Free Online Course in International Business

Assessment

1. The method of payment that carries the greatest risk for the exporter is

a. cash in advance.

b. letter of credit.

c. documentary collection.

d. open account.

2. The method of payment that carries the greatest risk for the importer is

a. cash in advance.

b. open account.

c. letter of credit.

d. documentary collection.

3. When shipping under a letter of credit the exporter is guaranteed payment when

a. the importer has received and inspected the goods at the port of import.

b. the exporter has complied with all terms and conditions as specified in the letter of credit.

c. the exporter has shipped the product and the bill of lading notes it as clean.

d. the importer advises the bank that the funds can be safely transferred to the exporter.

4. A documentary collection differs from a letter of credit in that

a. the exporter does not send the documents to a bank.

b. the importer does not receive the documents for a bank.

c. the fees for a documentary collection are greater than for a letter of credit.

d. the exporter cannot transfer risk to a banking institution.

(Correct answers: 1=d, 2=a, 3=b, 4=d.)

Activity

Importers –

You are a new company (in business 2 years) and you are interested in placing a fairly large order with your foreign supplier.
Your goal is to purchase the products and resell them to your customers.
You need the product to be shipped within 2 weeks and it will take 6 weeks for you to receive the product once it ships.
Once you receive the product, you will repack it and ship it to your customer within 1 week. You have agreed to receive payment from your customer 60 days after you ship.
In order to fund this scenario you have requested Open Account payment terms from your vendor at Net 120 Days on Invoice and will pay in their currency.

Exporters –

You are a well established company and have been selling your products overseas for 15 years, although you have never sold to a customer in this new market.
You currently hold inventory of the product this customer wants to purchase so you do not need to manufacture additional products.
You never extend open payment terms to new customers however this customer is also talking to your biggest competitor and may place the order with them if you do not comply.

Activity Alternatives

The currency in the importer’s country has devalued by 25%.
There are grumblings of a dock strike in the importer’s country.
The exporter wants to conduct a credit check in order to extend payment terms. The importer has agreed to supply the necessary information and will wait 4 weeks for the shipment to depart.
The exporter has to manufacture the necessary products and will require funds to purchase raw materials.
The exporter has never sold products overseas.

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