CCP Export Credit & Letters of Credit 3 — Questions and Answers
Question 1: A usance or deferred payment letter of credit benefits the importer by:
- Eliminating the need for a bill of lading
- Granting the buyer a period of credit before payment is due (Correct answer)
- Reducing the exporter's documentation requirements
- Allowing the LC to be cancelled at any time
Correct answer: Granting the buyer a period of credit before payment is due
Usance LCs specify a future payment date (e.g., 60 or 90 days after shipment), giving the buyer time to sell goods and generate cash before paying.
Question 2: Which Incoterm places the maximum responsibility on the seller for delivering goods to the buyer's named destination?
- EXW (Ex Works)
- FOB (Free on Board)
- CIF (Cost, Insurance and Freight)
- DDP (Delivered Duty Paid) (Correct answer)
Correct answer: DDP (Delivered Duty Paid)
DDP requires the seller to bear all costs and risks, including import duties and taxes, until goods are delivered to the buyer's named place.
Question 3: A back-to-back letter of credit involves:
- Two LCs issued by the same bank
- A new LC issued using an existing LC as collateral to pay a supplier (Correct answer)
- A confirmed LC with two beneficiaries named simultaneously
- An LC that automatically renews each month
Correct answer: A new LC issued using an existing LC as collateral to pay a supplier
In a back-to-back arrangement, the intermediary uses the master LC from their buyer as collateral to open a second LC in favor of their own supplier.
Question 4: Under the Foreign Credit Insurance Association (FCIA) or EXIM Bank export credit insurance, a short-term policy typically covers credit periods of:
- Up to 180 days
- Up to 360 days (Correct answer)
- 1 to 3 years
- 3 to 5 years
Correct answer: Up to 360 days
Short-term export credit insurance generally covers receivables with repayment terms up to 360 days (one year), applicable to consumer goods and raw materials.
Question 5: Which party in an LC transaction is also known as the 'opener' or 'accountholder'?
- Advising bank
- Beneficiary
- Applicant (Correct answer)
- Confirming bank
Correct answer: Applicant
The applicant is the buyer/importer who instructs their bank to issue the LC and is responsible for reimbursing the issuing bank.
Question 6: What is the purpose of a 'red clause' in a letter of credit?
- To signal that documents have discrepancies
- To allow the beneficiary to receive an advance payment before shipment (Correct answer)
- To restrict negotiation to a specific bank
- To permit partial shipments only
Correct answer: To allow the beneficiary to receive an advance payment before shipment
A red clause LC authorizes the advising or nominated bank to make pre-shipment advances to the beneficiary, historically typed in red ink.
Question 7: Country risk in export credit analysis primarily refers to:
- The risk that exchange rates will move against the exporter
- Political, economic, and transfer risks that could prevent the importer from paying (Correct answer)
- The risk of goods being damaged in transit
- The likelihood of an LC being issued with discrepancies
Correct answer: Political, economic, and transfer risks that could prevent the importer from paying
Country risk encompasses sovereign risk, political instability, currency inconvertibility, and other macro-level factors that could impair cross-border payment.
CCP Export Credit & Letters of Credit 3
A usance or deferred payment letter of credit benefits the importer by: