Multinational Business Finance 13th Edition Test Bank Chapter 20

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett)

Chapter 20 International Trade Finance

20.1 The Trade Relationship

Multiple Choice

Question: 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

Answer:

Question: 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:

Question: 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

Answer:

Question: Today, international trade is dominated by transactions between unaffiliated

parties (known or unknown).

Answer:

Question: 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.

Answer:

Question: 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.

Answer:

Question: 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

Answer:

Question: The fundamental dilemma of foreign trade is being unwilling to trust a stranger

in a foreign land.

Answer:

Question: 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.

Answer:

Question: If a foreign exchange transaction calls for payment in the importers currency, the

exporter has the foreign exchange risk.

Answer:

Question: If a foreign exchange transaction calls for payment in the exporters currency, the

importer has the foreign exchange risk.

Answer:

Question: 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.

Answer:

Question: 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 importers bank cuts a sales contract based on its assessment of the creditworthiness

of the importer.

Answer:

Question: 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

Answer:

Question: 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

Answer:

Question: A letter of credit that is confirmed in the ________ country has the additional

advantage of eliminating the problem of ________.

A) exporters; portfolio risk

B) importers; blocked foreign exchange

C) exporters; blocked foreign exchange

D) none of the above

Answer:

Question: The draft is the instrument normally used in international commerce to:

A) transfer product.

B) prove ownership.

C) transfer title.

D) initiate the sale.

Answer:

Question: The ________ is the instrument normally used to actually effect payment in

international commerce.

A) bankers acceptance

B) bill of exchange

C) bill of lading

D) letter of credit

Answer:

Question: 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

Answer:

Question: The person or company to whom the draft or bill of exchange is addressed is

the:

A) drawee.

B) drawer.

C) maker.

D) originator.

Answer:

Question: Drafts that have been accepted by banks become:

A) clean drafts.

B) nonmarketable.

C) bankers acceptances.

D) none of the above

Answer:

Question: 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.

Answer:

Question: The ________ is issued to the exporter by a common carrier transporting the

merchandise.

A) bill of lading

B) draft

C) bankers acceptance

D) line of credit

Answer:

Question: 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

Answer:

Question: 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.

Answer:

Question: A letter of credit is an agreement by the bank to pay against documents rather

than the actual merchandise.

Answer:

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

Answer:

Question: 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.

Answer:

Question: 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.

Answer:

Question: To constitute a true letter of credit transaction, the banks L/C must contain a

specified expiration date or a definite maturity.

Answer:

Question: To constitute a true letter of credit transaction, the banks commitment must be

open-ended and cannot have a stated maximum amount of money.

Answer:

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

a guarantee of payment.

Answer:

Question: A sight draft is payable on presentation to the drawee; a time draft allows a delay

in payment.

Answer:

Question: A draft is sometimes called a revocable letter of credit.

Answer:

Question: 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.

Answer:

Question: 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.

Answer:

Question: 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:

Question: 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

manufacturers bank presents a draft and documents to the buyers bank for acceptance; The

buyers bank submits payment to the manufacturers bank.

B) The domestic manufacturer ships to the buyer; The buyers bank submits payment to the

manufacturers bank; The foreign buyer places an order; The domestic manufacturer ships

to the buyer; The manufacturers bank presents a draft and documents to the buyers bank

for acceptance.

C) The foreign buyer places an order; The manufacturers bank presents a draft and

documents to the buyers bank for acceptance; The domestic manufacturer ships to the

buyer; The buyers bank submits payment to the manufacturers bank.

D) The domestic manufacturer ships to the buyer; The manufacturers bank presents a draft

and documents to the buyers bank for acceptance; The foreign buyer places an order; The

buyers bank submits payment to the manufacturers bank.

Answer:

Question: Because of the risks involved in international trade, most transactions follow

conventional methods and rarely require flexibility or creativity on the part of

management.

Answer:

Question: 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

Answer:

Question: 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.

Answer:

Question: 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

Answer:

Question: Refer to Instruction 20.1. What is the size of the commission Cypress will pay

the bank for the bankers acceptance?

A) $7,000

B) $5,000

C) $12,000

D) $14,000

Answer:

Question: 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

Answer:

Question: Refer to Instruction 20.1. ________ is an unsecured promissory note.

A) A bankers acceptance

B) An overdraft

C) A securitized loan

D) Commercial paper

Answer:

Question: 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%

Answer:

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

government.

Answer:

Question: 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.

Answer:

Question: Essentially, the Eximbank lends dollars to borrowers inside the United States for

the purchase of U.S. goods and services.

Answer:

Question: Bankers acceptances can be used to finance only international trade receivables

but not domestic trade receivables.

Answer:

Question: What is a bankers acceptance? How are they initiated? Why are they desirable

for the exporter?

Answer:

Question: ________ 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) Bankers Acceptances

Answer:

Question: In effect, the forfaiter functions both as a money market firm and a specialist in

packaging financial deals involving country risk.

Answer: