Finance Chapter 15 1 The Berne Union d The Importer Selling Its

Document Type
Test Prep
Book Title
Fundamentals of Multinational Finance 5th Edition
Authors
Arthur I. Stonehill, David K. Eiteman, Michael H. Moffett
Fundamentals of Multinational Finance, 5e (Moffett et al.)
Chapter 15 International Trade Finance
Multiple Choice and True/False Questions
15.1 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) Today, international trade is dominated by transactions between unaffiliated parties (known or
unknown).
5) 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.
15.2 Benefits of the System
1) The risk of default on the part of the importer is present as soon as
A) a price quote is requested.
B) goods are shipped.
C) the export contract is signed.
D) goods are received.
2) A fundamental problem of international trade is
A) authorities in the importing country may disallow the consular invoice.
B) authorities in the exporting country may refuse to issue a consular invoice.
C) buyer and seller may act in collusion.
D) buyer and seller may not completely trust each other.
15.3 Key Documents
1) A signed ________ is issued by the exporter and contains a precise description of the
merchandise.
A) packing list
B) bill of lading
C) commercial invoice
D) banker's acceptance
2) The main disadvantage of the Letter of Credit (L/C) is
A) L/C reduces counterparty and foreign exchange risk.
B) L/C can serve as collateral for pre-export financing vehicle.
C) L/C can entail significant bank fees and reduce borrowing line of credit.
D) All of the above
3) ________ may be required so that the contents of containers can be identified, either for
customs purposes or for importer identification of the contents of separate containers.
A) Banker's acceptances
B) Commercial invoices
C) Consular invoices
D) Packing lists
4) ________ is the risk that interest rates will change between signing the contract and payment
for goods and services.
A) Currency risk
B) Risk of non-completion
C) Default risk
D) Portfolio risk
5) A letter of credit is an agreement by the bank to pay against documents rather than the actual
merchandise.
6) 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.
7) 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
8) 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
9) The primary advantage of a letter of credit is that it reduces risk.
10) 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
11) The major advantage to the exporter of a letter of credit is that the exporter does not receive
any funds until the documents have arrived at a local port or airfield.
12) The letter of credit is designed to
A) allow the buyer to obtain title to the goods before they are received.
B) free the seller from concerns over the payment abilities of the buyer.
C) free the seller from any merchandise guarantees.
D) be issued by the bank at the request of an exporter.
13) Which are NOT types of letter of credit?
A) insurable vs. noninsurable
B) confirmed vs. unconfirmed
C) revocable vs. irrevocable
D) None are letters of credit.
14) An instrument issued by a bank, at the request of an importer, in which the bank promises to
pay a beneficiary upon presentation of specified documents is a
A) time certificate of deposit.
B) time draft.
C) sight draft.
D) letter of credit.
15) The disadvantages of a letter of credit to the importer include
A) the exporter's reduced line of credit as a result of the letter of credit.
B) the fee charged by the exporter's bank for accepting the letter of credit.
C) the fee charged by the importer's bank for issuing the letter of credit.
D) All of the above.
16) When a confirmed letter of credit is used, the exporting firm gains because
A) the government in effect subsidizes shipping costs.
B) the time involved in shipping is generally reduced.
C) the firm can sell against the promise of a local bank rather than a firm.
D) the exporting firm is considered of higher risk.
17) In a letter of credit, the bank substitutes its credit for that of the importer and promises to pay
if certain documents are submitted to the bank.
18) A ________ is issued to the exporter by a common carrier transporting the merchandise.
A) commercial invoice
B) banker's acceptance
C) packing list
D) bill of lading
19) Which of the following documents is NOT part of a system designed to protect both the
importer and exporter from non-completion of trade?
A) letter of credit
B) draft
C) bill of lading
D) All of the above are important protective documents.
20) The three parties to a letter of credit are
A) issuing bank, seller, and applicant.
B) importer, exporter, and shipping company.
C) notary public, importer, and importer's bank.
D) Ex-Im bank, commercial bank, and importer.
21) A banker's acceptance is a ________ that has been accepted by a bank.
A) credit certificate
B) time draft
C) line of credit
D) bill of lading
22) The draft is the instrument normally used in international commerce to
A) transfer product.
B) prove ownership.
C) transfer title.
D) initiate the sale.
23) 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
24) 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
25) The person or company to whom the draft or bill of exchange is addressed is the
A) drawee.
B) drawer.
C) maker.
D) originator.
26) Which of the following is NOT a requirement for a draft to become a negotiable instrument?
A) It must be payable to order or to bearer.
B) It must be payable on demand or at a fixed or determinable future date.
C) It must be in writing and signed by the maker or drawer.
D) All of the above.
27) A sight draft is payable on presentation to the drawee; a time draft allows a delay in
payment.
28) A bill of exchange or draft drawn on a bank and commonly used to guarantee exporters that
they will receive payment on goods delivered to importers is a/an
A) banker's acceptance.
B) clean draft.
C) bill of lading.
D) letter of credit.
29) An exporter has just received a banker's acceptance created by an international transaction. If
the banker's acceptance has a face value of $250,000, current rates on banker's acceptances are
6%, and the bank charges a commission of 1% per annum, how much will the exporter receive if
he sells the acceptance in the secondary market six months prior to maturity?
A) $250,000
B) $244,000
C) $242,500
D) $241,250
30) 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.
31) 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
15.4 Documentation in a Typical Trade Transaction
1) ________ drafts are unaccompanied by any other documents, and are usually used between
MNEs and ________.
A) Clean; new trading partners
B) Documentary; their own affiliates
C) Clean; their own affiliates
D) None of the above
2) Most drafts in international trade are "clean."
3) Drafts that have been accepted by banks become
A) clean drafts.
B) nonmarketable.
C) banker's acceptances.
D) none of the above.
4) An exporter has just received a banker's acceptance created by an international transaction. If
the banker's acceptance has a face value of $250,000 and the bank charges a commission of 1%
per annum, how much will the exporter receive from the banker if the acceptance is held until
maturity six months from today?
A) $250,000
B) $247,500
C) $248,750
D) $1,250
15.5 Government Programs to Help Finance Exports
1) The Foreign Credit Insurance Association is a branch of the U.S. federal government.
2) An exporter who insists on cash or a letter of credit for foreign shipments is likely to lose
orders to competitors from other countries that provide more favorable credit terms.
3) 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.
4) 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.
15.6 Trade Financing Alternatives
1) Which of the following is NOT a factor in the discounting of a securitized export receivable?
A) the cost of credit insurance
B) the historic collection risk of the importer
C) the historic collection risk of the exporter
D) the size of the financing and service fees
2) By obtaining export credit insurance
A) the importer insures additional costs for the L/C.
B) the exporter transfers high portion of the nonpayment risk to a government agency such as
Eximbank.
C) the exporter is selling its receivables to The Berne Union.
D) the importer is selling its payables to The Berne Union.
Instruction 15.1:
Use the information to answer the following question(s).
Jackson Automotive Inc. of California agrees to sell specialized automotive parts to Hidatsi of
Korea. Because the two companies have never done business with each other, Jackson 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 Jackson Inc. chooses to
discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.
3) Refer to Instruction 15.1. What is the size of the commission Jackson Automotive will pay the
bank for the banker's acceptance?
A) $7,000
B) $5,000
C) $12,000
D) $14,000
4) Refer to Instruction 15.1. What is the size of the discount (not including the commission fee)
Jackson 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
5) Refer to Instruction 15.1. What is the total Jackson Automotive can expect to receive if the
firm takes payment today?
A) $993,000
B) $995,000
C) $988,000
D) $996,000
6) Refer to Instruction 15.1. ________ is an unsecured promissory note.
A) A banker's acceptance
B) An overdraft
C) A securitized loan
D) Commercial paper
7) Custom Granite 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%
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8) Commercial Paper as unsecured promissory notes
A) is available to any domestic or foreign company.
B) usually yields higher costs than factoring instruments.
C) is a form of long term financing used for large transactions.
D) None of the above
9) A Firm sells its 90 days receivables through recourse base factoring thus
A) it avoids the costs of determining counterparty creditworthiness.
B) increases political and FX risk.
C) receives cash proceeds at lower cost compared to standard credit line.
D) accepts the risk that not all receivables will be collected.
15.7 Forfaiting: Medium- and Long-Term Financing
1) ________ is a French term meaning to forfeit or surrender a right.
A) Parfait
B) Forfait
C) Mon Dieu
D) Je ne sais pas
2) In a typical forfaiting agreement the importer and exporter agree between themselves on a
series of imports to be paid for over a period of time, typically three to five years.
3) The essence of forfaiting is the non-recourse sale by an exporter of bank-guaranteed
promissory notes, bills of exchange, or similar documents received from an importer in another
country.
Essay Questions
15.1 The Trade Relationship
1) The nature of the relationship between the exporter and the importer is critical to
understanding the methods for import-export financing utilized in industry. Provide an overview
of the three categories of relationships: unaffiliated unknown, unaffiliated known, and affiliated.
15.2 Benefits of the System
1) What is the trade dilemma and how is the dilemma generally solved?
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15.3 Key Documents
1) 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.
2) What is a banker's acceptance? How are they initiated? Why are they desirable for the
exporter?
15.4 Documentation in a Typical Trade Transaction
1) There are no questions in this section.
15.5 Government Programs to Help Finance Exports
1) What is the Import-Export Bank and how can it aid in export financing?
15.6 Trade Financing Alternatives
1) Define and describe the process of factoring. When might this process be attractive to firms?
15.7 Forfaiting: Medium- and Long-Term Financing
1) Forfaiting is a complicated process. The author describes the procedure through a seven part
process. Please describe the forfaiting process.

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