Question

2. What the process is by which a banker’s acceptance is created?

Clearly state your answer to each problem. Answers without justification/explanation will not be given credit

Answer 1

Answer:

Banker's acceptance- It is a negotiable instrument works like a post dated check. It is a form of payment that is guaranteed by a bank. It is a short term debt instrument like U.S treasury bill. It is traded at discount in the money market. It is payable in the future date, generally 30 to 90 days maximum to180 days.

Creation- It is created as a Time draft that is order to pay in the future. Draft is drawn on or accepted by commercial bank. This is a direct liability of bank. This is used in international trade. A banker's acceptance is created after taking title to the goods via bill.  

Process of creation-

1. Importer makes purchase from foreign exporter that is payable in future.
2. Importer wants to finance the purchase and exporter wants assurance of payment in the future.
3. Exporter draws time draft on bank.
4. Importer's bank accepts the draft that liability to pay and creates a Banker's acceptance
5. Importer's bank guarantees payment of draft in the future.
6. Exporter receives payment in the future by redeeming banker's acceptance.