From the sellerís perspective, the least risky form of payment in international trade is
Answer (C) is correct. Under a prepayment arrangement, the exporter will not ship the goods until the buyer has wired payment into the exporterís bank account. First-time buyers of unknown creditworthiness and buyers in financially troubled countries are often required to prepay. Established buyers are rarely willing to assume the risk that comes with prepayment.
An exporter delivers goods to a retailer for sale to the public. If the exporter is paid only after sale to third parties, the arrangement is a(n)
Answer (A) is correct. In a consignment, the seller-exporter delivers (consigns) goods to the importer-consignee for sale to third parties. The consignee pays the consignor only when goods are sold.
The method of financing international trade that necessarily involves sale of medium- to long-term receivables is
Answer (A) is correct. Forfaiting is a form of factoring. It involves the sale by exporters of large, medium- to long-term receivables to buyers (forfaiters) who are willing and able to bear the costs and risks of credit and collections.
A bankerís acceptance is
Answer (D) is correct. Bankerís acceptances are time drafts drawn on deposits in a bank. They are short-term credit investments created by a nonfinancial firm and guaranteed (accepted) by a bank as to payment. Acceptances are traded at discounts in secondary markets. These instruments have been a popular investment for money market funds.
Which of the following is a form of barter?
Answer (B) is correct. Countertrade at its simplest is barter -- the exchange of goods or services for other goods or services rather than merely for cash.
Cross-border factoring involves
Answer (A) is correct. A factor purchases receivables and assumes collection risk. Cross-border factoring is a method of consummating a transaction by a network of factors across borders. The exporterís factor contacts correspondent factors in other countries to assist in the collection of accounts receivable.
XCo is an American company that wants to sell widgets to DCo, a Danish Corporation. XCo is unsure about DCoís ability to pay. XCo should
Answer (D) is correct. If a U.S. company sells goods to a foreign company, the U.S. company may not know whether the foreign company will pay the contract price, is solvent, or whether it will reject a delivery of the goods. Requiring a letter of credit addresses the problem. A letter of credit is an engagement by the issuing bank (DCoís bank in Denmark) to pay on behalf of its customer when the requirements of the letter of credit are complied with. When the beneficiary (XCo) is in another country, the letter of credit is often sent to a confirming bank (in the U.S. in this case), which will pay the beneficiary directly upon presentation of a document of title. The
confirming bank will then be paid by the issuing bank.
Which of the following is false concerning a bill of lading?
Answer (C) is correct. A problem in an international sale is whether the seller will be paid. The problem is solved by using a letter of credit and a bill of lading. A bill of lading is a document of title evidencing receipt of goods by the carrier for shipment. A bill of lading is not an agreement with a bank to pay drafts or other demands for its customer. Such an agreement is a letter of credit (UCC 5-103). A seller is paid when (s)he presents the bill of lading to the buyerís bank.
Which of the following statements is true with respect to international transfer pricing by a U.S. firm?
Answer (C) is correct. Transfer pricing is an important aspect of the tax calculation for multinational corporations that transfer inventories between branches in different countries. Transfer prices charged to foreign subsidiaries may differ substantially from those charged to domestic subsidiaries for a variety of reasons. Limitations on taking profits out of a foreign country can be avoided by charging the foreign subsidiary a higher transfer price so that little or no profit exists to be repatriated.
A firm ships its product to a foreign subsidiary and charges a price that may increase import duties but lower the income taxes paid by the subsidiary. The most likely reason for these effects is that the
Answer (D) is correct. A transfer price is the price charged by one subunit of a firm to another. When the subsidiary-buyer is in a foreign country, the higher the transfer, the higher the potential tariffs. However, the tax levied on a subsequent sale by the subsidiary will be lower because of its higher acquisition cost.