Chapter 2- questions

1. In negotiating price and payment, what should the price the exporter quotes relate
to?
The complete set of contract terms: size of order, terms of delivery, terms of payment,
warranty provisions and so on
2. How can the exporter avoid the “price trap” occurred in many negotiations when
the buyer demands concessions about delivery time, method of payment, etc?
As items in the contract are negotiated, the exporter should assess the influence of each
factor on price, and adjust the price accordingly. Sometimes the exporter improves his
terms without adjusting the price, but only in order to create goodwill for future deals, to
ensure that the exporter gets the order, or for some other business reason.
3. What are the 5 steps in negotiating payment?
4. Why payment in international trade tightly controlled?
Because in international trade, trust is rare, the court is far away and unpredictable
5. What are the common methods of payment in international trade?
There are four common approach of payment in international trade:
- payment on open account with no security
- payment on open account secured with export credit insurance
- payment on open account secured with bank guarantee
- payment by letter of credit
6. What is payment by open account? What are the risks for the exporter if he accepts
payment by open account?
Open account means that the export ships the goods to the buyer and waits till a forced
date as agreed in their contract for payment from the buyer. Open account is risky for the
exporter as the buyer may not fulfill his payment or prolong the payment. Normally, the
exporter only uses this payment method when they have established a long-lasting and
trustworthy business relationship.
7. What are methods of payment in small purchases?
There are three common methods of payment in small purchases?
- Cash on delivery: make payment when receiving the goods
- Cash against invoice: receive the invoice with a certain date to pay
- Cash with order: 100% prepayment
8. What are payment insurances?
Payment insurance is used to minimize the risk of payment in international trade for the
exporter by third-party security for payment. There are two types of it: export credit
insurance and bank guarantee.
9. Who can offer bank guarantee? A reliable bank
10. Who can offer export credit insurance?
An insurance company or government export credit agencies
11. What are the two main elements in payment? Time and structure
12. What does the exporter have to suffer from late payment? bank interest, low cash
flow
13. What is an incentive for early payment? a discount
14. How to fix payment date? To use a straightforward calendar date or interval times
15. What points at which money is deemed to be paid does the Buyer prefer?
- When the buyer instructs the bank to pay.
- When the buyer pays the money into his bank.
16. What points at which money is deemed to be paid does the Seller prefer?
- When the buyer's bank transfers funds.
- When funds reach the seller's bank account
17. When delay in payment is excused?
- Delay happens in the grace period.
- Delay is caused by force majeure events
18. What payment does the importer have to pay the exporter in case of late payment?
Compensation for losses due to late payment.
19. What may reduce risk for exporters?
Exporter may reduce risk by spreading risk with the third party.
20. In order to take out non- payment risk insurance, what does the exporter have to
do?
Contact an insurance company and explain the details of the business, applies for a
quotation from the insurance
 21. What can we imply when the insurance company refuses to offer an insurance
quotation?
- The insurance company knows the buyer's uncreditworthiness.
- The business is risky.
22. What does the insurance premium depend on?
- The type of the goods.
- The creditworthiness of the buyer.
- The stability of the buyer's country and so on.
23. What is the guarantee triangle?
That is a relationship of principle, the beneficiary and the guarantor in term of guarantee.
The principle makes a promise to pay the price of the contract to the seller (the
beneficiary). Then the principle asks the guarantor to issue a guarantee. If the principle
fails to pay, the bank will pay to the benificiary.
24. What is Export credit insurance?
It is a guarantee for the exporter by a third party, an insurance company, which issue an
export credit insurance policy covering the risk of non-payment. The exporter has to pay
the costs for that guarantee. In case the buyer fails to pay, the insurance company will pay
to the exporter
25. What is a bank guarantee?
It is a guarantee for the exporter by a third party, the bank. The bank issues a bank
guarantee which assures that the bank will pay for the exporter if the buyer fails to do so.
The exporter has to pay the cost of that guarantee.
26. Distinguish Export credit insurance and Bank Guarantee?
Both of them are guarantee of payment by issued by third party, providing the exporter
with some level of security in terms of payment.
For the export credit insurance, the exporter has to pay the cost of that guarantee while
the buyer is the one pays for bank guarantee. The exported credit insurance is issued by
an insurance company while it is the bank that issues a bank guarantee.
27. What are some limitations of Export Credit Insurance?
- It is a long wait between when the buyer fails to pay and the time when the insurance
company compensates for the exporter, say 6 moths typically
- The exporter is not compensated 100% of the original invoice price by the insurance
company. So with export credit insurance, the exporter is covered against the worst.
28. What are some common guarantees in business? Explain each of them briefly.
1. For the risk of non-payment: payment guarantee
- the payment guarantee commits the bank to pay for the exporter if the buyer fails to do
so. The payment guarantee is usually 100% of the contract price.
2. For the risk of revocation: tender guarantee
- This type of guarantee is used in case that the exporter bids on the contract to supply
goods or materials for a government department or agency is withdrawn. A normal figure
of a tender guarantee is usually 1.5% to 5% of the contract price.
3. For the risk of non-performance: performance guarantee
- The performance guarantee makes sure the exporter works badly or not at all. The
guarantor will pay, with stated limits, the costs of the exporter's failure to perform. The
performance guarantee is usually 5%-10% of the contract price.
- For the risk of losing prepayment: prepayment guarantee
The guarantee promises the buyer that the bank will return the advance payment if the
exporter fails to deliver. The prepayment guarantee is often 100% of the contract price.
29. 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.
30. What is a Conditional Guarantee?
it is a guarantee from a bank but with serious, objective conditions must be met before
payment by the bank is possible
31. 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 a sum of money when the
exporter presents the necessary documents to the bank. In a letter of credit transaction,
the documents are exchanged for money, so they are formally also called Documentary
credits.
32. What method of payment makes late payment impossible?
The confirmed, irrevocable, at sight L/C
 33. What are steps in issuing an L/C?
There are four steps in issuing an L/C:
- the exporter and the buyer signs a contract
- the buyer asks the issuing bank to open an L/C
- the issuing bank of buyer's country asks the advising bank to advise the exporter that the
L/C has been opened
- The advising bank advises the exporter that the L/C has been opened
34. What are the steps in presenting a Letter of Credit?
There are six steps in presenting a L/C:
- the exporter ships the goods
- the exporter gets the shipping documents
- the exporter presents the shipping documents to the advising bank to ask for payment
- the advising bank checks the shipping documents and (if appropriate) pays the exporter
- The advising bank notifies the issuing bank that the exporter has presented and forwards
the shipping documents
- The issuing bank transfers necessary funds to the advising bank
35. Explain the two principles that make letters of credit safe for both exporter and
buyer: Autonomy and Strict compliance.
- Autonomy means the L/C is a contract on it own right, completely seperate from the
contract for the safe of the 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.

36. What are the most common problems with L/C that cause discrepancies
There are seven common problems with the L/C:
- documents required by the credit are missing
- document required to be signed is not signed
- the credit has exceeded
- the credit has expired
- the shipment was short
-The shipment was late
- documents are not presented within the required time
37. What are the 3 ways the exporter can proceed once the bank has indicated
discrepancies?
- Provide the missing paperwork or correct errors.
- Ask the buyer to instruct the bank to change the terms of the letter of credit, i.e., to issue
an amendment.
- Ask the bank to process the letter of credit with the discrepancies but to pay only when
(and if) the issuing bank permits payment.
38. 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
- An Irrevocable L/C is the L/C that can only be cancelled with the written consent of the
exporter.
39. 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 non-payment 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. It's a kind
of double guarantee for the exporter so he knows 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.
40. What is the term ”Settlement by Sight Payment”?
- The Seller presents the documents to the Paying bank.
- The Paying bank immediately pays the Seller.
41. What is the term ”Settlement by Deferred Payment”?
- The Seller presents the documents to the Paying bank.
- The Paying bank agrees to pay the Seller the face value of the credit when it matures.
42. What is the term: “Settlement by Acceptance”?
- The Seller presents to the Accepting bank the documents and bill of Exchange (time
draft) drawn usually on the Buyer.
- The Accepting bank agrees to pay the bill when it matures.
43. What is the term: “Settlement by Negotiation”?
The Seller presents to the Negotiating bank the documents and a Bill of Exchange drawn
usually on the buyer.
The Negotiating bank negotiates the bill (i.e., pays it at a discount).
44. What are the associated documents with the L/C?
- Commercial invoice.
- Transport document.
- The insurance document.
Other documents such as: certificate of origin, certificate of analysis, packing list, weight
list, phytosanitary certificate, etc.
45. If a letter of Credit requires “a full set of original air waybills” to be submitted,
what will be the problem for the exporter?
Normally, an air waybill is issued in 03 originals and 09 copies. If a L/C requires "a full
set of original air waybills", this is obviously a mistake or an incorrect requirement. Only
the second original goes to the buyer or consignee. The exporter cannot submit that full
set and may be refused by the issuing bank when asking for payment as the bank must
insist on strict compliance.
46. What are steps in negotiating the terms of a Letter of Credit?
- Agreement: The exporter and the buyer discuss and list all required documentation.
- Incorporation: The list is incorporated into the contract.
- Specification: The buyer applies for the letter of credit specifying the agreed
documentation.
- Verification: The exporter checks the credit to see that required documentation is as
agreed.
- Compliance: The exporter rigorously checks documentations and submits it to the bank.
47. What are different segments in a Letter of Credit?
There are 21 segments in a Letter of Credit:
- Applicant.
- Issuing bank.
- Application date.
- Date and place of expiry of the Credit.
- Benificiary.
- Method of issue.
- Transfer of the credit.
- Confirmation.
- Amount.
- Partial shipment.
- Transshipment.
- Availability.
- Insurance covered by the buyer.
- Transport information.
- Description of the Goods.
- Incoterms.
- Documents.
- Presentation period.
- Additional Instructions.
- Authorization to Debit.
Signature.

48. About the expiry date of a Letter of Credit, why does buyer want an early date
while exporter wants a later date?
- The buyer will want an early date to save bank charges.
The exporter will want enough time after delivery to present the documents and to correct
any discrepancies that might be discovered by the bank.
49. 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.
50. Name types of L/C you know?
- At-sight L/C.
- Advised L/C.
- Back-to-back L/C.
- Confirmed L/C.
- Deferred Payment L/C.
- Irrevocable L/C.
- Red Clause L/C.
- Revocable L/C.
- Revolving L/C.
- Stand-by L/C.
- Transferable L/C.
- Traveler's L/C.
Unconfirmed L/C