Question

7) A.What is the major difference between "currency risk" and "risk of noncompletion"? How are these risks handled in a typical international trade transaction? B. Explain what a letter of credit (L/C) is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade.

Answer 1

A.Currency risk is the risk of change in value of currency and the loss of value of one currency against another due to the gap between shipment of goods and receipt of money. Risk of non completion is the risk associated with payment on time and that is complete. In international trade, the exporter usually ships the goods first and then the importer pays at an agreed date later. The risk that the importer may not pay is inherent on the shipment of goods.

B. A letter credit is a document issued by the importers bank on the latter's request. It is issued against the bill of lading and the bank undertakes to honor the payment in case the importer fails to do so on the due date. The principal parties are the exporter, the importer and the importer's bank. The principal advantage is that it ensures timely payment for the exporter and protects it from risk of non completion. Letter of credit is an important financial tool to bridge the payments gap across international boundaries and helps in promoting the trade given the guarantee of payment. The letter can be issued irrespective of the political or economic conditions in the country.