Question 1

A sogo shosha might assist in the sale of Mitsubishi trucks in Ghana, taking payment in cocoa, which then can be sold to keiretsu-linked food processors back in Japan or to independent candy makers anywhere. This is an example of ________.

Accepted Answer

Switching arrangements involve a third party that facilitates the exchange of goods or services between two parties, often using a form of barter or countertrade, as described in the scenario.

Question 2

Which form of countertrade involves compensation arrangements whereby one firm sells capital goods to a second firm and is compensated in the form of output generated as a result of their use?

Accepted Answer

Buy-back arrangements involve a situation where one firm sells capital goods or technology to another firm and agrees to be paid with the products produced as a result of this sale. This form of countertrade allows the seller to recover the cost of the goods or technology sold by receiving a portion of the output it enables.

Question 3

After issuing the letter of credit, the importer's bank sends it and the accompanying documents to the exporter's bank, which advises the exporter of the terms of the instrument, thereby creating a(n) ________.

Accepted Answer

An advised letter of credit is one where the exporter's bank advises the exporter of the terms of the letter of credit without adding its confirmation. The bank acts as a mediator to convey the terms of the letter of credit from the importer's bank to the exporter.

Question 4

Which document is issued by a bank and contains its promise to pay the exporter on receiving proof that the exporter has fulfilled all requirements specified in the document?

Accepted Answer

A letter of credit is a document issued by a bank that guarantees the bank will pay the exporter upon receiving proof that the exporter has fulfilled the terms and conditions specified in the letter of credit. This is commonly used in international trade to reduce the risk for exporters.

Question 5

Japan's Fukusuke Corporation sold 10 knitting machines and raw materials to Chinatex, a Shanghai-based clothing manufacturer in exchange for one million pairs of underwear to be produced on the knitting machines. What form of countertrade is this?

Accepted Answer

This is an example of a buy-back arrangement, where the seller (Fukusuke Corporation) provides technology or equipment (knitting machines) to the buyer (Chinatex), and agrees to accept the output produced by this technology (underwear) as partial or full payment.

Question 6

What is the most common form of countertrade?

Accepted Answer

Counterpurchase is the most common form of countertrade, where two parties agree to buy goods and services from each other as part of the same transaction.

Question 7

Which form of countertrade is used when part of an exported good is produced in the importing country?

Accepted Answer

Offset purchase involves a situation where the seller agrees to purchase goods or services from the buyer country as part of the deal. This often includes producing part of the exported goods in the importing country, which helps in balancing trade and often fulfills local content requirements.

Question 8

What is the simplest form of countertrade?

Accepted Answer

Barter, the direct exchange of goods and services without the use of money, is considered the simplest form of countertrade.

Question 9

Credit card companies collect ________ from the merchant for assuming the costs of collecting the funds from the customer and any risks of nonpayment.

Accepted Answer

Credit card companies collect transaction fees from the merchant for assuming the costs of collecting the funds from the customer and any risks of nonpayment. These fees are a percentage of the sale amount.

Question 10

Company X sold its products to Company Z in September. Company X will be compensated with Company Z's products in December. Which term best describes this transaction?

Accepted Answer

This transaction is best described as a counterpurchase, where Company X sells products to Company Z and is compensated not with money but with Company Z's products at a later date.

Question 11

The ________ is a letter of credit that the bank may alter at any time and for any reason.

Accepted Answer

The revocable letter of credit is the type of letter of credit that can be altered or canceled by the bank at any time and for any reason, without the need for permission from the beneficiary.

Question 12

Columbus Trading agrees to exchange coffee and rice to Romania in return for machinery. Which term best describes this transaction?

Accepted Answer

Countertrade refers to a trade arrangement in which goods or services are exchanged for other goods or services, without the use of money. In this case, Columbus Trading is exchanging coffee and rice for machinery, which fits the definition of countertrade.

Question 13

The ________ is a letter of credit that cannot be altered without the written consent of both the importer and the exporter.

Accepted Answer

The irrevocable letter of credit is a financial instrument that cannot be changed or cancelled without the agreement of all parties involved, including the importer and the exporter.

Question 14

When acceptances are sold ________, it means that the exporter will have to reimburse the buyer of the acceptance in the case of nonpayment by the importer.

Accepted Answer

When acceptances are sold "with recourse," it means that the seller (in this case, the exporter) retains liability and must reimburse the buyer of the acceptance if the importer fails to pay. Selling "without recourse" would transfer all risk to the buyer of the acceptance, removing the seller's liability for reimbursement in case of nonpayment.

Question 15

A(n) ________ confirms that the goods being shipped were produced in the exporting country.

Accepted Answer

A certificate of product origin confirms that the goods being shipped were produced in the exporting country, verifying their origin.

Question 16

Which term refers to an accounting system used to facilitate international countertrade that requires a firm to balance its overall countertrade transactions but not any single countertrade transaction?

Accepted Answer

Clearinghouse accounts are used in international countertrade to allow firms to balance their overall countertrade transactions without the need to balance each individual transaction. This system facilitates smoother and more flexible trade arrangements between companies from different countries.

Question 17

A(n) ________ provides assurance that the products have been checked by authorities and that they conform to relevant standards.

Accepted Answer

An inspection certificate is issued by the relevant authority to confirm that a product has been inspected and meets the specified standards. This provides assurance to buyers that the product conforms to the required quality and safety standards.

Question 18

The State Trading Corporation of India agreed to exchange wheat and other grains to Turkmenistan in return for cotton. What form of countertrade is this?

Accepted Answer

This is an example of barter, which is a direct exchange of goods or services between two parties without the use of money.

Question 19

Which form of countertrade is used when each party simultaneously swaps its products for the products of the other?

Accepted Answer

Barter is the direct exchange of goods and services between two parties without the use of money, where each party simultaneously swaps its products for the products of the other.

Question 20

Martin Exporting requests ABC Bank to add its own guarantee of payment to a letter of credit, which creates a(n) ________.

Accepted Answer

When a bank adds its own guarantee of payment to a letter of credit, it is referred to as a confirmed letter of credit. This provides the beneficiary with an additional layer of protection, as they now have two parties (the issuing bank and the confirming bank) that are responsible for payment. Option A (advised letter of credit) refers to a letter of credit that has been forwarded to the beneficiary by a bank in the beneficiary's country, but the bank is not necessarily responsible for payment. Option C (irrevocable letter of credit) refers to a letter of credit that cannot be changed or cancelled without the agreement of all parties involved. Option D (unconfirmed letter of credit) refers to a letter of credit that only has the guarantee of the issuing bank, and not an additional confirming bank.

Quiz 18: International Financial Management