Exam 20: International Trade Finance

Instruction 20.1: Use the information to answer the following question(s). Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress 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 Cypress Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum. -Refer to Instruction 20.1. What is the size of the commission Cypress will pay the bank for the banker's acceptance?

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

The person or company initiating the draft or bill of exchange is known as the:

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.

A/An ________ letter of credit is an obligation only of the issuing bank whereas other banks honor a/an ________ letter of credit.

Which of the following purposes is NOT served by the bill of lading?

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

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.

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

A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of ________.

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

Instruction 20.1: Use the information to answer the following question(s). Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress 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 Cypress Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum. -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?

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.

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.

The exporter-importer relationship to a corporation of a foreign importer that has not previously conducted business with the firm would be an:

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.

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.

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.

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

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.