NAB International Banking 3 — Questions and Answers
Question 1: In international trade finance, what is the primary function of a Letter of Credit (LC)?
- To provide a loan directly to the importer for purchasing goods
- To guarantee the exporter payment provided documents comply with LC terms (Correct answer)
- To insure shipments against loss or damage in transit
- To establish a forward exchange rate for the transaction
Correct answer: To guarantee the exporter payment provided documents comply with LC terms
A Letter of Credit is a bank commitment to pay the exporter upon presentation of compliant documents, reducing payment risk for both buyer and seller in cross-border trade.
Question 2: What distinguishes a documentary collection from a letter of credit in trade finance?
- A documentary collection provides a bank guarantee of payment; an LC does not
- An LC is cheaper; a documentary collection is more expensive
- Under a documentary collection, the bank facilitates document exchange but does not guarantee payment (Correct answer)
- A documentary collection is only used for domestic transactions
Correct answer: Under a documentary collection, the bank facilitates document exchange but does not guarantee payment
In a documentary collection, the bank acts as an intermediary transmitting shipping documents but does not guarantee payment — the exporter bears more risk than with an LC.
Question 3: What does the Incoterm 'CIF' require the seller to arrange?
- Cost and insurance only, with freight paid by the buyer
- Cost, insurance, and freight to the destination port (Correct answer)
- Cost, inspection, and forwarding to the buyer's warehouse
- Currency, invoice, and freight documentation
Correct answer: Cost, insurance, and freight to the destination port
CIF (Cost, Insurance, and Freight) requires the seller to pay for the cost of goods, marine insurance, and freight charges to the named destination port.
Question 4: What is forfaiting in international trade finance?
- The forfeiture of an LC when documents are non-compliant
- The without-recourse purchase by a bank of medium-term receivables from an exporter (Correct answer)
- A penalty charged when a buyer cancels an international purchase order
- A government guarantee program for emerging-market exports
Correct answer: The without-recourse purchase by a bank of medium-term receivables from an exporter
Forfaiting is the without-recourse purchase by a financial institution of medium- to long-term export receivables, giving the exporter immediate cash and transferring all credit risk to the forfaiter.
Question 5: Which ICC publication governs the rules for Letters of Credit used in international trade?
- UCP 600 (Correct answer)
- Incoterms 2020
- URC 522
- ISP98
Correct answer: UCP 600
UCP 600 (Uniform Customs and Practice for Documentary Credits, 2007 revision) is the ICC publication that governs the rules and practices for documentary letters of credit worldwide.
Question 6: What is a 'Bill of Lading' (B/L) in international trade?
- An invoice issued by the exporter to the importer listing goods and prices
- A document of title issued by a carrier acknowledging receipt of goods for shipment (Correct answer)
- A bank guarantee that payment will be made upon delivery
- A customs declaration form required at the port of entry
Correct answer: A document of title issued by a carrier acknowledging receipt of goods for shipment
A Bill of Lading is issued by the carrier and serves three functions: a receipt for goods, evidence of the contract of carriage, and a document of title that can be used to transfer ownership.
Question 7: Under an irrevocable Letter of Credit, when can the issuing bank cancel or modify it?
- At any time before shipment occurs
- Only with the consent of all parties, including the beneficiary (Correct answer)
- When the applicant (importer) requests it in writing
- After 30 days of issuance if no documents are presented
Correct answer: Only with the consent of all parties, including the beneficiary
An irrevocable LC cannot be amended or cancelled without the agreement of the issuing bank, the confirming bank (if any), and the beneficiary (exporter), providing strong payment security.
NAB International Banking 3
In international trade finance, what is the primary function of a Letter of Credit (LC)?