What is a Letter of Credit? What role does it play as a method of payment in int
ID: 2727475 • Letter: W
Question
What is a Letter of Credit? What role does it play as a method of payment in international transaction? Identify, at least, four of the documents that issuing banks would normally request from beneficiaries before they honor any drafts drawn on them. Suppose a Factor agrees to buy an exporter's receivables at a discount of 2.0% per month. In addition, the Factor charges a flat fee valued at 1.80 % of total sales for non-recourse financing. If the exporter decides to factor $2.5million in 60-day receivables, how much will the exporter receive? If the financing is with recourse, will the amount received by the exporter be different? Explain with quantitative evidence. Find the annual percentage rate of return for the Factor in both the recourse and non-recourse financing.Explanation / Answer
a.
The letter of credit states what documents the Beneficiary must present, what information they must contain, and the place and date it expires. Beneficiaries who sell goods and utilize a letter of credit as the method of payment have the assurance of the issuing bank that if they present the documents stated in the letter of credit, the issuing bank will honor their demand for payment.
They are often used in international transactions to ensure that payment will be received where the buyer and seller may not know each other and are operating in different countries. In this case the seller is exposed to a number of risks such as credit risk, and legal riskcaused by the distance, differing laws and difficulty in knowing each party personally. A letter of credit provides the seller with a guarantee that they will get paid as long as certain documentary delivery conditions have been met. For this reason the use of letters of credit has become a very important aspect of international trade.
The documents that can be presented for payment are:
b. Sales = 2.5 million / 60 x 360 = $15 million
Amount received by exporter = (Receivables for year x 2% x 12) - Fee payable = (15 x 2% x 12) - (15 x 1.80%)
= $3.33 million
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.