Assume that DownPillow sells pillows to a Japanese buyer and forwards documents and a draft for acceptance.Assume also that DownPillow discounts the trade acceptance to a U.S.bank,which then discounts the instrument in the credit markets.If the pillows turn out to be moldy and worthless,which of the following statement(s)is (are)true?

Question

Quizplus · Accepted Answer

The fact that the pillows are moldy and worthless does not excuse the Japanese buyer from paying the trade acceptance. The trade acceptance is a separate financial instrument that is independent of the underlying product (in this case, the pillows). Therefore, the Japanese buyer must still honor and pay the acceptance upon presentation. The U.S. bank, as the holder of the trade acceptance, may have recourse against DownPillow for the value of the instrument, but this does not affect the Japanese buyer's obligation to pay. Option A and D are incorrect as the damage to the pillows does not relieve the Japanese buyer of their obligation to pay. Option B is incorrect because the U.S. bank is not necessarily obligated to reimburse anyone, as they may have discounted the instrument in the credit markets to a third party who assumes the risk.

Assume That DownPillow Sells Pillows to a Japanese Buyer and Forwards