Question 1

What is the major difference between "currency risk" and "risk of noncompletion"? How are these risks handled in a typical international trade transaction?

Accepted Answer

Currency risk is the risk that the currency designated for payment of the import changes in value relative to the other currency.A U.S.firm exporting to France wants dollars,while the French importer wants to pay euros.If the sale contract specifies payment in dollars,the French importer has a currency risk-more euros than expected might be needed when payment is due.If the sales contract specifies payment in euros,the U.S.exporter has a currency risk-fewer dollars than expected might be received when the euros are exchanged for dollars.
Risk of noncompletion is the risk that one of the parties fails to fulfill its obligations.The importer may refuse to pay for the goods,or the exporter may fail to ship the goods.Events not under the control of the parties to the trade,such as major storms,disease epidemics,terrorist acts,or war,may make completion of the trade impossible.The several documents involved in international trade are intended to reduce financial loss from noncompletion.

Question 2

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?

Accepted Answer

The combination of a letter of credit, a sight draft, and an order bill of lading provides protection against the risk of noncompletion, foreign exchange risk, and financing risk. The letter of credit ensures that payment will be made once the terms and conditions are met, the sight draft ensures that the payment will be made upon presentation of the shipping documents, and the order bill of lading ensures that the goods will not be released until payment is made. Therefore, all of these risks are reduced when using these trade implements.

Question 3

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

Accepted Answer

The foreign importer that has not previously conducted business with the firm would be an unaffiliated unknown, as there is no preexisting relationship or affiliation between the two parties.

Question 4

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.

Accepted Answer

Most international transactions are conducted between affiliated parties, meaning that they are part of the same multinational enterprise (MNE). As a result, contracts for these transactions tend to be simpler than those for unrelated parties. However, managing the total value of the MNE across multiple countries and subsidiaries can be a complex task.

Question 5

Why might different documentation be used for an export to a nonaffiliated foreign buyer who is a new customer,as compared with an export to a nonaffiliated foreign buyer to whom the exporter has been selling for many years?

Accepted Answer

The answer of Why might different documentation be used for...

Question 6

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

Accepted Answer

A revocable letter of credit can be cancelled or altered by the issuer without the consent of the beneficiary, and therefore does not provide a guarantee of payment. It is primarily used to facilitate trade and arrange payment between the parties involved.

Question 7

In the case of international trade,the risk of nonpayment is essentially eliminated with the use of a letter of credit issued through a trustworthy bank.

Accepted Answer

A letter of credit, when issued by a trustworthy bank, serves as a guarantee of payment for international trade transactions, thus reducing the risk of nonpayment.

Question 8

The risk of noncompletion is most important when:

Accepted Answer

The answer of The risk of noncompletion is most important...

Question 9

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

Accepted Answer

The fundamental dilemma of foreign trade is the lack of trust between two parties from different countries who do not have established relationships or prior experience working with each other.

Question 10

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:

Accepted Answer

Since the two firms have communicated regularly since the last sale three years ago, they are considered a known party, and since they have not entered a contracted agreement for three years, they are unaffiliated. Therefore, this is an unaffiliated known party transaction.

Question 11

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

Accepted Answer

Federal funds transaction is a domestic financial instrument used for interbank lending within the US, and is not typically used in international trade transactions. The other options (Letter of Credit, Sight Draft, Order bill of lading) are all commonly used financial instruments in international trade transactions.

Question 12

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

Accepted Answer

The answer of Which of the following relationships between importing...

Question 13

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

Accepted Answer

International trade is significantly influenced by transactions within multinational corporations, involving trade between affiliated parties such as parent companies and their subsidiaries, in addition to transactions between unaffiliated parties.

Question 14

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

Accepted Answer

The answer of The risk of default on the part...

Question 15

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

Accepted Answer

If the transaction calls for payment in the exporter's currency, the importer assumes the risk of fluctuations in the exchange rate between their home currency and the exporter's currency, which could ultimately affect the cost of the transaction.

Question 16

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

Accepted Answer

The answer of Which of the following is NOT true...

Question 17

For what reason might an exporter use standard international trade documentation (letter of credit,draft,order bill of lading)on an intrafirm export to its parent or sister subsidiary?

Accepted Answer

The answer of For what reason might an exporter use...

Question 18

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

Accepted Answer

If the transaction calls for payment in the importer's currency, it means that the exporter will receive the payment in foreign currency and will have to convert it back to their domestic currency, exposing them to exchange rate fluctuations and potential losses. Therefore, the exporter has the foreign exchange risk.

Question 19

From a financial management perspective,all of the following are primary risks associated with an international trade transaction EXCEPT:

Accepted Answer

Currency risk, default risk, and noncompletion risk are all primary risks associated with international trade transactions. Interest rate risk is not typically considered a primary risk, as it is more closely associated with financial investments rather than trade transactions. However, interest rates can still have an indirect impact on trade transactions, particularly in terms of financing and borrowing costs. So, the correct answer is D.

Question 20

An advantage of trading with an affiliated party for an MNE,compared to an unaffiliated party,could be reduced contracting costs and less to even no need to protect against nonpayment.

Accepted Answer

Trading with an affiliated party usually involves a closer relationship and greater trust, leading to reduced risk of nonpayment and lower transaction costs compared to trading with an unaffiliated party.

Quiz 16: International Trade Finance