CHAPTER 16
INTERNATIONAL TRADE FINANCE
1. Unaffiliated Buyers. 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?
A new nonaffiliated buyer presents a credit risk for the exporter because the exporter may be unable
2. Affiliated Buyers. 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?
3. Related Party Trade. What reasons can you give for the observation that intrafirm trade is now
greater than trade between non-affiliated exporters and importers?
4. Documents. Explain the difference between a letter of credit (L/C) and a draft. How are they linked?
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directed to) that bank.
5. Risks. What is the major difference between currency risk and risk of noncompletion? How are these
risks handled in a typical international trade transaction?
Currency risk is the risk that the currency designated for payment of the import changes in value
6. Letter of Credit. Identify each party to a letter of credit (L/C) and indicate its responsibility.
A bank issues a letter of credit, promising to pay for an international trade transaction if certain
7. Confirmined Letter of Credit. Why would an exporter insist on a confirmed letter of credit?
8. Documenting an Export of Hard Drives. List the steps involved in the export of computer hard disk
drives from Penang, Malaysia, to San Jose, California, using an unconfirmed letter of credit
authorizing payment on sight.
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5. The Penang exporter draws a sight draft against the California bank in accordance with the terms
of the L/C and presents the draft, along with any other required documents, to its own Malaysian
bank.
6. Malaysian bank forwards the draft, accompanied by the order bill of lading and any other
required documents, to the California bank.
7. California bank pays the Malaysian bank for the sight draft, receiving the order bill of lading,
now endorsed by the Malaysian bank. At this point, the California bank has legal title to the
merchandise.
8. Malaysian bank, having received the proceeds from the sale (via the sight draft paid by the
California bank), pays the Penang exporter (less any fees).
9. California bank collects the proceeds of the sale from the San Jose importer and endorses the
order bill of lading over to the importer so the importer, in turn, can collect the merchandise from
the shipper. (The California bank could endorse the order bill of lading over to the San Jose
importer without collecting at that time. In such an instance, the California bank is making an
unsecured loan to the importer, a lending transaction entirely separate from the import/export
transaction.)
9. Documenting an Export of Lumber from Portland to Yokohama. List the steps involved in the
export of lumber from Portland, Oregon, to Yokohama, Japan, using a confirmed letter of credit,
payment to be made in 120 days.
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exporter presents it to its Oregon bank, which in turn forwards it to the Japanese bank for
collection. When the Oregon bank receives funds, it credits the account of the Portland exporter.
10. Governmentally Supplied Credit. Various governments have established agencies to insure against
nonpayment for exports and/or to provide export credit. This shifts credit risk away from private
banks and to the citizen taxpayers of the country whose government created and backs the agency.
Why would such an arrangement be of benefit to the citizens of that country?