Instructions Application of Material from Textbook Chapter 7 Your company has de

Question

Instructions Application of Material from Textbook Chapter 7 Your company has decided to export to an Indian distributor. A major concern you have is getting paid by this distributor. You have asked the distributor to use irrevocable letters of credit. a. Discuss the non-payment risks involved (4 points) b. Describe in step-by-step detail how payments in an irrevocable letter of credit works (8 points) c. Explain how an irrevocable letter of credit helps to minimize the risk of non-payment (8 points)

Explanation / Answer

ans a)Irrevocable Letters Of Credit are usually utilized to enable trade internationally due to the added credit risk entailed when 2 parties unfamiliar with one another are performing business across national boundaries.

ans b)An Irrevocable Letter Of Credit ensures the seller of obtaining payment as it is a guarantee of the issuing financial institution, the purchaser's bank, that the financial institution will make payment in the event the purchaser fails to do so. By giving the seller a guarantee for the payment, an Irrevocable Letter Of Credit

also aids the purchaser in organizing a transaction which the seller might otherwise be unwilling to make.

ans c)The purchaser requests for an ILOC from his financial institution, which is thereafter sent to the seller's financial institution . In addition to giving protection from credit risk, a LOC normally also states vital details of the transaction, like the pricing, the payment terms, timing & location for delivery of the products. In the event the purchaser fails to make payment as settled , the purchaser's bank gives the payment to seller's financial institution, which in turn makes payment to the seller, the recipient of the ILOC.

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