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Multinational Business Finance, 14e (Eiteman)
Chapter 16 International Trade Finance
16.1 The Trade Relationship
1) 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
2) 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
3) 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
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
5) Today, international trade is dominated by transactions between unaffiliated parties (known or
unknown).
6) 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.
7) 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.
8) The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a foreign
land.
9) 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?
Answer: A new nonaffiliated buyer presents a credit risk for the exporter, because the exporter
may be unable to assess the creditworthiness of that importer due to geographic distance,
10) 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?
Answer: An export to a parent or sister subsidiary has no credit risk because both exporter and
importer are part of the same corporate unit. Non-payment to an exporter in this situation is just a
16.2 Benefits of the System
1) 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.
2) The risk of noncompletion is most important when:
A) the international trade is recurrent in nature.
B) there is a sustained relationship between the buyer and seller.
C) with an outstanding agreement for recurring shipments.
D) when the relationship is between countries whose currencies are considered strong.
3) From a financial management perspective, all of the following are primary risks associated
with an international trade transaction EXCEPT:
A) currency risk
B) default risk
C) noncompletion risk
D) interest rate risk
4) The risk of default on the part of the importer - risk of noncompletion - is present as soon as:
A) a price quote is given.
B) goods are received.
C) the export contract is signed.
D) the financing period begins.
5) If a foreign exchange transaction calls for payment in the importer's currency, the exporter has
the foreign exchange risk.
5
6) If a foreign exchange transaction calls for payment in the exporter's currency, the importer has
the foreign exchange risk.
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.
8) What is the major difference between "currency risk" and "risk of noncompletion"? How are
these risks handled in a typical international trade transaction?
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,
16.3 Key Documents
1) 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.
2) 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
3) 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
4) 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
5) The draft is the instrument normally used in international commerce to:
A) transfer product.
B) prove ownership.
C) transfer title.
D) initiate the sale.
6) 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
7) 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
8) The person or company to whom the draft or bill of exchange is addressed is the:
A) drawee.
B) drawer.
C) maker.
D) originator.
9) Drafts that have been accepted by banks become:
A) clean drafts.
B) nonmarketable.
C) banker's acceptances.
D) none of the above
10) 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.
11) 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
12) 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
13) 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
14) 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.
15) A letter of credit is an agreement by the bank to pay against documents rather than the actual
merchandise.
16) The primary advantage of a letter of credit is that it reduces risk.
17) 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.
18) 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.
19) To constitute a true letter of credit transaction, the bank's L/C must contain a specified
expiration date or a definite maturity.
20) 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.
