Chapter20 - CHAPTER 20 INTERNATIONAL TRADE FINANCE...

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CHAPTER 20 INTERNATIONAL TRADE FINANCE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Discuss some of the reasons why international trade is more difficult and risky from the exporter’s perspective than is domestic trade. Answer: International trade is more difficult and risky for a firm than is domestic trade. In foreign trade, the exporter may not be familiar with the buyer, and thus not know if the importer is creditworthy. If merchandise is exported abroad and the buyer does not pay, it may prove difficult, if not impossible, for the exporter to have any legal recourse. Additionally, political instability makes it risky to ship merchandise abroad to certain parts of the world. 2. What three basic documents are necessary to conduct a typical foreign commerce trade? Briefly discuss the purpose of each. Answer: The three basic documents necessary to conduct a typical foreign commerce trade are: letter of credit, time draft, and a bill of lading. A letter of credit (L/C) is a guarantee from the importer’s bank that it will act on behalf of the importer and pay the exporter for the merchandise if all relevant documents specified in the L/C are presented according to the terms of L/C. A time draft is a written order instructing the importer or his agent, the importer’s bank, to pay the amount specified on its face on a certain date. A bill of lading (B/L) is a document issued by the common carrier specifying that it has received the goods for shipment; it can serve as title to the goods. 3. How does a time draft become a banker’s acceptance? Answer: When the goods are shipped by the exporter via common carrier, the exporter’s bank presents the shipping documents and the time draft to the importer’s bank. After taking title to the goods via the bill of lading, the importer’s bank accepts the time draft, creating at this point a banker’s acceptance (B/A). A B/A is a money market instrument for which a secondary market exists.
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4. Discuss the various ways the exporter can receive payment in a foreign trade transaction after the importer’s bank accepts the exporter’s time draft and it becomes a banker’s acceptance. Answer: The exporter can hold the B/A until maturity and present it to the importer’s bank for payment at face value. Alternatively, the exporter can receive the discounted value at inception from its bank, or sell it at its current discounted value in the money market prior to maturity. 5. What is a forfaiting transaction? Answer: Forfaiting is a form of medium-term trade financing used to finance the sale of capital goods. A forfaiting transaction involves the sale by the exporter of promissory notes signed by the exporter in favor of the importer. The forfait, usually a bank, buys the notes at a discount from face value. The forfait does not have recourse against the exporter in the event of default by the importer. The promissory notes typically extend out in a series over a period of three to five years, with a note in the series maturing every
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This note was uploaded on 07/28/2011 for the course FIN 308 taught by Professor Canarella during the Summer '11 term at University of Nevada, Las Vegas.

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Chapter20 - CHAPTER 20 INTERNATIONAL TRADE FINANCE...

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