21) A revocable L/C is intended to serve as a means of arranging payment but not as a guarantee
of payment.
22) A sight draft is payable on presentation to the drawee; a time draft allows a delay in
payment.
23) A draft is sometimes called a revocable letter of credit.
24) 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.
25) 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.
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.
27) 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.
Answer: A letter of credit (L/C) is a bank’s conditional promise to pay issued by a bank at the
request of an importer. The primary advantage of an L/C is the reduction in risk. This reduction
16.4 Government Programs to Help Finance Exports
1) 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
2) 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.
3) The Eximbank does all of the following EXCEPT:
A) guarantees lease transactions
B) supplies counseling for exporters in finding financing for US goods
C) finances the cost involved in the preparation of feasibility studies for non-US clients
D) provides letters of credit for U.S. exporters.
4) The Foreign Credit Insurance Association is a branch of the U.S. federal government.
5) 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.
6) Essentially, the Eximbank lends dollars to borrowers inside the United States for the purchase
of U.S. goods and services.
7) In the United States, domestic taxpayers bear the cost of export credit insurance and export
financing provided by institutions like the FCIA and Eximbank to foreign buyers in order to
create employment and maintain a technological edge.
8) Export credit insurance provides assurance to the exporter or the exporter‘s bank that, should
the foreign customer default on payment, the insurance company will pay for a major portion of
the loss.
9) One way a nation can improve its exports is by shortening the period for which credit
transactions can be insured.
10) The European Union recommends maximum credit terms for many items including, for
example, heavy capital goods (five years), light capital goods (three years), and consumer
durable goods (one year).
16.5 Trade Financing Alternatives
Instruction 16.1:
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.
1) Refer to Instruction 16.1. 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
2) Refer to Instruction 16.1. 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
3) Refer to Instruction 16.1. 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
4) Refer to Instruction 16.1. ________ is an unsecured promissory note.
A) A banker’s acceptance
B) An overdraft
C) A securitized loan
D) Commercial paper
5) 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%
6) Export receivables are normally sold at a discount. The size of the discount depends on the
following factors EXCEPT:
A) overdraft fees
B) collection risk
C) cost of credit insurance
D) size of financing and services fees
7) Banker’s acceptances are used to finance only international trade receivables but not domestic
trade receivables.
8) The first owner of the bankers’ acceptance created from an international trade transaction will
be the importer, who receives the endorsed draft back after the bank has stamped it “accepted.”
9) An overdraft agreement allows a firm to overdraw its bank account up to the limit of its credit
line.
10) Issuing commercial papers to finance accounts receivable or short term financing needs lies
at the low end of the pecking order of trade financing alternatives.
11) Recourse means that the factor assumes the credit, political, and foreign exchange risk for
the receivables it purchases.
12) The firm selling the recourse receivables avoids the cost of determining the creditworthiness
of its customers.
13) What is a banker’s acceptance? How are they initiated? Why are they desirable for the
exporter?
Answer: A draft, or bill of exchange, is a written order from the exporter telling the importer
when and how much to pay. When properly contracted, a draft can become a negotiable
1) ________ 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
2) Which of the following is NOT true about forfeiting?
A) The exporter is responsible for the quality of delivered goods.
B) Exporter receives an unconditional cash payment at the time of the transaction.
C) The exporter sells bank-guaranteed promissory notes at its face value.
D) The political and commercial risk is carried by the guaranteeing bank.
3) A typical forfaiting transaction involves the following parties EXCEPT:
A) importer
B) exporter
C) carrier
D) importer’s Bank
4) The following parties are usually guarantors in forfaiting EXCEPT:
A) commercial banks
B) government ministries of finance
C) large commercial enterprises
D) government banks
5) In effect, the forfaiter functions both as a money market firm and a specialist in packaging
financial deals involving country risk.
6) Success of the forfaiting technique springs from the belief that the aval can be depend on.
7) The liability of the aval is an “on balance sheet” obligation for the endorsing bank.