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CHAPTER REVIEW

CHAPTER 2
1. What is payment by open account ? What are the risks for the
exporter if he accepts payment by open account ?
Open account means the exporter ships the goods to the
buyer and just waits till a forced date as agreed in their
contract for payment from the the buyer. Normally, the
exporter only accepts open account method of payment if he
has known the buyer quite well and they have established a
long-term and trustworthy business relationship.
2. What is Export credit insurance?
Export credit insurance is a guarantee of payment for the
exporter from a third party, an insurance company, which
issues an export credit insurance policy covering the risk of
non-payment. The exporter has to pay the costs for that
guarantee. The insurance company will pay the exporter in
case the buyer fails to do so.
3. What is a bank guarantee ?

- A bank guarantee is a guarantee of payment for the expoerter from a third


party, a bank. The bank may issue a bank guarantee assuring in case the
bank will pay for the exporter in case the buyer fails to do so. The buyer has
to pay the costs of that guarantee.

4. Distinguish Export credit insurance and Bank Guarantee ?

- Both of them are guarantee of payment from a third party, providing the
exporter with some level of security in terms of payment.
- For ECI, the exporter has to pay for that guarantee while it is the buyer who
pays for a BG. The third party offering export credit insurance is the
insurance company while the bank offers a BG.

5. What are some limitations of Export Credit Insurance ?

- There is always a long wiat between the time when the buyer fails to pay
and the time when the insuarance company compensates the exporter, says
six months typically.
- When compensates is paid, it is unlikely to cover 100% of the original
invoice price.
So with ECI, te export is ownerd against the worst.

6. If shipment is made on CIF or CIP terms, how much is normally the


insurance coverage on that shipment ?
7. What method of payment makes late payment impossible ?
The confirmed, irrevocable, at sight Letter of Credit.
8. Distinguish Irrevocable and Revocable Letter of Credit.
A revocable L/C is the L/C that can be cancelled at any time by
the buyer or by the issuing bank while an Irrevocable L/C is the
L/C that can only be cancelled with the written consent of the
exporter.
9. Distinguish the Confirmed and Unconfirmed L/C.
The Unconfirmed L/C is less secure than the Confirmed one.
Normally, the exporter has got certain security for the nonpayment risk when using the L/C as a method of payment in
their sales of goods to the buyer. The issuing bank will have
to pay the exporter for the goods in case the buyer fails to do
so. With the Confirmed L/C, there is a promise from another
bank, the confirming bank, usually the advising bank too, to
pay for the goods, if the buyer fails to do so. Its a kind of
double guarantee for the exporter so he known for sure that
he will get money as long as he submits a set of documents,
strictly complying with the terms and conditions stated in the
L/C.
10.
What are the most common problems with the Letter of
Credit that cause discrepancies?
Answer:

Any three of the following discrepancies will be enough


for the answer of this question.
Documents required by the credit are missing.
Documents required to be signed are not signed.
Credit amount is exceeded.
Late submission of documents.
Late shipment.
Shipment is short.
11.
Why do exporters greatly prefer confirmation of credit from
their bank?
Because the bank in his own country not only handies the
paperwork but also makes payment itself and recovers the
funds from the buyers bank.
12.

Distinguish Partial Shipments and Shipment in installments.


Shipment in installments means that an agreed schedule
has been set up, for example, three equal shipments in
March, August and October 2012.
A Partial Shipment is simply an incomplete shipment with
some part of the goods to follow later.

13.
Explain the two principles that make letters of credit safe for
both exporter and buyer: Autonomy and Strict compliance.
Autonomy means that the L/C is a contract in its own right,
entirely separate from the contract for the safe of goods.
Strict compliance means that the exporter must present to the
bank shipping documents that comply in all respects with the
terms of the credit. Small deviations will result in refusal by the
bank to pay.
14.

Why do people ask for Prepayment Guarantee?

For some custom-made goods, the manufactuers often ask


for an advance payment. Making this prepayment is risky for
the buyer until the items arrive in working order. The advance

payment guarantee promises the buyer that the bank will


return advance payments if the exporter fails to deliver. The
guarantee is normally for 100% at the prepayment.
15.
In terms of guarantee, what does it mean by Without demur
or objection?
It means on first demand. Whenever the beneficiary
demands payment under the guarantee, the bank will pay.
16.
What is Non-payment Guarantee? What is Prepayment
Guarantee?
Answer:
Non-payment Guarantee commits the bank to pay if the
buyer defaults. It is usually for 100% of the contract price.
Prepayment Guarantee means a promise to the buyer that
the bank will return advance payments, if the exporter fails
to deliver. Normally, the guarantee is for 100% of the
prepayment, decreasing as deliveries are made.
17.
What does Settlement by Sight Payment mean?
It means the exporter presents the necessary documents to
the paying bank (normally the confirming bank) if they are in
order, the bank pays the full face value of the L/C.
18.
What does Settlement by deferred Payment mean?
It means the letter of credit is not payable until a number of
days after delivery. Payment is safe but it is delayed.
If the seller needs money immediately, he can exchange the
L/C for cash (at a discount) with any agreeable bank.
19.
Why do exporters prefer Letter of Credit as a security for
payment to asking for a payment guarantee from the Buyer?
Because payment guarantees are expensive to set up and
they run into trouble so often.
20.
What is a Letter of Credit? Why it is also called Documentary
Credits?

A letter of credit is a binding agreement by a bank to pay


(P.87)
In a supermarket purchase, goods are exchanged for
money; in a letter of credit situation documents are
exchanged for money-that is why letters of credit are
formally called documentary credits.

A L/C is a binding agreement by a bank to pay a certain sum of money


when the exporter presents the necessary documents to the bank. In a
L/C transaction, documents are exchanged for money so they a
formally called DC.