Deck 15: Financing Foreign Trade

Question 1

SCI borrows SFr 1.5 million from Credit Suisse for one year at 12% interest. Interest is prepaid. What is the effective SFr interest rate on SCI's loan?

A) 14.52%
B) 13.64%
C) 16.44%
D) 21.22%

Answer 1

B

Question 2

An exporter shipping goods to a nation that may impose currency controls will seek an L/C that is

A) revocable
B) clean
C) documentary
D) confirmed by a domestic bank

Answer 2

D

Question 3

Countertrade arrangements may take the form of

A) barter
B) buyback
C) drafts
D) both a and b

Answer 3

D

Question 4

Which of the following is NOT an advantage to the importer of L/C financing?

A) any documents required are carefully inspected by clerks with years of experience
B) an L/C is almost as good as cash in advance
C) the importer using an L/C can usually command better credit terms and/or prices from the exporter
D) L/C financing is always cheaper than the alternative financing methods

Question 5

The Apex Supplies Corporation needs to acquire €100 million in funds to expand their facilities. The bank has offered them a discounted loan at 10% and a compensating balance of 6%. What is the effective interest rate on this loan?

A) 5.5%
B) 7.8%
C) 11.9%
D) 14.5%

Question 6

Which one of the following conditions is NOT required for a draft to be negotiable under the U.S. Uniform Commercial Code?

A) to be in writing
B) signed by the drawer
C) an open amount of money
D) an unconditional order to pay

Question 7

The only U.S. agency dedicated solely to financing and facilitating U.S. exports is the

A) Ex Im Bank
B) Foreign Credit Insurance Association
C) Bankers' Association for Foreign Trade
D) Agency for International Development

Question 8

Fluor is seeking to bid on a construction project in Turkey. Which Ex Im Bank program will likely be most useful to Fluor?

A) "standby" loan commitment
B) Ex Im Bank payment guarantee
C) preliminary commitment
D) Ex Im Bank loan guarantee

Question 9

Allied Products has been offered a one?year loan of £100,000 at 14%, payable at maturity. What is the effective pound interest rate on Allied's loan?

A) 14.0%
B) 17.5%
C) 15.2%
D) 18.3%

Question 10

Which one of the following is NOT a disadvantage to open account financing?

A) high risk
B) seller must finance production
C) increased risk from currency controls
D) no customer resistance

Question 11

Which of the following payment methods provides both parties with a strong measure of protection against commercial and political risks?

A) Cash in advance
B) Letter of credit
C) Draft
D) Consignment

Question 12

RJR Nabisco sells its export receivables to a firm that takes responsibility for collecting payment from the importers. RJR has used
A) accounts receivable financing

A) letter of credit
B) factoring
C) forfaiting

Question 13

The party to a draft who signs and sends the draft to the second party is called the

A) drawer
B) payee
C) drawee
D) opening bank

Question 14

Which of the following organizations was created by the Bankers' Association for Foreign Trade to mobilize private capital for financing the export of big?ticket items by U.S. firms?

A) the Ex Im Bank
B) Private Export Funding Corporation
C) Foreign Credit Insurance Association
D) Bankers' Export Financing Association

Question 15

Which of the following payment methods provides the exporter with the strongest protection against risk?

A) Cash in advance
B) Letter of credit
C) Draft
D) Consignment

Question 16

Most L/Cs issued in connection with commercial transactions are

A) documentary
B) clean
C) revocable
D) without discrepancies

Question 17

Consolidated Corporation requires C$50 million in funds. The banks has offered them a discounted loan at 8% with a compensating balance of 15%. How much must they borrow in order to net this amount?

A) 64,935,165
B) 55,455,700
C) 85, 985,005
D) 35,097,555

Question 18

Philips N.V. requires Lit 500 million for one year. It can borrow from Banca di Roma at a 15% interest rate. How many lira must Philips borrow to receive this amount if the loan is quoted on a discount basis?

A) Lit 667 million
B) Lit 588 million
C) Lit 435 million
D) Lit 556 million

Question 19

When factoring is done on a nonrecourse basis, the ???? has title to the receivables and the ???? is responsible for credit checking and collecting the receivables.

A) factor, factor
B) factor, borrowing firm
C) borrowing firm, factor
D) borrowing firm, borrowing firm

Question 20

Why is Ex Im Bank financing often referred to as financing of "last resort?"

A) it will not provide financing unless the U.S. exporter is doing business in more than one country
B) it will not provide financing unless private capital is unavailable
C) fees are extremely high for guarantees and insurance
D) the Ex-Im Bank authorizes loans for only the worst credit risks

Question 21

Which of the following is NOT a function of a draft ?

A) to provide written evidence, in clear and simple terms, of a financial obligation
B) to enable both parties to potentially reduce their costs of financing
C) to provide a negotiable and unconditional instrument
D) to insure the exporter is paid on a non-recourse basis

Question 22

Which of the following is not an advantage to the exporter of L/C financing?
A) an L/C eliminates credit risk if the bank that opens it is of undoubted standing

A) an L/C guards against pre-shipment risk such as order cancellation
B) an L/C reduces the danger that payment will be delayed or withheld due to exchange controls or other political acts
C) payment is only in compliance with the L/C's stipulated conditions

Question 23

Which of the following is the LEAST important economic rationales for countertrade?
A) it avoids tariff and quota constraints

A) many Third World countries use countertrade to conserve what little foreign exchange they have
B) the goods taken in countertrade are often unattractive and difficult to market
C) countertrade enables members of cartels such as OPEC to undercut an agreed?upon price without formally doing so

Question 24

Microsoft sells software to a French firm. In return, the French firm's bank, Credit Agricole, acknowledges it will pay Microsoft after the software is delivered to its client. Microsoft has most probably used

A) accounts receivable financing
B) factoring
C) forfaiting
D) letter of credit

Question 25

Precor sells exercise equipment to thousands of health clubs and sporting goods stores around the world. Its average order size is about $3,500. Which of the following techniques would you recommend to Precor to deal with its credit risk?

A) insure the receivables through the FCIA, which will charge a 1.2% fee to cover 90% of the receivables
B) use a factor, who will charge a 1.3% export factoring fee
C) request letters of credit from customers. The customers will have to pay $75 plus 0.5% for each letter of credit. To remain competitive, Precor will have to reduce its prices to reimburse customers for their L/C costs
D) all are about equally acceptable

Question 26

A documentary draft is typically accompanied by a

A) document verifying the importer's address
B) guarantee to pay from the importer's bank
C) currency futures contract to hedge exchange rate changes
D) commercial invoice

Question 27

Caterpillar Tractor sells heavy construction equipment to a Polish firm. In return, the Polish firm issues a promissory note to Caterpillar promising to pay for the equipment over a five?year period. Caterpillar sells the note to Deutsche Bank at a discount. Caterpillar has used
A) accounts receivable financing

A) letter of credit
B) factoring
C) forfaiting

Question 28

Which one of the following is NOT an important attribute of a bankers' acceptance?

A) makes an unconditional promise to pay the holder of the draft a stated amount on a specified day
B) effectively substitutes its own credit for that of a borrower
C) creates a negotiable instrument that may be freely traded
D) it allows the bank to hold them on their books as an asset

Question 29

An exporter manufacturing a specialized piece of equipment can hedge the risk that its customer will cancel the contract before shipment by obtaining a

A) consignment contract
B) open account
C) bill of lading
D) letter of credit

Question 30

Which of the following firms would find a factor most useful?

A) Levi Strauss, which has been shipping jeans to the same customers in 120 countries for over 40 years,
B) Brown and Root, which manages major construction projects around the world
C) RC Cola, which periodically ships a small order of soft drinks overseas
D) IBM, which exports mainframes and other expensive equipment to customers in over 100 countries around the world

Question 31

By shipping goods under documentary time drafts for acceptance

A) the exporter is extending credit to the importer
B) the exporter is relinquishing control of the goods in return for a signature on the acceptance to assure it of payment
C) the importer guarantees that it will pay cash on delivery
D) a and b only

Question 32

Which of the following L/Cs is safest for the exporter?

A) revocable, confirmed L/C
B) irrevocable, unconfirmed L/C
C) irrevocable, confirmed L/C
D) revocable L/C

Question 33

Which of the following attributes of a bankers' acceptance greatly enhances its marketability?

A) the authenticity of an accepted draft is separated from the underlying commercial transaction
B) the accepted draft may not be dishonored for reason of a dispute between the exporter and importer
C) the accepted draft is automatically guaranteed by the Ex im Bank
D) a and b only