Deck 20: 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

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

Answer 2

False

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 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 5

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 6

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 7

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

Question 8

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 9

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.

Question 10

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 11

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 12

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 13

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 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 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 16

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 17

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 18

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

Question 19

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.

Question 20

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

Question 21

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

Question 22

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

Question 23

To constitute a true letter of credit transaction, the bank's L/C must contain a specified expiration date or a definite maturity.

Question 24

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 25

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 26

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 27

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 28

To constitute a true letter of credit transaction, the issuing bank must receive a fee or other valid business consideration for issuing the L/C.

Question 29

To constitute a true letter of credit transaction, the bank's commitment must be open-ended and cannot have a stated maximum amount of money.

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

To become a negotiable instrument, a draft must conform to the following requirements EXCEPT:

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

Question 32

A revocable L/C is intended to serve as a means of arranging payment but not as a guarantee of payment.

Question 33

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 34

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 35

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

Question 36

A time draft is payable on presentation to the drawee; the drawee must pay at once or dishonor the draft. A sight draft, allows a delay in payment.

Question 37

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

Question 38

A draft is sometimes called a revocable letter of credit.

Question 39

The bill of lading is issued to the exporter by a common carrier transporting the merchandise. It serves three purposes: a receipt, a contract, and a document of title.

Question 40

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 41

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

Question 42

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 43

Essentially, the Eximbank lends dollars to borrowers inside the United States for the purchase of U.S. goods and services.

Question 44

Instruction 20.1: Use the information to answer the following question(s).
Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress 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 Cypress 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 Cypress will pay the bank for the banker's acceptance?

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

Question 45

________ 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)Forfeiting
B)Marketable Bank Shares
C)Forfaiting
D)Banker's Acceptances

Question 46

Rogue Spices 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

Banker's acceptances can be used to finance only international trade receivables but not domestic trade receivables.

Question 48

Instruction 20.1: Use the information to answer the following question(s).
Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress 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 Cypress 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

The Export-Import Bank (also called Eximbank)is an independent agency of the U.S. government, established in 1934 to stimulate and facilitate the foreign trade of the United States.

Question 50

Instruction 20.1: Use the information to answer the following question(s).
Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress 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 Cypress 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 Cypress can expect to receive if the firm takes payment today?

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

Question 51

Instruction 20.1: Use the information to answer the following question(s).
Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress 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 Cypress 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)Cypress 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 52

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

Question 53

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