Banking Trade Finance 1

Question 1

What is a Letter of Credit (LC) in trade finance?

Accepted Answer

A bank's guarantee to pay the seller once specified conditions are met

Answer

A Letter of Credit is a written commitment by a bank to pay the exporter a specified amount when the documents proving shipment of goods are presented as required.

Question 2

In a Documentary Collection, which party presents shipping documents to collect payment?

Accepted Answer

The exporter's bank on behalf of the seller

Answer

In a documentary collection, the exporter's bank forwards trade documents to the importer's bank, which releases them to the buyer only upon payment or acceptance of a bill of exchange.

Question 3

What is a 'Bill of Lading' in international trade?

Accepted Answer

A document issued by the carrier acknowledging receipt of goods for shipment

Answer

A Bill of Lading serves as a receipt for goods, a contract of carriage, and a document of title, making it one of the most important documents in international trade.

Question 4

What does 'open account' trading mean in international trade?

Accepted Answer

The seller ships goods and invoices the buyer to pay later, bearing the credit risk

Answer

In open account trading, the exporter ships goods and sends an invoice, trusting the importer to pay on the agreed future date — the seller bears significant credit risk.

Question 5

What is the primary purpose of Export Credit Insurance in trade finance?

Accepted Answer

To protect the exporter against non-payment by the foreign buyer

Answer

Export credit insurance protects exporters from the risk of non-payment due to commercial defaults or political events in the buyer's country.

Banking Practice Test

Banking Practice Test

Banking Trade Finance 1