TUTOR MARKED ASSIGNMENT COURSE CODE : ECO-13 COURSE TITLE : Business Environment

ASSIGNMENT CODE : ECO-13/TMA/2023-2024 COVERAGE : ALL BLO

1) List out the details included in letter of credit and documents required
under letter of credit. Briefly explain different types of letter of credit

A Letter of Credit (LC) is a financial instrument used in international trade to facilitate secure and
guaranteed payment between a buyer and a seller. It involves the involvement of a bank, which
acts as an intermediary. Here are the details typically included in a Letter of Credit and the
documents required under it:

Details Included in a Letter of Credit:

1. Parties Involved:
• Applicant (Buyer): The party requesting the LC.
• Beneficiary (Seller): The party to whom the payment is to be made.
• Issuing Bank: The bank that issues the LC on behalf of the buyer.
• Advising Bank: The bank that advises the LC to the seller.
• Confirming Bank (if applicable): A bank that adds its confirmation to the LC,
ensuring payment to the beneficiary.
2. LC Number and Date:
• A unique identifier and the date when the LC is issued.
3. Expiry Date:
• The date until which the LC is valid.
4. Amount:
• The total amount to be paid to the beneficiary.
5. Description of Goods or Services:
• A detailed description of the products or services being traded.
6. Shipping Terms:
• Details about the mode of shipment, the destination, and the delivery terms.
7. Payment Terms:
• Specifies the method of payment (e.g., sight payment, deferred payment) and the
documents required for payment.
8. Conditions:
• Any special conditions or requirements that must be met for the LC to be valid.
9. Documents Required:
• A list of the documents that the beneficiary must present to receive payment.

Documents Required Under a Letter of Credit:

The specific documents required can vary based on the terms and conditions of the LC, but
common documents include:

1. Commercial Invoice: An invoice from the beneficiary to the buyer detailing the
transaction.
2. Bill of Lading: A receipt issued by the carrier that shows the goods have been shipped.
3. Packing List: A detailed list of the contents and packaging of the shipment.
4. Certificate of Origin: A document stating the country of origin of the goods.
TUTOR MARKED ASSIGNMENT COURSE CODE : ECO-13 COURSE TITLE : Business Environment
ASSIGNMENT CODE : ECO-13/TMA/2023-2024 COVERAGE : ALL BLO

5. Certificate of Inspection: An inspection certificate ensuring the quality and condition of

the goods.
6. Insurance Certificate: Proof of insurance coverage for the shipment.
7. Draft or Bill of Exchange: A financial instrument that acts as a payment order.
8. Transport Document: A document that specifies the means of transportation (e.g.,
airway bill or road bill).
9. Other Documents: Additional documents as specified in the LC, such as a certificate of
analysis, certificate of conformity, or phytosanitary certificate.

Different Types of Letter of Credit:

1. Sight Letter of Credit: Payment is made upon presentation of compliant documents,

typically within a few days of receipt.
2. Deferred Payment Letter of Credit: Payment is made at a specified future date after the
documents have been accepted.
3. Revocable Letter of Credit: It can be amended or canceled by the issuing bank without
the consent of the beneficiary.
4. Irrevocable Letter of Credit: It cannot be amended or canceled without the consent of
all parties involved.
5. Transferable Letter of Credit: The beneficiary can transfer all or part of the credit to
another supplier or entity.
6. Confirmed Letter of Credit: A confirming bank adds its confirmation to the LC,
providing an additional layer of security to the beneficiary.
7. Standby Letter of Credit: It serves as a financial guarantee, often used in non-trade
transactions, to ensure payment if the applicant defaults.
8. Back-to-Back Letter of Credit: Two separate LCs are issued, one in favor of an
intermediary who uses it as collateral to obtain a second LC in favor of the ultimate
beneficiary.

Understanding the specific terms and conditions of the Letter of Credit is crucial in international
trade, as they impact the payment process and the responsibilities of the parties involved.

2) What do you mean by foreign exchange risk. Explain risk as an exporter

and risk as an importer. What are the methods of dealing with foreign
exchange risk?
Foreign exchange risk, also known as currency risk or exchange rate risk, is the risk that
arises from the fluctuation in foreign exchange rates, which can impact the financial
performance of companies involved in international trade. This risk affects both exporters
and importers differently:

Risk as an Exporter:
When a company exports goods or services to foreign markets and expects payment in a
foreign currency, it faces several types of foreign exchange risk:

Transaction Risk: This risk occurs when the exchange rate changes between the date of the
sale and the date of actual receipt of payment. If the foreign currency weakens against the
domestic currency, the exporter may receive less revenue than expected.
TUTOR MARKED ASSIGNMENT COURSE CODE : ECO-13 COURSE TITLE : Business Environment
ASSIGNMENT CODE : ECO-13/TMA/2023-2024 COVERAGE : ALL BLO

Translation Risk: If the exporter maintains foreign currency-denominated assets or liabilities

(e.g., foreign subsidiaries or foreign currency loans), fluctuations in exchange rates can
impact the company's financial statements.

Risk as an Importer:
Importers also face foreign exchange risk, although it affects them differently:

Transaction Risk: Similar to exporters, importers face transaction risk when they owe money
in a foreign currency and the exchange rate changes. If the foreign currency strengthens
against the domestic currency, the cost of imported goods or services increases.

Economic Risk: This risk pertains to the overall economic impact of exchange rate
fluctuations. If the importer's domestic currency strengthens significantly, it can lead to
reduced competitiveness and lower demand for imported goods.

Methods of Dealing with Foreign Exchange Risk:

Companies can employ various strategies to manage and mitigate foreign exchange risk:

Forward Contracts: These allow companies to lock in an exchange rate for a future date,
ensuring a fixed rate at which currency will be exchanged. It helps in eliminating transaction
risk.

Currency Options: Currency options give the holder the right, but not the obligation, to
exchange currency at a predetermined rate. This provides flexibility, as the holder can
choose whether to exercise the option based on market conditions.

Currency Hedging: Using financial instruments and derivatives to offset the risk of exchange
rate fluctuations. This can include options, futures, and swaps to protect against adverse
currency movements.

Natural Hedging: Aligning the currency of revenues and expenses. For example, an exporter
could source inputs in the same currency as their foreign sales to reduce the transaction risk.

Diversification: Diversifying the customer base by selling to customers in different countries

and currencies, reducing dependence on a single market.

Leading and Lagging: Timing payments and receipts to manage cash flows and take
advantage of currency movements. Importers may try to delay payments when their
domestic currency is weak, while exporters may accelerate receipt of payments in a strong
currency.

Use of Local Currency: Negotiating trade contracts in the local currency or using a common
international currency (e.g., the U.S. dollar) can reduce exchange rate risk.
TUTOR MARKED ASSIGNMENT COURSE CODE : ECO-13 COURSE TITLE : Business Environment
ASSIGNMENT CODE : ECO-13/TMA/2023-2024 COVERAGE : ALL BLO

Monitoring and Analysis: Continuously monitor exchange rates and economic factors that
influence them. This allows companies to make informed decisions and timely adjustments.

Consulting with Experts: Seeking advice from financial experts and currency specialists can
help in developing and executing effective foreign exchange risk management strategies.

The choice of method depends on a company's specific circumstances, risk tolerance, and
financial objectives. Effective risk management is crucial for companies engaged in
international trade to protect their profitability and financial stability in a volatile global
market.
3) Differentiate between the following:
a) Spot rate and forward rate.
b) Lines of credit and buyer’s credit.
c) War perils and strike perils.
d) Bill buying rate and bill selling rate.

a) Spot Rate and Forward Rate:

1. Spot Rate: The spot rate, also known as the spot exchange rate, is
the current exchange rate at which a currency can be bought or sold
for immediate delivery, typically within two business days. It reflects
the current market rate for currency exchange.
2. Forward Rate: The forward rate, on the other hand, is the exchange
rate at which a currency can be bought or sold for delivery at a
specified future date. It is determined in the present but settled at a
future date, allowing parties to lock in an exchange rate for future
transactions.

b) Lines of Credit and Buyer's Credit:

1. Lines of Credit: Lines of credit are financial arrangements extended

by a lender, such as a bank, to a borrower. They provide the borrower
with a specified amount of funds that can be borrowed on an as-
needed basis. Lines of credit are typically used for a variety of
purposes, including working capital, financing, and short-term
liquidity needs.
2. Buyer's Credit: Buyer's credit is a specific type of financing often
used in international trade. It involves a financial institution, typically
a bank, extending credit to the buyer in a foreign country to facilitate
TUTOR MARKED ASSIGNMENT COURSE CODE : ECO-13 COURSE TITLE : Business Environment
ASSIGNMENT CODE : ECO-13/TMA/2023-2024 COVERAGE : ALL BLO

the purchase of goods or services. This allows the buyer to obtain

goods on credit terms and pay the financial institution at a later date.

c) War Perils and Strike Perils:

1. War Perils: War perils refer to the risks associated with war and
military conflicts. In insurance, policies that cover war perils provide
protection against losses or damages resulting from acts of war, such
as bombings, invasions, or other war-related events. These are
typically excluded from standard insurance policies and may require
specific coverage.
2. Strike Perils: Strike perils, on the other hand, pertain to the risks
associated with strikes, industrial actions, and labor disputes.
Insurance policies that cover strike perils provide protection against
losses or damages resulting from strikes, lockouts, or other labor-
related disruptions. Like war perils, coverage for strike perils may
require separate insurance.

d) Bill Buying Rate and Bill Selling Rate:

1. Bill Buying Rate: The bill buying rate is the exchange rate at which a
bank or financial institution purchases a foreign currency bill, often a
negotiable instrument like a foreign currency draft or bill of
exchange, from a customer. This rate is typically lower than the spot
exchange rate, and the bank buys the bill at this rate.
2. Bill Selling Rate: The bill selling rate is the exchange rate at which a
bank or financial institution sells a foreign currency bill to a customer.
It is typically higher than the spot exchange rate, and the bank sells
the bill at this rate. The difference between the bill buying rate and
bill selling rate represents the bank's profit or margin on the currency
exchange transaction.

These differentiations help clarify the distinct characteristics and

applications of each term or concept.

4) a) What do you mean by pre-shipment finance. Describe the methods of

pre-shipment finance.
b) What is post shipment finance. Explain various methods of post
shipment finance.
TUTOR MARKED ASSIGNMENT COURSE CODE : ECO-13 COURSE TITLE : Business Environment
ASSIGNMENT CODE : ECO-13/TMA/2023-2024 COVERAGE : ALL BLO

a) Pre-shipment Finance:

Pre-shipment finance, also known as pre-export finance or packing credit,

is a form of short-term working capital finance provided to exporters to
meet the various expenses incurred before the shipment of goods. It helps
exporters manage the cash flow requirements associated with producing,
processing, and preparing goods for export. Pre-shipment finance is crucial
for ensuring that exporters have the necessary funds to fulfill their export
orders. There are several methods of pre-shipment finance:

1. Packing Credit: Packing credit is the most common form of pre-

shipment finance. It provides funds to cover the costs of purchasing
raw materials, processing, packing, transportation, and other
expenses related to preparing goods for export. The loan amount is
typically a percentage of the confirmed export order.
2. Export Cash Credit: Under this method, exporters are granted a cash
credit facility based on the value of the confirmed export orders. This
revolving credit line allows exporters to draw funds as needed, up to
a predetermined limit, to meet pre-shipment expenses.
3. Export Bill Purchasing: Exporters can sell their export bills (i.e.,
invoices or trade documents representing the value of the goods to
be exported) to banks or financial institutions before actual shipment.
The bank pays the exporter the value of the bills, minus a discount,
and takes ownership of the bills.
4. Advance Against Cheques/Drafts: Exporters can receive advances
against post-dated cheques or drafts they receive from importers.
Banks provide funds based on the face value of these financial
instruments.
5. Foreign Bill Purchase: Exporters can obtain finance against bills
drawn in foreign currency. The bank pays the exporter in the local
currency after converting the foreign currency bill at the prevailing
exchange rate.
6. Credit Against Warehouse Receipts: If goods are stored in a
warehouse, exporters can obtain credit against warehouse receipts.
Banks provide funds based on the value of the goods stored.
7. Credit Against Duty Drawback Claims: In some countries, exporters
can avail themselves of finance based on claims for duty drawbacks
or incentives provided by the government.
TUTOR MARKED ASSIGNMENT COURSE CODE : ECO-13 COURSE TITLE : Business Environment
ASSIGNMENT CODE : ECO-13/TMA/2023-2024 COVERAGE : ALL BLO

b) Post-shipment Finance:

Post-shipment finance, also known as post-export finance, is a form of

short-term financing provided to exporters after the shipment of goods. It
is used to bridge the gap between the time of shipment and the actual
receipt of payment from the overseas buyer. Various methods of post-
shipment finance include:

1. Export Bill Negotiation: Exporters can present their export bills to

the bank for negotiation. The bank may provide immediate funds to
the exporter against the bill, minus a fee or discount. The bank then
collects the payment from the importer when the bill matures.
2. Export Bill Purchase: Similar to pre-shipment finance, exporters can
sell their export bills to the bank at a discounted rate after shipment.
The bank takes ownership of the bills and collects payment from the
importer.
3. Discounting of Export Bills under Letter of Credit: Exporters can
discount the export bills that are drawn under a letter of credit (LC).
The bank provides funds based on the LC terms and collects the
payment from the LC-issuing bank.
4. Export Packing Credit (EPC) Refinance: In some countries, central
banks provide refinance facilities to banks for extending post-
shipment finance to exporters. This helps ensure adequate liquidity in
the market for exporters.
5. Export Bill Rediscounting: Exporters can rediscount export bills with
banks, which means selling the bills at a discount to get immediate
funds and having the bank collect payment from the importer on
maturity.
6. Foreign Bill Purchase: Exporters can avail themselves of post-
shipment finance against foreign currency bills, with the bank
providing funds in the local currency.
7. Overdraft Against Export Bills: Exporters can obtain overdraft
facilities from banks by pledging their export bills, allowing them to
access funds for various purposes.

Both pre-shipment and post-shipment finance are critical for exporters to

manage their cash flow and fulfill export orders without facing financial
TUTOR MARKED ASSIGNMENT COURSE CODE : ECO-13 COURSE TITLE : Business Environment
ASSIGNMENT CODE : ECO-13/TMA/2023-2024 COVERAGE : ALL BLO

constraints. The choice of method depends on the exporter's specific needs

and the terms of their trade transactions.

5) . Write a short note on the following:

a. Duty drawback scheme
b. Fiscal incentives
c. EXIM Bank
d. India trade promotion organisation

a. Duty Drawback Scheme:

The Duty Drawback Scheme is a government initiative that aims to promote exports by
providing a refund of customs and excise duties paid on imported and domestically sourced
inputs and materials used in the manufacture of export goods. This scheme is designed to reduce
the input costs for exporters, making their products more competitive in international markets.

Under the Duty Drawback Scheme, when an exporter successfully ships products overseas, they
can claim a refund on the customs and excise duties paid on raw materials, components, and
inputs used to produce those export goods. The drawback rate varies based on the nature of the
input and the product being exported. The scheme encourages domestic industries to remain
competitive in the global market and fosters growth in the export sector.

b. Fiscal Incentives:

Fiscal incentives refer to a range of government measures designed to promote economic

activities, such as investment, production, or exports, by providing various tax benefits or financial
incentives. These incentives are often implemented to attract investment, stimulate economic
growth, and enhance the competitiveness of businesses. Examples of fiscal incentives may
include tax credits, tax holidays, investment allowances, and preferential tax rates for specific
industries or activities.

Fiscal incentives can vary widely from one country to another and can be targeted at specific
sectors, regions, or activities. The goal is to create a favorable business environment that
encourages both domestic and foreign investment and fosters economic development.

c. EXIM Bank (Export-Import Bank of India):

The Export-Import Bank of India (EXIM Bank) is a specialized financial institution established by
the Government of India to promote international trade and facilitate India's economic growth by
providing financial and strategic support to Indian businesses involved in export and import
activities. Some key functions of EXIM Bank include:

• Providing financial assistance to Indian exporters and importers.

• Offering export credit and financing facilities to support exports.
• Promoting the development of infrastructure for export production.
• Facilitating access to export markets and global supply chains.
TUTOR MARKED ASSIGNMENT COURSE CODE : ECO-13 COURSE TITLE : Business Environment
ASSIGNMENT CODE : ECO-13/TMA/2023-2024 COVERAGE : ALL BLO

• Extending lines of credit to foreign governments and banks to promote Indian exports.
• Supporting the expansion of Indian investments overseas.
• Engaging in research and information dissemination related to international trade.

EXIM Bank plays a crucial role in boosting India's trade competitiveness and enhancing the
country's presence in the global market.

d. India Trade Promotion Organisation (ITPO):

The India Trade Promotion Organisation (ITPO) is a government agency in India responsible
for promoting and organizing trade events, exhibitions, and fairs to boost India's trade and
commerce activities. ITPO plays a pivotal role in showcasing India's capabilities and products to
both domestic and international audiences. Its primary functions include:

• Organizing trade fairs, exhibitions, and conferences to facilitate business interactions and
promote exports.
• Offering trade-related information and market intelligence to Indian businesses.
• Promoting India as a trade and investment destination to foreign investors.
• Supporting the growth of Indian industries and businesses by providing platforms for
networking and market access.
• Fostering partnerships and collaborations between Indian and foreign companies.

ITPO is a significant contributor to India's efforts to expand its trade relations, attract investment,
and showcase its diverse range of products and services to a global audience.