INSTITUTE OF BANKERS IN MALAWI

DIPLOMA IN BANKING EXAMINATION

SUBJECT: INTERNATIONAL TRADE FINANCE (IOBM - D202)

Date: Saturday, 3rd May 2009

Time Allocated: 3 hours (08:00 – 11:00 am)

INSTRUCTIONS TO CANDIDATES

1 This paper consists of TWO Sections, A and B.

2 Section A consists of 4 questions, each question carries 15 marks.

Answer ALL questions.

3 Section B consists of 4 questions, each question carries 20 marks.

Answer ANY TWO questions.

4 You will be allowed 10 minutes to go through the paper before the start of
the examination, when you may write on this paper but not in the answer
book.

5 Begin each answer on a new page

6 DO NOT open this question paper until instructed to do so.

7 Please write your examination number on each answer book used.

SECTION A (60 Marks)

Answer ALL questions from this section.

QUESTION 1

In what way can a stand-by letter of credit be used as a bid guarantee? In your
answer, compare the two by spelling out similarities, from the point of application
up to the maturity or payment under the stand-by L/C or bid guarantee. Use
relevant diagrams and tables to explain your answer.
(15
marks)

(Total 15 marks)

QUESTION 2

(a) Explain the “Mercantilist Theory” of trade and mention the system that
replaced this theory? (5 marks)

(b) Assume you are buying a car from the United States of America. The
price quoted to you is US$5,000. The US$/MWK exchange rate on the
day you were quoted the car was 1 US$ = MK140.

(i) Calculate the cost of the car to you in Malawi. (2 marks)

(ii) Suppose at the time of paying for the car, the US$/MWK exchange
rate is now US$1 = MWK145. Calculate the new cost of the car in
Malawi. (2 marks)

(iii) Explain the effect of a strong dollar to you as an importer, as well

as to an exporter. Quantify your answer by showing your
calculations (2 marks)

(c ) Explain how a fixed exchange rate system works, by giving an example of

the Malawi Kwacha and the United States Dollar (US$). Assume MWK is
a freely convertible currency. (4 marks)

(Total 15 Marks)

QUESTION 3

(a) Describe the four payment methods in International Trade.

(8
marks)

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(b) Within the Uniform Rules for Collection prepared by the International
Chamber of Commerce, describe the four articles related to presentation of
documents in order to ensure uniform interpretation under documentary
collection. (7 marks)

(Total 15 Marks)

QUESTION 4

(a) Explain how the following factors affect currency exchange rates?

(i) Balance of payments. (2 marks)

(ii) Economic growth. (2 marks)

(i) Inflation. (2 marks)

(ii) Political developments. (2 marks)

(b) A US$-Malawi Kwacha exchange rate is quoted as 0.0056 indirect

quotation. Use this information to answer the following questions:

(i) Convert this rate to direct quotation. (1 marks)

(ii) How many Malawi Kwachas will as customer receive in exchange

for US$2,300.00? (1 marks)

(c) Mention one major difference between the bid guarantee and standby
letter of credit? (2 marks)

(d) Give three reasons why an importer would opt to use a documentary
collection rather than a documentary credit. (3 marks)

(Total 15 Marks)

SECTION B (40 Marks)

Answer ANY TWO questions from this section.

QUESTION 5

(a) There has always been desire to integrate world economies through
international trade. However, there are still factors that impede free
movement of goods and services between countries. Briefly describe any
five of these factors. (10 marks)

A qualification examined by the Institute of Bankers in Malawi 3

(b) A Malawian importer would like to import some items from South Africa.
The Financial Controller of the company comes to your bank and explains
that the supplier has given a condition that he will only transact on a letter
of credit terms. The FC is not sure what an L/C is. Advise the FC on the
following:-

i) What a letter of credit is by spelling out all the elements. (4 marks)

ii) The six main parties to an LC and their roles. (6 marks)

(Total 20 Marks)

QUESTION 6

(a) Define a bill of exchange. (2 marks)

(b) Look at the figure below: it is an example of a draft/bill of exchange.

Assuming it is a term draft, fill in the missing parts from (1) to (7), and give
details. (7 marks)

DUE (1)

_____(2)______ 20_____

(3)
_____________________ after date for value received pay to
TO THE ORDER OF

The sum of

$_________(5)________
(4)
____________________________________________________ Dollars

TO: _________ (6)_______________

___________________________
___________________________
___________________________ ____________________
___________________________

(c) Your customer who has just received a documentary bill for collection
asks you the following:

A qualification examined by the Institute of Bankers in Malawi 4

 “Will the receipt of a documentary bill for collection impact on my banking
credit facilities?” What will be your response and why? (2 marks)

(d) The choice of Incoterms is affected by the way in which the goods are
sent. Categorize in 2 groups, the Incoterms in line with the transport mode
used. (9 marks)

(Total 20 Marks)

QUESTION 7

(a) Define the following terms:

(i) Sight draft (1

mark)

(ii) Consignment (2 marks)

(b) Explain how a bank draft operates to settle international trade. (3 marks)

(c) Teamw, a tea producing company based in Malawi would like to export tea
to Scotblend, a tea blending firm in the United Kingdom. The main bankers
of Teamw are ZBS Bank of Malawi.

As an official of ZBS Bank, advise the sales director of Teamw on how this
transaction can be executed using documentary collections.
(7
marks)

(d) A country needs exports in high volumes in order to strengthen the value
of its currency. However, there are exchange control regulations affecting
exports. Explain why a country like Malawi reinforces exchange control
regulations on exports. (2 marks)

(e) What does the acronym SWIFT stand for? (1

mark)

(ii) What do the following codes stand for under SWIFT?

(i) MT 103 (1
mark)

(i) MT 205 (1
mark)

(ii) MT 210 (1
mark)
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 (iii) MT 300 (1
mark)

(Total 20 Marks)

QUESTION 8

(a) Describe any five roles banks play in order to bring efficiency in
international trade? (10 marks)

(b) Explain the following risks in international trade:

(i) Country risk. (2 marks)

(ii) Foreign exchange risk. (2 marks)

(iii) Market risk. (2 marks)

(iv) Geographical risk. (2 marks)

(v) Commercial risk. (2 marks)

(Total 20 Marks)

END OF THE EXAMINATION PAPER

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