International Payment and Export Import Financing Past Paper PDF

**Học phần:** International Payment and Export -- Import Financing **Bộ môn:** Ngân hàng và thị trường tài chính **Số tín chỉ:** 03 **Thời gian thi:** 90 phút **MỤC LỤC** {#section.TOCHeading} [Question group 1 2](#question-group-1) [1. What is international payment? Give examples. 2](#what-...

**Học phần:** International Payment and Export -- Import Financing **Bộ môn:** Ngân hàng và thị trường tài chính **Số tín chỉ:** 03 **Thời gian thi:** 90 phút **MỤC LỤC** {#section.TOCHeading} [Question group 1 2](#question-group-1) [1. What is international payment? Give examples. 2](#what-is-international-payment-give-examples.) [2. What are the characteristics of international payment? 2](#what-are-the-characteristics-of-international-payment) [3. What are the three sources of law that regulate international payment activities? 2](#what-are-the-three-sources-of-law-that-regulate-international-payment-activities) [4. What are the two categories of documents in international payment? 3](#what-are-the-two-categories-of-documents-in-international-payment) [5. What is a B/E? 3](#what-is-a-be) [6. What are the characteristics of B/E? 4](#what-are-the-characteristics-of-be) [7. What is a Cheque? 5](#what-is-a-cheque) [8. Distinguish between bills of exchange and cheques? 5](#distinguish-between-bills-of-exchange-and-cheques) [9. Terms of currency of international payment? 6](#terms-of-currency-of-international-payment) [10. Terms of time of international payment? 7](#terms-of-time-of-international-payment) [11. Terms of place of international payment? 8](#terms-of-place-of-international-payment) [12. Terms of method of international payment? 9](#terms-of-method-of-international-payment) [13. Definition and process of documentary collection payment method? 10](#definition-and-process-of-documentary-collection-payment-method) [14. What are the pros and cons of documentary collection payment method? 11](#what-are-the-pros-and-cons-of-documentary-collection-payment-method) [15. Distinguish between clean collection and documentary collection? 12](#distinguish-between-clean-collection-and-documentary-collection) [16. Definition and process of documentary credit payment method? 12](#definition-and-process-of-documentary-credit-payment-method) [17. What are the pros and cons of documentary credit payment method? 14](#what-are-the-pros-and-cons-of-documentary-credit-payment-method) [18. Types of Letter of Credit? 15](#types-of-letter-of-credit) [19. Definition and process of open account payment method? 16](#definition-and-process-of-open-account-payment-method) [20. What are the pros and cons of open account payment method? 16](#what-are-the-pros-and-cons-of-open-account-payment-method) [Questions group 2 17](#questions-group-2) [Question 1 17](#question-1) [Question 2 18](#question-2) [Question 3 19](#question-3) [Question 5 20](#question-5) Question group 1: ================= 1. What is international payment? Give examples. ------------------------------------------------ [Definition:] International payment means the performance of payment obligations due to conomic and non-economic activities between counterparties located in different countries. More specific, international payment is made by the Government, or individual or organisation of one country to Government, or individual or organisation of another through the banking systems. [Example:] An American company by computers from a company in Japan for 100,000,000 JPY. According to the contract, the payment will take place at the end of December 2024 through L/C. 2. What are the characteristics of international payment? --------------------------------------------------------- Characteristics of international payment: - International payments are not only governed by national laws, but also by international laws, conventions, custom and practices such as ULB, UCP, URC, URR and Incoterms. - International payments are influenced by the variation in exchange rates and foreign exchange reserves. - International payments transactions are mainlly done through commercial banking systems. - International payments is a type of banking services. 3. What are the three sources of law that regulate international payment activities? ------------------------------------------------------------------------------------ International payment activities are regulated by three sources of law: International law, national law, international custom and practices \- International laws: - United Nations Convention on Contracts for the International Sale of Goods -- Wien Convention 1980; - Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes (Geneva, 1930) -- ULB 1930; - Convention Providing a Uniform Law for Cheques (geneva, 1931) -- ULC 1931; - United Nations Convention on International Bills of Exchange and International Promissory Notes; - Other Laws and International Conventions on Transport and Insurance. \- National laws: - Civil law; - Commercial law; - Foreign Exchange Law; - Law on Negotiable Instruments; - Law on International Payment. \- International custom and practices: - The Uniform Customs and Practice for the Documentary Credits; - Uniform Rules for Collection; - Uniform Rules for Bank to Bank Reimbursements; - International Commercial Terms. 4. What are the two categories of documents in international payment? --------------------------------------------------------------------- According to the URC 522 (the Uniform Rules for Collections, 1955 Revision, ICC Publication No.522), documents come in two types: *financial documents* and *commercial documents*. - **Financial documents:** means bills of exchange, promissory notes, cheques, or other similar instruments used for obtaining the payment of money. - **Commercial documents:** \- Transport documents: - Multimodal Bill of Lading - Ocean Bill of Lading -- B/L - Airway Bill - Railway Bill \- Commercial invoice: A commercial invoice is the bill issued by the seller to the buyer. A commercial invoice is to be produced by the seller in accordance with the contract. \- Other documents: - Insurance certificate: This document indicates type and amount of insurance coverage in force on a perticular shipment. - Packing list: A packing list is used to describe how the goods are packaged for shipment. - Certificate of Origin (C/O): A certificate of origin certifies the country in which the goods were produced or originated. - Others: Inspection certificate, Quality and Quantity certificate, Phytosanitary Certificate, Fumigation Certificate, etc. 5. What is a B/E? ----------------- The *Bills of Exchange Act 1882 (England)* defines a "bill of exchange" as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer. According to *Law on Negotiable instruments*, a bill of exchange means a valuable paper created by a drawer, requesting the drawee to pay unconditionally a specific sum upon demand or upon a fixed time in the future to the beneficiary. 6. What are the characteristics of B/E? --------------------------------------- Characteristics of a bill of exchange: 1\) There are 3 parties to a bill: i. Drawer - person who gives the order ii. Drawee - person to whom the order is given and if the drawee accepts the bill by signing it, he is called the acceptor iii. Payee - person to whom the payment is to be made (by the drawee/acceptor). Sometimes one person may take on 2 roles e.g. where he draws a bill payable to himself or payable to the drawee e.g. a person drawing a cheque on a bank and payable to the bank itself 2\) the bill must be an unconditional order to pay i. Eg: \'please pay X\' or \'pay Xʼ ii. A request /authority to pay is not a bill of exchange - e.g. \"we hereby authorise you to pay on our account \... \" is not a bill of exchange. iii. The order must be unconditional. If [conditional] not bill of exchange. E.g.: the order that gives drawee the [discretion] to \' pay X \... [if] satisfied with the goods delivered\' or \'on [or] before Jan 1 2024' 3\) The bill must be in writing i. Can be printed or written ii. However, it is advisable not to write in pencil to avoid fraudulent alteration. 4\) The bill must be addressed by one person or body of person to another. i. Body of person = company, partnership etc ii. Drawee must be identified with reasonable certainty. e.g. : Mr. X and Mr. Y, not Mr. X or Mr. Y iii. Section 5(2) provides that if the drawer and the drawee are the same person the holder may treat the document either as bill of exchange or a promisory note. 5\) The bill must be signed by the drawer or his authorised agent. i. Signature by means of rubberstamp is acceptable provided it is affixed with the intention of being the drawer\'s signature. 6\) The bill must order payment of a sum certain in money, not in goods or services i. If the order is to pay by bond or gold, it is not a bill of exchange. ii. The sum may be payable with interest or by stated instalments, or according to a specified rate of exchange. iii. Where there is a difference between the amount stated in words and figures, the sum stated in words is the amount payable. 7\) The bill must be payable on demand or at a fixed or determinable future time i. Payable on demand - the holder is entitled to payment immediately upon demand. This includes bills payable on sight or on presentation or in which no time for payment is stated ii. Fixed or determinable future times - payment on expiry of the period after date or sight or after the happening of specified event which is certain to happen though the time ofhappening may be uncertain eg \"30 days after date/sight/T\'s death\" are valid. iii. A bill ordering payment \"on or before\" a certain date is invalid because of lack of certainty in the time of payment 8\) The bill must be payable to or to the order of a specified person or to bearer. i. A bill is payable to order when : - it is drawn \"payable to order\" eg \"pay X or order\" - It is payable to a particular person without any other words prohibiting transfer eg \"pay X RM1,000.00\" - It is payable to the order of a particular person eg \"pay to the order of X\" -- this instruction indicates that it is payable to X or to X\'s order ii. A bill is payable to bearer when: - It is drawn payable to bearer eg \'pay bearer\' or \'pay Y or bearer\' - this means Y himself can obtain payment or he can negotiate the bill to another by mere delivery without indorsement - the indorser merely signed his name without naming the person to whom the bill is payable. - It is payable to a fictitious or non existent person - The order is to pay \"cash\" 7. What is a Cheque? -------------------- Cheque means a valuable paper created by a drawer, ordering the payer being a bank or an organization providing payment services, which is licensed by the State Bank of Vietnam, to pay fixed sum from its account to the beneficiary (Law on Negotiable Instruments 2005). Cheque is a written order from one party (the drawer) to another (the drawee, normally a bank) requiring the drawee to pay a specified a sum on demand to the drawer or to a third party specified by the drawer (CPSS Glossary -- March 2003). 8. Distinguish between bills of exchange and cheques? ----------------------------------------------------- **Basis of Difference** **Cheque** **Bill of Exchange** ------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Meaning** A document used for immediate payments on demand, transferable through delivery. A written document indicating a debtor's indebtedness to a creditor. **Definition** Cheque is a written order from one party (the drawer) to another (the drawee, normally a bank) requiring the drawee to pay a specified a sum on demand to the drawer or to a third party specified by the drawer (CPSS Glossary -- March 2003). A bill of exchange an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer (Bills of Exchange Act 1882). **Drawn** Only on a particular banker. On any person, including bankers. **Payability** On-demand only. On the expiry of a certain date or period. **Acceptance** No formal acceptance required. Requires formal acceptance from the drawee. **Grace Period** Not applicable, payable on demand. A grace period of three days allowed for time bills. **Discounting** Cannot be discounted. Can be discounted with a bank. **Stamping** No stamping required before payment. Must be sufficiently stamped before payment. **Notice** Notice not necessary for dishonour. Notice of dishonour necessary for resolution. **Crossing** Can be crossed for added security. Not allowed. **Dishonour** No formal protest or noting required. Requires noting and protesting for dishonour. **Discharge from Liability** Drawer not discharged if payment delayed. Drawer discharged if not presented for payment. 9. Terms of currency of international payment? ---------------------------------------------- **[Definition:]** Curency of payment means in what currency will payment be made. The contract currency will differ from (at least) one of the parties' national currency. Some contracts contain payment terms with currency fluctuation clauses to accommodate drastic changes in the valuation of the specified current. - If the value of the specified currency appreciates between the contract date and payment date, it is a hardship for the buyer. If it depreciates, it is a benefit to the buyer. - By contrast, if the value of the specified currency depreciates between the contract date and payment date, it is a hardship for the seller. If it appreciates it is a benefit to the seller. **[Classification:]** - Currencies of certain countries have a fairy wide acceptance for settlement of international obligations and are used as a medium in international transactions. These currency are known as hard currencies (U.S dollar, British pound, Japanese yen, euro). - Soft currencies are not widely accepted as a medium for settling international financial transactions (Zimbabwe dollar, Vietnam dong, Cuban peso). Soft currencies can fluctuate erratically or depreciate against hard currencies, and the transaction with a soft currency can cause bigger problems for the other party. **[Several approaches to managing currency risk:]** - Sharing currency fluctuation risk: sharing of risk requires equal division of a change in agreed-upon pric because of currency fluctuation. - Currency adjustment contact clause: both parties agree that payment occurs as long as exchange rates do not fluctuate outside an agreed-upon price. If happen, the parties can renegotiate or review the contract. - Currency hedging: Hedging involves the simultaneous purchase and sale of current contracts in two markets. 10. Terms of time of international payment? ------------------------------------------- **[Definition:]** time of payment refers to when payment should take place. International trade present a spectrum of risk, which causes uncertainty over the timing of payments between the exporter and importer. +-----------------------------------+-----------------------------------+ | **Buyer/Importer** | **Seller/Exporter** | +===================================+===================================+ | For importers, any payment is a | For exporters, any sale is a gift | | donation until the goods are | until payment is received. | | received. | | | | Therefore, exporters want to | | Therefore, importers want to | recaive payment as soon as | | recaive the goods as soon as | possible, preferably as soon as | | possible but to delay payment as | an order is placed or before the | | long as possible, preferably | goods are sent to the importer. | | until after the goods are resold | | | to generate enough income to pay | | | the exporter. | | +-----------------------------------+-----------------------------------+ **[Classification:]** \- Advance payment: - Cash with order (CWO): means that payment is settled immediately when making an order. - Remittance in Advance: means that the goods aare paid before they have been exported and received. Payment in advace is used in very limited circumstances, namely: products in high demand; ------------------------------------------------------------------ ---------------------------------------------------------------------------------- unique products, not available elsewhere; small orders (such as spare parts); the importer is a new customer (first order); the importer has a less-established operating history; the mporter's creditworthiness is doubful, unsatisfactory, or unverifiable; the political and commercial risks of the importer's home country are very high. \- Concurrent payment: - At sight: payment is made against a documentary bill that is issued by a sight L/C. - D/P: payment is made upon delivery of documents. - COD: payment is made upon delivery of goods, delivery order or warehouse warranty. \- Deffered payment: - Usance basis: payment is made after the shipment against documentary bills under a usance L/C. - D/A: payment is made against acceptance of bills. - Escrow account: means that money will put aside, via a third party, and will be given to the grantee only after fulfillment of the terms of agreement. - Open account. \- Mixed payment: progessive payments and lon-term deffered payments are often made along with an advance payment, concurrent payment, and deffered payment. 11. Terms of place of international payment? -------------------------------------------- **[Definition:]** The question of where payment should take place must be defined since it determines the fulfillment of obligations of the buyer. This also relates to what form of payment is used. **[Classification:]** **No** **Method of payment** **Place of payment** -------- ------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 1 Documentary credit Issuing bank 2 Documentary collection Collecting bank 3 Cheque It is up to the parties to decide if the buyers obligations have been fulfilled when the cheque is sent, when it has been received by the sellers or when it had been cleared in the banking system and the payment is available to the seller add cleared funds. 4 Bank transfer The seller wants to the payment to be received by their bank before accepting that the buyer have fulfilled their payment obligations, whereas the buyers may consider their obligations to have been fulfilled when they pay the amount at their local bank. 5 Open account in most countries, the law stipulates that the debt should be paid in the domicile of the creditor, namely the seller. 12. Terms of method of international payment? --------------------------------------------- **[Defintion:]** How payment is made depends on the role of the banks involved and affects the sercurity offered to both buyer and seller. **[Classification:]** \- Payment in advance: aka cash in advance, the seller gets paid begore "delivery of goods", requires the buyer to pay prior to the delivery of the goods. \- Open account: in an open account transaction, the seller ships goods and sends shipping documents including invoice directly (not using a banking system) to the buyer without receiving payment, and the buyer will pay at the future due date. The seller extends credit to the buyer by allowing them to pay in arrears. \- Collection: a seller sells the goods to the buyer and asks his banker to collect money on his behalf from the buyers. Therefore, the bank acts as agent of the seller in collecting money from the buyer. - Clean collection: is collection of financial documents (drafts) when they are not accompanied by commercial documents. - Documentary collection: is collection of financial documents (drafts) accompanied by commercial documents (invoices, transport and insurance documents, etc.) \- Documentary credit: is a defining undertaking of the issuing bank to pay a complying presentation (presentation of documents). An issuing banks would pay a beneficiary (normally the seller), if the documents presented complies with the terms and conditions of the credit. 13. Definition and process of documentary collection payment method? -------------------------------------------------------------------- **[Definition:]** documentary collection is collection of financial documents (drafts) accompanied by commercial documents (invoices, transport and insurance documents, etc.) Documentary collections are divided into two main groups: document against payment (D/P) and document against acceptance (D/A). **[Process:]** \- D/P: (1) The exporter and importer define the terms of payment and sign a contract outlining these terms. ---------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- (2) The exporter dispatches the shipment based on the terms of the contract. (3) After the goods have been shipped, the exporter submits a set of export documents to their bank, known as the remitting bank. These include a bill of exchange (at sight), bill of lading, commercial invoice, packing list, and import manifest, among others. (4) After reviewing the paperwork, the remitting bank will deliver the documents and payment instructions to the importer's bank, known as the collecting bank. (5), (6) Once the shipment arrives in the destination country, the collecting bank presents the documents to the importer for review. The importer reviews the documents and makes the full payment. (7) Once the payment is received, the collecting bank will release the documents to the importer. (8), (9) The collecting bank will transfer the funds to the remitting bank, which will deliver the payment to the exporter. \- D/A: (1) The exporter and importer define the terms of payment and sign a contract outlining these terms. ----------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- (2) The exporter dispatches the shipment based on the terms of the contract. (3) After the goods have been shipped, the exporter submits a set of export documents to their bank, known as the remitting bank. These include a bill of exchange (at sight), bill of lading, commercial invoice, packing list, and import manifest, among others. (4) After reviewing the paperwork, the remitting bank will deliver the documents and payment instructions to the importer's bank, known as the collecting bank. (5) Once the shipment arrives in the destination country, the collecting bank presents the documents to the importer for review. (6) The importer accepts the time draft by signing it, which represents a formal promise to pay the amount due at the maturity of the draft. (7) Upon the acceptance, the collecting bank will release the documents to the importer. (8) The importer makes payment to the collecting bank on the maturity date of the accepted draft. (9), (10) The collecting bank will transfer the funds to the remitting bank, which will deliver the payment to the exporter. 14. What are the pros and cons of documentary collection payment method? ------------------------------------------------------------------------ **[Definition:]** documentary collection is collection of financial documents (drafts) accompanied by commercial documents (invoices, transport and insurance documents, etc.) +-----------------+-----------------+-----------------+-----------------+ | **Pros** | **Cons** | | | +=================+=================+=================+=================+ | **For the | **For the | **For the | **For the | | seller** | buyer** | seller** | buyer** | +-----------------+-----------------+-----------------+-----------------+ | \- A | \- The | \- A buyer may | \- The buyer | | documentary | documentary | try to bargain | may receive | | collection can | collection can | down the price | defective goods | | increase the | provide some | once they take | if they make | | certainty of | assurance to | the goods, | payment or | | payment; | the buyer that | claiming some | accept | | | the goods paid | defect; | documents; | | \- A | for or accepted | | | | documentary | forwill arrive; | \- Should the | \- A | | collection | | buyer not pay | documentary | | includes | \- The | or accept the | collection | | drafts, and the | documentary | drafts, the | costs more than | | drafts can help | collection can | cost of | an open | | the seller to | improve cash | reselling or | account. | | negotiate the | flow to the | shipping back | | | documents and | buyer. | the goods would | | | the drafts to | | be high. | | | the bank. | | | | +-----------------+-----------------+-----------------+-----------------+ 15. Distinguish between clean collection and documentary collection? -------------------------------------------------------------------- **Clean collection** **Documentary collection** ---------------------- -------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Definition** Clean collection is collection of financial documents (drafts) when they are not accompanied by commercial documents. Documentary collection is collection of financial documents (drafts) accompanied by commercial documents (invoices, transport and insurance documents, etc.) **Role of the bank** Acts as an intermediary to facilitate the transfer of funds but does not verify any accompanying shipping or commercial documents. Collects funds and ensures that the buyer receives the documents only upon payment or acceptance of a draft. Acts as an intermediary to ensure documents are exchanged for payment ot acceptance. **Used when** There is a high level of trust betwwen the buyer and the seller, or when the financial document itself is sufficient for the seller. The seller wants more security than what is offered by a clean collection. **Risk level** Higher risk for the seller, as there are no accompanying documents of title. Lower risk for the seller, as the documents are controlled by the bank until payment or acceptance. 16. Definition and process of documentary credit payment method? ---------------------------------------------------------------- **[Definition:]** Documentary credit is a defining undertaking of the issuing bank to pay a complying presentation (presentation of documents). An issuing banks would pay a beneficiary (normally the seller), if the documents presented complies with the terms and conditions of the credit. **[Process:]** +-----------------------------------+-----------------------------------+ | (1) | After signing the contract, it is | | | up to the buyer to take the first | | | step by applying to their bank | | | (the bank referred to as the | | | issuing bank in the terms of | | | payment) to issue the agreed L/C. | +===================================+===================================+ | (2) | The issuing bank must process a | | | formal credit approval of the | | | application and check that local | | | permissions, import licences or | | | currency approvals, if needed, | | | have been granted. When all | | | formalities and procedures have | | | been dealt with (this may take | | | time), the L/C is issued, | | | hopefully as stipulated in the | | | terms of payment, and forwarded | | | to the selected advising bank. | +-----------------------------------+-----------------------------------+ | (3) | Upon arrival of the L/C from the | | | issuing bank -- by letter or | | | mostly nowadays as a SWIFT | | | message -- the advising bank will | | | assess its contents and determine | | | where it should be made payable | | | (honoured). If the advising bank | | | is instructed to add its | | | confirmation, this involves a | | | separate credit decision in this | | | bank, after which the seller is | | | notified of the L/C and its | | | details, including information | | | about where it is to be honoured | | | for payment, acceptance or | | | deferred payment, and whether it | | | has been confirmed by the | | | advising bank. | | | | | | At this point, it is vital that | | | the seller checks the terms of | | | the L/C against the agreed terms | | | of payment to make sure that all | | | the details and instructions can | | | be met at a later stage when the | | | documents are to be produced and | | | delivered. If not, the seller | | | must immediately communicate | | | directly with the buyer so that | | | the necessary amendments are made | | | and confirmed to the seller | | | through the banks. Only then does | | | the seller have the security on | | | which the whole transaction is | | | based. | +-----------------------------------+-----------------------------------+ | (4) | The seller delivers the goods to | | | the buyer | +-----------------------------------+-----------------------------------+ | (5) | The documents are then forwarded | | | to the advising bank, which | | | checks their conformity with the | | | terms of the L/C. The seller is | | | contacted about any | | | discrepancies. Discrepancies that | | | cannot be corrected at this late | | | stage, for example wrong shipping | | | details or late presentation, | | | will be subject to later approval | | | by the buyer, and any payment | | | made by the advising bank will | | | then be with recourse, subject to | | | this approval. | +-----------------------------------+-----------------------------------+ | (6) | The issuing bank will also check | | | the documents and the buyer has | | | to consider any discrepancies. | | | When approved, or if the | | | documents are compliant, the | | | buyer has to pay. If not | | | approved, the documents will be | | | held at the disposal of the | | | advising bank, pending any new | | | negotiation between the buyer and | | | the seller of the terms for such | | | an approval, or ultimately | | | returned to the advising bank | | | (and the seller) against | | | repayment of any earlier payment | | | made with recourse to the seller. | +-----------------------------------+-----------------------------------+ | (7), (8) | The documents are released to the | | | buyer against payment at sight or | | | at any later date as stipulated | | | in the L/C. | +-----------------------------------+-----------------------------------+ 17. What are the pros and cons of documentary credit payment method? -------------------------------------------------------------------- **[Definition:]** Documentary credit is a defining undertaking of the issuing bank to pay a complying presentation (presentation of documents). An issuing banks would pay a beneficiary (normally the seller), if the documents presented complies with the terms and conditions of the credit. +-----------------+-----------------+-----------------+-----------------+ | **Pros** | **Cons** | | | +=================+=================+=================+=================+ | **For the | **For the | **For the | **For the | | exporters** | importers** | exporters** | importers** | +-----------------+-----------------+-----------------+-----------------+ | \- payment is | \- the importer | \- the exporter | \- the amount | | more secured: | will obtain | must present | of documentary | | the issuing | transport | complying | credit is | | bank must | documents prior | documents | treated as the | | accept and pay | to payment. The | within the | importer's | | the complying | importer needs | letter of | contingent | | presentation; | to pay out | credit expiry | liability; | | | funds before | date; | | | \- the payment | the documents | | \- the amount | | risk is | have arrived; | \- the importer | of documentary | | transferred | | may request a | credit will | | from the | \- the importer | price discount | reduce the | | buyer\'s credit | may be able to | in return for a | credit limit of | | rating to the | obtain a price | documentary | the importer; | | issuing bank's | discount in | credit; | | | credit rating; | return for a | | \- the importer | | | documentary | \- the exporter | should pay | | \- | credit; | usually pays | documentary | | post-shipments | | the cost | credit issuance | | financing may | \- the importer | incurred in | cost; | | be available | maybe may be | their country. | | | such as | able to obtain | | \- the | | negotiation, | favourable | | importers | | factoring, and | payment terms | | account will be | | forfaiting; | such as usance | | debited on | | | documentary | | receipt of | | \- pre-shipment | credit, | | compliant | | finance may be | deferred | | documents; | | available; | payment | | | | | documentary | | \- the importer | | \- the | credit. | | may receive | | transport | | | defective goods | | documents and | | | even after | | the draft may | | | payment. | | be negotiated | | | | | more easily. | | | | +-----------------+-----------------+-----------------+-----------------+ 18. Types of Letter of Credit? ------------------------------ **[Basic types of Credit under UCP:]** \- Sight credit (sight L/C): means a credit that is available by sight payment. Sight payment means that payment should be made on presentation or on demand. \- Deferred payment credit (deferred L/C): means a credit that available by deferred payment, in a deferred payment credit, the issuing bank or the nominated bank accepts a complying presentation, and pays at a future due date. \- Acceptance credit (acceptance L/C): means a credit that is available by acceptance. In acceptance credit, an issuing bank or a nominated bank accepts drafts and/or documents complying with the credit and pay at the future due date. \- Negotiation credit (negotiation L/C): means of credit that is available by negotiation/acceptance. In a negotiation credit, the nominated bank is authorized to negotiate the complyng presentation but is not obligate to do so. **[Others forms of Credit:]** \- Transferable credit means a credit that can be transferred to a second beneficiary by a first beneficiary. \- back-to-back credit is a credit that serves as the collateral for another credit. The advising bank of the first letter of credit becomes the issuing bank of the second letter of credit. \- Red clause credit is the credit that includes a clause (traditionally written or typed in red ink) that allows the advising bank to make advances to the beneficiary in advance of the shipment or before presenting the prescribed documents. \- Revolving credit: can be used to avoid the need for repetition of issuing an advising credits, and thus is used for regular shipments. The credit stipulates that it is revolving whether automatically or under specified conditions. \- A standby letter of credit is similar to documentary credit but is used as a guarantee that can contractual undertakings are fulfilled. \- Confirmed credit is when the sellers wishes to have a documentary credit issued by a foreign bank to be confirmed by a bank in an exporting country. 19. Definition and process of open account payment method? ---------------------------------------------------------- **[Definition:]** In an open account transaction, the seller ships goods and sends shipping documents including invoice directly (not using a banking system) to the buyer without receiving payment, and the buyer will pay at the future due date. The seller extends credit to the buyer by allowing them to pay in arrears. **[Process:]** (1) The seller and the buyer conclude a contract for sale, for which the payment method is an open account. ----- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- (2) The seller ships the goods according to a contract for sale (3) The seller sends shipping documents (transport document: bill of lading or airway bill, invoice, packing list) directly to the buyer. (4) The buyer simply instructs its bank to transfer the amount by depositing funds or by debiting his account. This is the same as a normal bank transfer in domestic trade transaction. (5) The buyer's bank transfers funds to the seller's bank by crediting the seller's bank account or debiting their account with the seller's bank. (6) The seller's bank gives the funds to the seller by crediting the seller's account with the bank. 20. What are the pros and cons of open account payment method? -------------------------------------------------------------- **[Definition:]** In an open account transaction, the seller ships goods and sends shipping documents including invoice directly (not using a banking system) to the buyer without receiving payment, and the buyer will pay at the future due date. The seller extends credit to the buyer by allowing them to pay in arrears. +-----------------------------------+-----------------------------------+ | **Pros** | **Cons** | +===================================+===================================+ | \- The buyer will be relieved of | \- The seller will lose control | | cash flow problem. | of goods without payment. | | | | | \- The buyer has time to inspect | \- The seller will lose control | | goods before payment. | goods without security for | | | payment, such as a bill of | | \- The buyer can save costs, such | exchange (a documentary draft), | | as the letter of credit issuing | promissory note, payment | | fee, collection fee. | guarantee, documentary credit. | | | | | | \- The seller can hardly use | | | trade finance techniques such as | | | negotiation, factoring, or | | | forfaiting. | | | | | | \- The seller will suffer cash | | | flow problem. | | | | | | \- The Sounders had no pursue | | | collection of aboard in case of | | | non-payment. | | | | | | \- The seller may not get paid by | | | reason of market claim by the | | | buyer. | +-----------------------------------+-----------------------------------+ Questions group 2: ================== Question 1 ---------- On September 1 2020, Thanh An company signed a contract No. 0023/EX-JP to export frozen seafood to ABC Co.Ltd address at No.1 Chome, Tokyo, Japan. - Quantity: 12,000Kg±5%, - Unit price: 15USD/Kg - FOB Haiphong - Payment term: Irrevocable letter of credit at sight. On September 15 2020 ABC Co.Ltd requested Mitsubishi Bank, Tokyo branch to issue LC No. ILC00013437MB in favor of Thanh An Co. Thanh An Co. must present documents at Mitsubishi Bank, Tokyo branch before October 21, 2020. On September 30 2020, Thanh An Co. delivered 11,500kg according to the terms and conditions of the signed contract. - **Requirement:** *Draw a bill of exchange according to the above situation.* Question 2 ---------- On September 1 2020, Generalexim company signed a contract No. 0023/EX-JP to export frozen seafood to Marubeni Co.Ltd address at No.1 Chome, Tokyo, Japan. - Quantity: 12,000Kg± 5%, - Unit price: 15USD/Kg - FOB Haiphong, - Payment term: D/P On September 30 2020, Generalexim No.1 delivered 11,500kg according to the terms and conditions of the signed contract. The seller entrusted the collection of the payment to Vietcombank, Cau Giay branch (remitting bank). After that, Vietcombank sent the documents and, together with the collection instruction), to the Mitsubishi Bank, Tokyo branch (collecting bank) to entrust the collection of the payment. - **Requirement:** *Draw a bill of exchange according to the above situation.* Question 3 ---------- Nikken Microsystems. Assume Nikken Microsystems has sold Internet servers to Telecom España for €700,000. Payment is due in three months and will be made with a banker acceptance from Citibank Acceptance. The acceptance fee is 1.0% per annum of the face amount of the note. This acceptance will be sold at a 4% per annum discount to Wells Fargo Bank. a\. How much cash will Nikken Microsystems receive from the sale in three months if it holds the acceptance until maturity? b\. How much cash will Nikken Microsystems receive from the sale at once if it discounts the acceptance at Wells Fargo Bank. c\. What is the annualized percentage all-in cost of this method of trade financing? **Question 4** Inca Breweries of Lima, Peru, has received an order for 10,000 cartons of beer from Alicante Importers of Alicante, Spain. The beer will be exported to Spain under the terms of a letter of credit issued by a Madrid bank on behalf of Alicante Importers. The letter of credit specifies that the face value of the shipment, \$720,000 U.S. dollars, will be paid 90 days after the Madrid bank accepts a draft drawn by Inca Breweries in accordance with the terms of the letter of credit. The current discount rate on a 3-month banker\'s acceptance is 8% per annum, and Inca Breweries estimate its weighted average cost of capital to be 20% per annum. The commission for selling a bank- er\'s acceptance in the discount market is 1.2% of the face amount. How much cash will Inca Breweries receive from the sale if it holds the acceptance until maturity? Do you recommend that Inca Breweries hold the acceptance until maturity or discount it at once in the U.S. banker\'s acceptance market? Question 5 ---------- Sunny Coast Enterprises has sold a combination of films and DVDs to Hong Kong Media Incorporated for US\$100,000, with payment due in six months. Sunny Coast Enterprises has the following options for financing this receivable: \(1) Use its bank credit line. Interest would be at the rate of 6.15% per annum. Sunny Coast Enterprises would need to maintain a compensating balance of 20% of the loan\'s face amount. No interest will be paid on the compensating balance by the bank. \(2) Sunny Coast Enterprises has been approached by a factor that offers to purchase the Hong Kong Media Imports receivable at a 16% per annum discount plus a 2% charge for a non-recourse clause. a\. What are the annualized percentage all-in-costs of each option? b\. What are the advantages and disadvantages of each option? c\. Which option would you recommend?