Suppose an importer's bank issues a letter of credit to the seller in a foreign country....

Suppose an importer's bank issues a letter of credit to the seller in a foreign country. The letter of credit often states that it is available "against your draft at sight" when accompanied by a set of additional documents. a. Why will the seller-instead of the buyer--be presenting a sight draft? b. Why is the bank requiring a set of additional documents?

Solutions

Expert Solution

a) If the Seller conforms to the letter of credit, the seller must be paid by the bank hence the seller is required to present a sight draft.

Also, the issuing bank provides a guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due and to examine the documents, and only pay if these documents comply with the terms and conditions set out in the letter of credit.

b) The bank requires an additional set of documents as it is the basis of payments and proofs in the letter of credit situatuation. also basically parties of letter of credit deal in documents and not in goods.

keosha answered 2 years ago

Next > < Previous

Related Solutions

Create a flow chart of a letter of credit transaction. There will be a buyer, seller,...

Create a flow chart of a letter of credit transaction. There will be a buyer, seller, issuing bank, correspondent bank, foreign freight forwarder, customhouse broker in the buyer’s country and the shipper (air or water). The seller starts by making an offer to a buyer who either accepts the term of sale or asks for different terms. The buyer then goes to the issuing bank and so forth.

a sample of a full document of the letter of credit issued by the buyer's bank

Suppose the Central Bank of Country X has $700 million in foreign assets, $1,200 million in...

Suppose the Central Bank of Country X has $700 million in foreign assets, $1,200 million in domestic assets, and holds $600 million in deposits by private banks. 1. How much currency in circulation is there in Country X (in millions)? 2. Suppose the Cental Bank engages in a non-sterilized purchase of foreign assets in the amount of $200 million. Determine the balance sheet ( domestic assets, foreign assets, currency in circulation, and bank deposits). 3. Suppose the purchase above is...

When a foreign businessman buys American produce and pays with a letter of credit, the current...

When a foreign businessman buys American produce and pays with a letter of credit, the current account: A.) rises b.) stays the same c. Falls

“A confirming bank will only pay under a letter of credit if the documents presented to...

“A confirming bank will only pay under a letter of credit if the documents presented to it conform strictly with the terms of the credit”. Discuss the role of a confirming bank under a letter of credit. “In dealing with a letter of credit, a bank has no interest in goods being bought or sold. The credit is separate from and independent of the underlying contract of sale or other transaction”. Discuss why the bank has no interest in the...

Deutche Bank South African firm applied for a revolving letter of credit in favor of a...

Deutche Bank South African firm applied for a revolving letter of credit in favor of a German exporter at a branch of Barclays Bank in Johannesburg. The letter of credit was issued covering shipments of pharmaceuticals and was confirmed by Deutsche Bank in Germany. Shipments proceeded with no problem, growing larger and more frequent. Barclays increased the amount of the letter of credit on several occasions to accommodate the growing business. To Barclays’ knowledge, their account party had always taken...

Suppose that the liquidity preferences for the home country h and foreign country f are both...

Suppose that the liquidity preferences for the home country h and foreign country f are both fixed (i.e. they are not a function of the interest rate, i.e. you can ignore the interest rate in this question). The real GDP growth rates of countries h and f are both 0. The nominal money supply growth rate of the foreign country f is also 0. The nominal money supply growth of the home country h is initially 3%, until time T,...

22. Victoria Credit Bank (VCB) issues bonds to households who are not depositors in that bank....

22. Victoria Credit Bank (VCB) issues bonds to households who are not depositors in that bank. VCB makes a loan to a commercial company, Rio Tinto, which is a depositor in that bank. Rio Tinto is funding the forage of a new mine. The households fund their investment with accumulated past savings and hold their bank deposits in Northern Territory Credit Bank (NTCB). a) Using a flow-of-funds diagram incorporating the surplus spending units, deficit spending units, financial intermediary, financial markets...

Suppose that home country A has the following transactions with foreign country B. For each transaction,...

Suppose that home country A has the following transactions with foreign country B. For each transaction, indicate and explain the appropriate debit and credit entry in A’s balance-of payments accounts. a) A firm in country A sells $9,000 of iron & copper to a country B firm. Payment is made by the firm in B drawing down its checking account in a country A commercial bank. b) An importer in country A buys $5,000 of apparel from a country-B supplier,...

Suppose that home country A has the following transactions with foreign country B. For each transaction,...

Suppose that home country A has the following transactions with foreign country B. For each transaction, indicate and explain the appropriate debit and credit entry in A’s balance-ofpayments accounts. a) A firm in country A sells $9,000 of iron & copper to a country B firm. Payment is made by the firm in B drawing down its checking account in a country A commercial bank. b) An importer in country A buys $5,000 of apparel from a country-B supplier, paying...

Subjects