FIN 165 Chapter 16

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

A) $7,000

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%

A) 14.82%

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 manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The buyer's bank submits payment to the manufacturer's bank.

The ________ is issued to the exporter by a common carrier transporting the merchandise. A) bill of lading B) draft C) banker's acceptance D) line of credit

A) bill of lading

The person or company to whom the draft or bill of exchange is addressed is the: A) drawee. B) drawer. C) maker. D) originator.

A) drawee.

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

A) overdraft fees

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

A) unaffiliated known party transaction.

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

B) $5,000

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

B) bill of exchange

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

B) revocable

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

B) unaffiliated unknown party

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

C) $988,000

________ 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

C) Forfaiting

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.

C) The exporter applies to its local bank for the issuance of a letter of credit.

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.

C) The exporter sells bank-guaranteed promissory notes at its face value.

Drafts that have been accepted by banks become: A) clean drafts. B) nonmarketable. C) banker's acceptances. D) none of the above

C) banker's acceptances.

A typical forfaiting transaction involves the following parties EXCEPT: A) importer B) exporter C) carrier D) importer's Bank

C) carrier

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

C) exporter's; blocked foreign exchange

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

C) facilitate and stimulate foreign trade of the United States.

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

C) it must be written in English

The following parties are usually guarantors in forfaiting EXCEPT: A) commercial banks B) government ministries of finance C) large commercial enterprises D) government banks

C) large commercial enterprises

The draft is the instrument normally used in international commerce to: A) transfer product. B) prove ownership. C) transfer title. D) initiate the sale.

C) transfer title.

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

C) unaffiliated unknown.

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

C) when the shipment is to an affiliate

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.

D) All of these risks are reduced when using these trade implements.

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

D) Commercial paper

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

D) Federal funds transaction

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.

D) It acts as all of the above.

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

D) any of the above

From a financial management perspective, all of the following are primary risks associated with an international trade transaction EXCEPT: A) currency risk B) default risk C) noncompletion risk D) interest rate risk

D) interest rate risk

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.

D) provides letters of credit for U.S. exporters.

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.

D) provides policies that protect U.S. exporters against default by foreign importers.

The risk of default on the part of the importer - risk of noncompletion - is present as soon as: A) a price quote is given. B) goods are received. C) the export contract is signed. D) the financing period begins.

D) the financing period begins.

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

D) unconfirmed; confirmed

The risk of noncompletion is most important when: A) the international trade is recurrent in nature. B) there is a sustained relationship between the buyer and seller. C) with an outstanding agreement for recurring shipments. D) when the relationship is between countries whose currencies are considered strong.

D) when the relationship is between countries whose currencies are considered strong.

A draft is sometimes called a revocable letter of credit.

False

A sight draft is payable on presentation to the drawee; a time draft allows a delay in payment.

False

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.

False

Banker's acceptances are used to finance only international trade receivables but not domestic trade receivables.

False

Because of the risks involved in international trade, most transactions follow conventional methods and rarely require flexibility or creativity on the part of management.

False

Essentially, the Eximbank lends dollars to borrowers inside the United States for the purchase of U.S. goods and services.

False

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.

False

One way a nation can improve its exports is by shortening the period for which credit transactions can be insured.

False

Recourse means that the factor assumes the credit, political, and foreign exchange risk for the receivables it purchases.

False

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).

False

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

False

The firm selling the recourse receivables avoids the cost of determining the creditworthiness of its customers.

False

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."

False

The liability of the aval is an "on balance sheet" obligation for the endorsing bank.

False

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.

False

To constitute a true letter of credit transaction, the bank's commitment must be open-ended and cannot have a stated maximum amount of money.

False

Today, international trade is dominated by transactions between unaffiliated parties (known or unknown).

False

A letter of credit is an agreement by the bank to pay against documents rather than the actual merchandise.

True

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

True

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.

True

An overdraft agreement allows a firm to overdraw its bank account up to the limit of its credit line.

True

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.

True

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.

True

If a foreign exchange transaction calls for payment in the exporter's currency, the importer has the foreign exchange risk.

True

If a foreign exchange transaction calls for payment in the importer's currency, the exporter has the foreign exchange risk.

True

In effect, the forfaiter functions both as a money market firm and a specialist in packaging financial deals involving country risk.

True

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.

True

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.

True

Success of the forfaiting technique springs from the belief that the aval can be depend on.

True

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.

True

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.

True

The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a foreign land.

True

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

True

To constitute a true letter of credit transaction, the bank's L/C must contain a specified expiration date or a definite maturity.

True

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.

True