CES CES Trade Finance & Payment Methods 2 — Questions and Answers
Question 1: What is the primary purpose of a standby letter of credit in international trade?
- To finance the production of export goods
- To serve as a payment guarantee if the buyer defaults (Correct answer)
- To insure cargo during ocean transit
- To confirm the exporter's creditworthiness
Correct answer: To serve as a payment guarantee if the buyer defaults
A standby LC acts as a backup payment guarantee — it is drawn upon only if the buyer fails to fulfill their contractual payment obligation.
Question 2: Under a D/P (Documents against Payment) documentary collection, when does the buyer receive title documents?
- After the goods arrive at the destination port
- Upon signing a time draft
- Only after making immediate payment to the collecting bank (Correct answer)
- After the letter of credit is confirmed
Correct answer: Only after making immediate payment to the collecting bank
In a D/P collection, the collecting bank releases shipping documents — including the bill of lading — to the buyer only after they pay immediately.
Question 3: Which financing option allows a US exporter to receive immediate cash by selling their foreign accounts receivable to a third party?
- Export factoring (Correct answer)
- Trade credit insurance
- Countertrade
- A revolving credit facility
Correct answer: Export factoring
Export factoring involves selling foreign receivables to a factor at a discount, providing the exporter with immediate liquidity.
Question 4: What does 'forfaiting' refer to in export finance?
- Forfeiting export rights due to sanctions
- Purchasing medium- to long-term receivables at a discount without recourse (Correct answer)
- A penalty clause in an LC for discrepant documents
- Cancelling an export order before shipment
Correct answer: Purchasing medium- to long-term receivables at a discount without recourse
Forfaiting is the purchase of medium- to long-term export receivables (often guaranteed by an aval) at a discount on a non-recourse basis.
Question 5: Which US government program provides working capital loan guarantees to small and medium-sized exporters to help finance export transactions?
- EXIM Bank Working Capital Guarantee Program (Correct answer)
- SBA Export Express
- ITA Trade Finance Assistance
- USDA Export Enhancement Program
Correct answer: EXIM Bank Working Capital Guarantee Program
The EXIM Bank Working Capital Guarantee Program guarantees lender loans so US exporters can obtain the working capital needed to fulfill export orders.
Question 6: In international trade, what is 'political risk' as it applies to export credit insurance?
- Risk that a domestic political party opposes the export
- Risk of non-payment due to war, expropriation, or currency transfer restrictions in the buyer's country (Correct answer)
- Risk that tariff rates will increase during shipment
- Risk of intellectual property theft in a foreign market
Correct answer: Risk of non-payment due to war, expropriation, or currency transfer restrictions in the buyer's country
Political risk in export credit insurance covers losses caused by government actions such as war, expropriation, or blocked currency transfers that prevent payment.
CES CES Trade Finance & Payment Methods 2
What is the primary purpose of a standby letter of credit in international trade?