Question

A banker's acceptance might be best described as a post-dated check. Generally used in international trade, a banker's acceptance arrangement is established between a bank and a firm. Suppose one of your classmates owns a business named Kakoli Ventures and wants to buy a consignment (shipment) of branded watches from USA.

Draw a flow chart showing the process how a banker's acceptance is used in trading also explain why it is important in international trading. 

Answer 1

The banker's acceptance is a form of payment that is guaranteed by a bank rather than an individual account holder.

 

The bank guarantees payment at a later time.

 

BAs are most frequently used in international trade to finalize transactions with relatively little risk to either party.

 

Banker's acceptances are traded at a discount in the secondary money markets.

 

Thus, unlike a post-dated check, BAs can be investments that are traded, generally at a discounted price (similar to Treasury bills).

 

One of the key advantages of a banker’s acceptances is it’s backed by a financial institution (i.e., protected against default). This gives the seller assurances related to payment. Meanwhile, buyers are afforded the ability to make purchases in a timely manner and not worry about having to make payments in advance.

 

WORKING OF BA:

For a banker’s acceptance, the importer will seek to make a purchase from an exporter (generally in another country). The exporter wants assurance of payment, but the importer also wants assurance that the seller can deliver. Banker’s acceptance is a form of payment backed by a bank that eliminates transaction-related risks for the importer and exporter.

 

A bankers acceptance is used for international trade as means of ensuring payment. For instance, if an importer wants to import a product from a foreign country, he will often get a letter of credit from his bank and send it to the exporter.

 

Banker's acceptance facilitates trade between the two unknown parties. This helps build trust between the business entities. The exporter is assured about its payment, and the importer is assured about the timely receipt of goods. The exporter need not worry about default since a financial institution, banker's acceptances substitute the credit worthiness of a bank for that of a business. when a company sells a product to a company it is unfamiliar with, it often prefers to have the promise of a bank that payment will be made.