer need rely on the ability of the importing firm to pay for the goods, but rather it can rely on the bank.
There are three primary parties involved with a letter of credit. Party number one is the exporter, who makes a sale to the importer in exchange for the bank's L/C. Party number two is the importer who receives the goods and promises to pay the bank. And third, the bank that contracts with the importer and agrees to pay the exporter upon presentation of documents as specified in the L/C.
The advantage to an exporter is the increased likelihood of receiving payment because funds are due from a known international commercial bank as opposed to a relatively unknown importer. Furthermore, an exporter with a good reputation for delivery may be able to sell the L/C at a discount in the secondary market prior to shipping and speed up cash flow.
The importer benefits because it doesn't need to pay for goods purchased until they actually reach port. The bank benefits from the fees they charge.

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

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 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 6

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 7

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 8

Which of the following is NOT a financial instrument that may be included in an international trade transaction?

A)Letter of Credit
B)Sight Draft
C)Order bill of lading
D)Federal funds transaction

Question 9

The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a foreign land.

Question 10

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

Question 11

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 12

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 13

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 14

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 15

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

Question 16

The combination of a letter of credit, a sight draft, and an order bill of lading protect both parties in international transactions from which of the following?

A)The risk of noncompletion.
B)The risk of foreign exchange risk (when combined with a various hedging techniques).
C)The risk that financing will not be available due to foreign exchange risk.
D)All of these risks are reduced when using these trade implements.

Question 17

If a foreign exchange transaction calls for payment in the importer's currency, the exporter has the foreign exchange risk.

Question 18

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 19

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 20

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 21

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 22.1. 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 22

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 22.1. 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 23

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 24

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

Question 25

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 26

________ is a specialized technique to eliminate the risk of nonpayment by importers in instances where the importing firm and/or its government is perceived by the exporter to be too risky for open account credit.

A)Forfitting
B)Marketable Bank Shares
C)Forfaiting
D)Banker's Acceptances

Question 27

In effect, the forfaiter functions both as a money market firm and a specialist in packaging financial deals involving country risk.

Question 28

In a typical international trade transaction, the order of activity would be which of the following?

A)The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The buyer's bank submits payment to the manufacturer's bank.
B)The domestic manufacturer ships to the buyer; The buyer's bank submits payment to the manufacturer's bank; The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance.
C)The foreign buyer places an order; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The domestic manufacturer ships to the buyer; The buyer's bank submits payment to the manufacturer's bank.
D)The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The foreign buyer places an order; The buyer's bank submits payment to the manufacturer's bank.

Question 29

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

Question 30

Drafts that have been accepted by banks become

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

Question 31

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 32

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 33

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 22.1. ________ is an unsecured promissory note.

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

Question 34

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 22.1. 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 35

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 36

Because of the risks involved in international trade, most transactions follow conventional methods and rarely require flexibility or creativity on the part of management.

Question 37

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

Question 38

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 39

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

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