Unit 4 – Exercises

Part 1:
I. True/False Questions
1. Export/ import financing in which a bank acts as an intermediary without accepting financial
risk is called documentary collection.
2. A sight draft extends the period of time following delivery by which the importer must pay
for the goods.
3. A revocable letter of credit allows the bank issuing the letter to modify the terms of the letter
only after obtaining the approval of both exporter and importer.
4. A confirmed letter of credit is guaranteed by both the exporter's bank in the country of export
and the importer's bank in the country of import.
5. The advance payment method reduces the risk of non-shipment that the importer faces under
the open account method.
II. Multiple Choice Questions
1. Which of these financing methods comprises the highest risk for importers?
a. Documentary collection b. Advance payment c. Letter of credit d. Open account
2. Which of these financing methods comprises the highest risk for exporters?
a. Documentary collection b. Advance payment c. Letter of credit d. Open account
3. A document ordering the importer to pay the exporter a specified sum of money at a
specified time is called a(n)
a. bill of lading. b. letter of credit c. bill of exchange. d. airway bill
4. Which of these requires the importer to pay when goods are delivered?
a. A sight draft b. A bill of lading c. A time draft d. An air way bill
5. A contract between the exporter and carrier that specifies destination and shipping costs of
the merchandise is called a(n)
a. draft. b. bill of lading. c. letter of credit. d. bill of exchange.
6. Export/import financing in which the importer's bank issues a document that the bank will
pay the exporter when the exporter fulfills the terms of the document is called a (n)
a. draft . b. bill of lading. c. letter of credit. d. bill of exchange.
7. Which of these allows the bank issuing the letter to modify the terms of the letter only after
obtaining the approval of both exporter and importer?
a. A revocable letter of credit b. A confirmed letter of credit
c. A bill of lading d. An irrevocable letter of credit
8. Which of these can be modified by the issuing bank without obtaining approval from either
the exporter or the importer?
a. A revocable letter of credit b. A confirmed letter of credit
c. A bill of lading d. An irrevocable letter of credit.
9. _______ is guaranteed by both the exporter's bank in the country of export and the importer's
bank in the country of import.
 a. A revocable letter of credit b. A confirmed letter of credit
c. A bill of lading d. An irrevocable letter of credit
III. Short – Answer Questions
1. Export/ import financing in which a bank acts as an intermediary without accepting financial
risk is called ______.
2. A document ordering an importer to pay an exporter a specified sum or money at a specified
time is called a (an) _____.
3. Export/ import financing in which the importer's bank issues a document stating that the
bank will pay the exporter when the exporter fulfills the terms of the document is called a
(an) _____.
4. A contract between the exporter and carrier that specifies destination and shipping costs of
the merchandise is called a(n)____.
5. Export / import financing in which an exporter ships merchandise and later bills the importer
for its value is called _____.

Part 2:
I. Match these terms with their definitions.
1. invoice a) document that shows details of goods being transported; it
2. clean collection entitles the receiver to collect the goods on arrival
3. documentary b) list of goods sold as a request for payment
collection c) bank that issues a letter of credit (i.e. the importer’s bank)
4. bill of exchange d) bank that receives payment of bills, etc. for their customer’s
5. bill of lading account (i.e. the exporter’s bank)
6. document of title e) document allowing someone to claim ownership of goods
7. issuing bank f) payment by bill of exchange to which documents are not
8. collecting bank attached
9. confirming bank g) signed document that orders a person or organization to pay a
10. letter of credit fixed sum of money on demand or on a specified date
h) bank that confirms they will pay the exporter on evidence of
shipment of goods
i) method of financing overseas trade where payment is made by a
bank in return for delivery of commercial documents, provided
that the terms and conditions of the contract are met
j) j) payment by bill of exchange to which commercial documents
(and sometimes a document of title) are attached

II. True/ False

Open Account
1. The importer pays for the goods after receiving the documents.
 2. There is no contract involved.
3. The exporter must be able to trust the buyer.
Documentary Credit
4. If a letter of credit is issued, the importer’s bank agrees to pay for the goods without
conditions.
5. If a letter of credit is confirmed, the exporter’s bank takes responsibility for payment.
Documentary Collection
6. Commercial documents and the document of title are always enclosed with a bill of
exchange.
7. Importers may not accept the bill of exchange until the goods arrive.
8. Exporters can keep control of goods by sending bills of lading through the banking system.
9. Exporters reduce risk if documents are released against acceptance of the bill rather than
payment.
Advance Payment
10. This means that the importer has to pay before any goods are dispatched.

III. Label the diagram

Read about the first four steps in a transaction involving a letter of credit, and number
the steps 1 to 4, using the diagram below to help you.
a. The advising bank authenticates the letter of credit and sends the beneficiary (the seller) the
details. The seller examines the details of the letter of credit to make sure that he or she can
meet all the conditions. If necessary, he or she contacts the buyer and asks for amendments
to be made.
b. The applicant (the buyer) completes a contract with the seller.
c. The issuing bank (the buyer’s bank) approves the application and sends the letter of credit
details to the seller’s bank (the advising bank).
d. The buyer fills in a letter of credit application form and sends it to his or her bank for
approval.

2. Now read about the next six steps, and number them 5 to 10 using the diagram below.
e. If the documents are in order, the advising bank sends them to the issuing bank for payment
or acceptance. If the details are not correct, the advising bank tells the seller and waits for
corrected documents or further instructions.
f. The advising/confirming bank pays the seller and notifies him or her that the payment has
been made.
g. The issuing bank advises the advising (or confirming) bank that the payment has been made.
h. The issuing bank (the buyer’s bank) examines the documents from the advising bank. If they
are in order, the bank releases the documents to the buyer, pays the money promised or
agrees to pay it in the future, and advises the buyer about the payment. (If the details are not
correct, the issuing bank contacts the buyer for authorization to pay or accept the
documents.) The buyer collects the goods.
i. The seller presents the documents to his or her bankers (the advising bank). The advising
bank examines these documents against the details of the letter of credit and the International
Chamber of Commerce rules.
k. When the seller (beneficiary) is satisfied with the conditions of the letter of credit, he or she
ships the goods.

IV. Complete the sentence

1. Use an appropriate form of the words in the box to complete the sentences which
describe the procedure for documentary collection.

draw accept dishonour release remit forward dispatch

present
1. The first step the exporter takes is to ask his bank to ………….. a bill of exchange on the
overseas buyer.
2. The exporter’s bank ………………. the bill of exchange, together with the commercial
documents, to the importer’s bank.
3. At the same time, the exporter…………………. the goods.
4. The exporter must take care to ………………….the correct documents to the bank.
5. When the importer………..…the bill of exchange, the bank will………….the documents of
title to the goods.
6. If the importer…………………..the bill, the exporter may have to find an alternative buyer
or ship the goods back again.
7. In some parts of the world, banks may be slow to …………….. payment to the exporter’s
bank.
2. Supply one suitable word for each space
1. Every exporter has problems of getting _____. There are even risks of buyer _____ in rich
countries. The importers might _____ bankrupt or the government might not _____ the
importers to buy the payment ____. On the other hand there are ____ problems. The sellers
need to be ____ in advance but buyers have no _____ and need credit. The sellers must
_____ good terms, otherwise they will lose ____ customers who will look for other ______.
There are also problems caused by ____ rates and changes of value of ____ payment
currency. If it falls, the _____ losses money. Both sellers and buyers ____ to be sure that the
other ____ will fulfill their side of the ____. The exporters want to be paid ____ full at the
right time and _____ importers want the right goods delivered ___ time. These problems
can be solved _____ the banks acting as advisers.
2. The safest methods of payment for ____ buyer and seller are arranged through ____. These
are Documentary Bills and Documentary ____ of Credit. The other two methods of
payment methods _____ are Cash in Advance and Open _____. These methods of payment
are not ______ very much because they give no ____ to traders. However, the method of
____ used, depends partly on what is ____ in the trade, the credit status ____ the customer
and also on the ____ of the order. If the order _____ large, either the sellers’ or the ___
government will be involved.
3. The most important function of the ____ of Exchange is to solve the ____ problems of
traders. It helps buyers ____ have no cash, to buy goods ____ credit. The sellers draw a
draft ____ the buyers who then become the ____. The bank which represents the buyers
____ the draft making it a Bill ____ Exchange. They send it to the ______ representing the
exporters who can then _____ the Bill until it matures or _____ the Bill of Exchange at a
____ on the discount market where it ____ be traded until maturity. The importers ____ to
pay the accepting bank the ____ amount of the Bill plus a ____ which the bank charges for
accepting____ risk.
4. It is very convenient to collect _____ by documentary Bills of Exchange but _____ is a
bit risky for the ____. They have to rely on the _____ honouring their drafts. If the
importers ____ not pay or accept the exporters’ ___, the exporters can not do anything
____ it. They then have to pay _____ storage and selling to someone else, ____ even
shipping the goods home. But ____ importers who dishonor a draft may ____ business if
other people think they ____ unreliable. But usually the exporters find ____ about the
reliability of a customer _____ agreeing to this kind of payment.