Chapter 19 447

How can a banker's acceptance be beneficial to an exporter, an importer, and

A banker's acceptance guarantees payment to the exporter so that credit risk of the importer is not worrisome. It allows the importers to import goods without being turned down due to uncertainty about their credit standing. It is a revenue generator for the bank since a fee is received by the bank for this service.

What is the role of a factor in international trade transactions?

A factor can relieve the exporter of the worry about the credit risk of the importer. In return, the factor is rewarded by being able to purchase the accounts receivables at a lower price than their cash value.

What is forfaiting? Specify the type of traded goods for which forfaiting is applied.

A forfaiting transaction involves an importer that issues a promissory note to pay for the imported capital goods over a period of three to seven years or so. Notes are extended to the exporter who sells them at a discount to a forfaiting bank.

In ________, a bank will provide a loan to the exporter secured by an assignment of the account receivable; in ________, the exporter sells the account receivable without recourse.

Accounts receivable financing; factoring

Why would an exporter provide financing for an importer? Is there much risk in this activity? Explain.

An exporter could increase sales by allowing the importer to pay at a future date. There may be high credit risk incurred by the exporter here, especially if the importer is an unknown small firm.

Letter of Credit (L/C)

An instrument issued by a bank on behalf of the importer (buyer) promising to pay the exporter (beneficiary) upon presentation of shipping documents in compliance with the terms stipulated therein

Consignment

Arrangement in which the exporter ships goods to the importer while still retaining title to the merchandise

Name the trade financing methods used in international trade from an exporter's perspective? (3)

Barter Accounts Receivable Financing Letter of Credit

What are bills of lading, and how do they facilitate international trade transactions?

Bills of lading provide a receipt for shipment, a summary of freight charges, and convey title to the merchandise.

What is countertrade?

Countertrade involves the sale of goods to one country in exchange for goods from that country.

Trade Acceptance

Draft that allows the buyer to obtain merchandise prior to paying for it

The Working Capital Guarantee Program and the Medium-term Guarantee Program are offered by the

Export-Import Bank of the United States.

Minnesota Co. has just sold its accounts receivables on its exports to Utah Co. This transaction represents a. factoring. b. counterpurchase. c. amortizing. d. forfaiting.

Factoring

Which of the following is not a payment method used for international trade? a. Consignment b. Letter of credit c. Open account d. Draft e. Factoring

Factoring

T/F: A bill of exchange is a draft drawn on and accepted by a bank.

False

T/F: The Medium-Term Guarantee Program covers the risk of non payment due to political, but not commercial, reasons.

False

T/F: The Overseas Private Investment Corporation (OPIC) is owned by a consortium of commercial banks and industrial companies; it cooperates closely with the Export-Import Bank.

False

T/F: The Working Capital Guarantee Program of the Private Export Funding Corporation (PEFCO) encourages commercial bank to extend short-term export financing to eligible exporters by providing a comprehensive guarantee that covers 100 percent of the loan's principal and interest.

False

Describe how foreign trade would be affected if banks did not provide trade-related services.

Foreign trade would be reduced without the trade-related services by banks, because some trade can only occur if banks back the transaction with bankers' acceptances.

Vegas Co. imports products from Mexi Co. in Mexico. It issues a promissory note to pay Mexi Co. for imported products. Mexi sells the note at a discount to a bank, which reflects a. factoring. b. a letter of credit. c. accounts receivable financing. d. forfaiting.

Forfaiting

This chapter described many forms of government insurance and guarantee programs. What motivates a government to establish such programs?

Governments may be able to boost exports by establishing policies that either protect the exporters from various types of risk or encourage lenders to provide financing to the exporters.

Every quarter, Bronx Co. ships computer chips to a firm in central Asia. It had not used any trade financing because the importing firm always pays its bill in a timely manner upon receipt of the computer chips. However, Bronx Co. was concerned that the foreign government may impose foreign exchange controls. Bronx Co. reconsidered whether it should use some form of trade financing that would ensure that it would be paid for its exports upon delivery. Offer a suggestion to Bronx Co. on how it could achieve its goal.

It could use banker's acceptances in which the importer's bank would guarantee the payment by the importer. Normally, such obligations are allowed by the local government even if the government imposes foreign exchange controls.

The ____ is a self-sustaining federal agency responsible for insuring direct U.S. investments in foreign countries against the risk of currency inconvertibility, expropriation, and other political risks.

Overseas Private Investment Corporation

Briefly describe the role of the Private Export Funding Corporation (PEFCO).

PEFCO provides medium- and long-term credit to importers of U.S. goods and services.

hich of the following is not a method used in financing international trade? a. accounts receivable financing b. prepayment c. letter of credit d. countertrade

Prepayment

What agencies actively promote international trade?

Private Export Funding Corporation (PEFCO) Export-Import Bank of the U.S. Overseas Private Investment Corporation (OPIC)

Open Account Transaction

Sale in which the exporter ships the merchandise and expects the buyer to remit payment according to agreed-upon terms

Documents Against Payment

Shipping documents that are released to the buyer once the buyer has paid for the draft

Under a ________, the exporter is paid once shipment has been made and the draft is presented to the buyer for payment; under a ________, the exporter provides instructions to the buyer's bank to release shipping documents against acceptance, by the buyer, of the draft.

Sight draft; time draft

Documents Against Acceptance

Situation in which the buyer's bank does not release shipping documents to the buyer until the buyer has accepted (signed) the draft

Describe the role of the Overseas Private Investment Corporation (OPIC).

The OPIC insures direct U.S. investments in foreign countries against the risks of currency inconvertibility, expropriation, and other potential risks; it also offers insurance coverage for exporters that bid on foreign contracts.

Describe the Small Business Policy.

The Small Business Policy provides enhanced coverage against credit risk to new exporters and small businesses.

Briefly describe the Working Capital Guarantee Program administered by the Export-Import Bank.

The Working Capital Guarantee Program allows exporters to obtain short-term loans from commercial banks that are guaranteed by the Ex-Im bank. This protects the commercial banks against default risk of the exporter and makes it easier for exporters to obtain loans.

Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its obligation, however, stating that it was not authorized to guarantee commercial transactions. Explain how an irrevocable L/C would normally facilitate the business transaction between the Russian importer and Ocean Traders of North America (the U.S. exporter). Explain how the cancellation of the L/C could create a trade crisis between the U.S. and Russian firms. Why do you think situations like this (the cancellation of the L/C) are rare in industrialized countries? Can you think of any alternative strategy that the U.S. exporter could have used to protect itself better when dealing with a Russian importer?

The letter of credit was issued by a Russian bank to guarantee payment for the goods to be exported by the U.S. exporter. If exporting firms can not rely on letters of credit, they must resort to trusting the counterparty in the trade agreement. This will reduce trade, because exporters frequently do not know much about the counterparty. Governments or regulators have a vested interest in ensuring that banks follow through on letters of credit. Otherwise, there would be a reluctance to conduct trade in any country that does not back its guarantees. The U.S. exporter could have attempted to obtain a letter of credit from a U.S. bank, with the responsibility placed on the U.S. bank to guarantee payment. In this case, the U.S. bank would have been put in a position to demand payment from the Russian importer or the importer's Russian bank.

What is the role today of the Export-Import Bank of the U.S.?Describe the Direct Loan Program administered by the Export-Import Bank.

The role today is to finance and facilitate the export of American goods and to strengthen the competitiveness of U.S. industries involved in foreign trade. Under the Direct Loan Program, the Ex-Im bank provides long-term loans to foreign buyers to purchase U.S. goods. The loan rates are channeled through banks, which serve as the intermediaries.

A(n) ________ allows the first beneficiary to transfer all or part of the original letter of credit (LC) to a third party; a(n) ________ allows the original beneficiary of the LC to pledge the amount in the LC to the end supplier.

Transferable LC; assignment of proceeds

T/F: A bank issuing a letter of credit on behalf of an importer is obligated to honor drawings under the letter of credit regardless of the buyer's willingness or ability to pay.

True

T/F: An accepted time draft, where the buyer is promising to pay the exporter at a specified future date, is also called a trade acceptance.

True

T/F: The payment method that affords the supplier the greatest degree of protection is the prepayment method.

True

T/F: The person buying an account receivable in factoring is called the "factor."

True

T/F: Trade-related letters of credit are often referred to as either commercial letters of credit or import/export letters of credit.

True

T/F: Two of the more popular loan programs of the Export-Import Bank are the Direct Loan Program (offering fixed-rate loans directly to foreign buyers) and the Project and Structured Finance Loan Program (allowing banks to extend long-term financing for capital equipment purchases).

True

Export-Import Bank

a bank that finances and facilitates the export of American goods and services and maintains the competitiveness of American companies in overseas markets.

Which of the following is not an example of countertrade? a. A French firm enters a contract to purchase cars from Germany and is contemplating a future sale of wine to the German firm from which it purchased the cars. b. A U.S. firm exchange steel for brass from a German firm. c. A British firm sells sulfur to a South Arabian firm and simultaneously agrees to purchase dung from the South Arabian firm. d. [A French firm enters a contract to purchase cars from Germany and is contemplating a future sale of wine to the German firm from which it purchased the cars.] and [A U.S. firm buys coffee from a Brazilian firm and, under a separate contract, simultaneously sells wheat to the Brazilian firm.] e. A U.S. firm buys coffee from a Brazilian firm and, under a separate contract, simultaneously sells wheat to the Brazilian firm.

a. A French firm enters a contract to purchase cars from Germany and is contemplating a future sale of wine to the German firm from which it purchased the cars.

Which of the following is not a payment method used for international trade? a. Bill of lading b. Bill of exchange c. Letter of credit d. Supplier credit e. All of these choices are payment methods used.

a. Bill of Lading

Which of the following is not true regarding a banker's acceptance? a. It is a sight draft. b. It can be beneficial to the importer, as he may have greater access to foreign markets when purchasing supplies. c. It can be beneficial to the bank accepting the draft in that it earns a commission for creating an acceptance. d. It can be beneficial to the exporter, as he does not have to worry about the credit risk of the importer. e. All of these choices are true.

a. It is a sight draft.

Illinois Bank promises to make payment on behalf of Rockford Co. (an importer) once Illinois Bank receives documents showing that that the products have been shipped to Rockford. This reflects a. a letter of credit. b. accounts receivable financing. c. factoring. d. forfaiting.

a. a letter of credit.

Countertrade refers to foreign trade a. transactions in which the sale of products to one country is linked to the purchase or exchange of products from the same country. b. restrictions imposed by the government on imports from another country. c. financing provided to an exporter in exchange for products provided to the creditor by the exporter. d. restrictions imposed by the government on exports sent from the country.

a. transactions in which the sale of products to one country is linked to the purchase or exchange of products from the same country.

Partial Compensation

an arrangement in which the delivery of goods to one party is partially compensated for by buying back a certain amount of product from the same party

Compensation

arrangement in which the delivery of goods to a party is compensated for by buying back a certain amount of the product from that same party.

Which of the following is not true regarding letters of credit? a. A revocable letter of credit can be cancelled or revoked at any time without prior notification to the beneficiary. b. They guarantee that the goods shipped are the goods purchased. c. They are issued by banks on behalf of the importer promising to pay the exporter. d. All of these choices are true.

b. They guarantee that the goods shipped are the goods purchased.

Banker's Acceptance

bill of exchange drawn on and accepted by a banking institution; it is commonly used to guarantee exporters that they will receive payment on goods delivered to importers.

Which of the following is not a payment method used for international trade? a. letter of credit b. bill of exchange c. supplier credit d. bill of lading

bill of lading

Countertrade does not include ________. a. Barter b. Counterpurchase c. Countertrade includes all of these choices d. Partial compensation e. Compensation Hide Feedback

c. Countertrade includes all of these choices

Which of the following statements is incorrect? a. Under a prepayment method, the exporter will not ship the goods until the buyer has remitted payment to the exporter. b. A letter of credit is an instrument issued by a bank on half of the importer (buyer) promising to pay the exporter upon presentation of shipping documents in compliance with the terms stipulated therein. c. Under a sight draft, the exporter provides instructions to the buyer's bank to release shipping documents against acceptance (signing) of the draft. d. All of these statements are true.

c. Under a sight draft, the exporter provides instructions to the buyer's bank to release shipping documents against acceptance (signing) of the draft.

Supplier Credit

credit provided by the supplier to itself to fund its operations.

Which of the following statements is incorrect? a. Under the Direct Loan Program, Eximbank offers fixed-rate loans directly to foreign buyers to purchase U.S. capital equipment. b. The Financial Institution Buyer Credit Policy provides insurance coverage for loans by banks to foreign buyers on a short-term basis. c. The Medium-Term Guarantee Program encourages commercial lenders to finance the sale of U.S. equipment and services to approved foreign buyers. d. The Working Capital Guarantee Program encourages commercial banks to extend short-term export financing to eligible importers by providing a comprehensive guarantee.

d. The Working Capital Guarantee Program encourages commercial banks to extend short-term export financing to eligible importers by providing a comprehensive guarantee.

Bill of Lading (B/L)

document serving as a receipt for shipment and a summary of freight charges and conveying title to the merchandise

Standby Letter of Credit

document used to guarantee invoice payments to a supplier; it promises to pay the beneficiary if the buyer fails to pay.

If trade transactions handled on a draft basis are processed through banking channels, they may be a. Trade acceptances. b. "Documents against acceptance". c. Documentary collections. d. "Documents against payment". e. All of these choices are correct.

e. All of these choices are correct.

A ________ letter of credit is not a trade-related letter of credit. a. Revocable b. Import/export c. Commercial d. Irrevocable e. All of these choices are trade-related letters of credit.

e. All of these choices are trade-related letters of credit.

Counterpurchase

exchange of goods between two parties under two distinct contracts expressed in monetary terms

Barter

exchange of goods between two parties without the use of any currency as a medium of exchange.

Commerical invoice

exporter's description of merchandise being sold to the buyer

Factor

firm specializing in collection on accounts receivable; exporters sometimes sell their accounts receivable to a factor at a discount.

Accounts Receivable Financing

indirect financing provided by an exporter for an importer by exporting goods and allowing for payment to be made at a later date.

Prepayment

method that exporter uses to receive payment before shipping goods

Single-Buyer Policy

policy administered by the Ex-Im Bank that allows the exporter to selectively insure certain transactions.

Multibuyer Policy

policy administered by the Ex-Im Bank that provides credit risk insurance on export sales to many different buyers.

Umbrella Policy

policy issued to a bank or trading company to insure exports of an exporter and handle all administrative requirements.

Small Business Policy

policy providing enhanced coverage to new exporters and small businesses.

Bank Letter of Credit Policy

policy that enables banks to confirm letters of credit by foreign banks supporting the purchase of U.S. exports.

Financial Institution Buyer Credit Policy

policy that provides insurance coverage for loans by banks to foreign buyers of exports on a short-term basis.

Of all the payment methods available in international trade, ____ probably affords the most protection to the exporter, while ____ probably affords the least protection.

prepayment; open account

Working Capital Guarantee Program

program conducted by the Ex-Im Bank that encourages commercial banks to extend short-term export financing to eligible exporters; the Ex-Im Bank provides a guarantee of the loan's principal and interest.

Direct Loan Program

program in which the Ex-Im Bank offers fixed rate loans directly to the foreign buyer to purchase U.S. capital equipment and services.

Project Finance Loan Program

program that allows banks, the Ex-Im Bank, or a combination of both to extend long-term financing for capital equipment and related services for major projects

Bill of Exchange

promise drawn by one party (usually an exporter) to pay a specified amount to another party at a specified future date, or upon presentation of the draft

Factoring

purchase of receivables of an exporter by a factor without recourse to the exporter

All-In Rate

rate used in charging customers for accepting banker's acceptances, consisting of the discount interest rate plus the commission.

Airway Bill

receipt for a shipment by air, which includes freight charges and title to the merchandise

Forfaiting

refers to the purchase of financial obligations, such as bills of exchange or promissory notes, without recourse to the original holder (usually, the exporter).

Countertrade

sale of goods to one country that is linked to the purchase or exchange of goods from that same country

Under a ____, the exporter is paid once shipment has been made and the draft is presented to the importer for payment; under a ____, the exporter instructs the importer's bank to release the shipping documents when the importer accepts the draft.

sight draft; time draft

Ocean bill of lading

the carrier issues this if the merchandise is to be shipped by boat.

Tenor

time period of drafts

Documentary Collections

trade transactions handled on a draft basis

Draft

unconditional promise drawn by one party (usually the exporter) instructing the buyer to pay the face amount of the draft upon presentation