CHAPTER 17 PRICING STRATEGIES: TERMS OF SALE AND PAYMENT. 3. A one-time direct and simultaneous exchange of products of equal value is

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1 CHAPTER 17 PRICING STRATEGIES: TERMS OF SALE AND PAYMENT MULTIPLE CHOICE 1. This is not an advantage of countertrade. a) market access b) foreign exchange c) pricing alternative d) efficiency (X) 2. The simplest type of countertrade is a) counterpurchase b) parallel barter c) barter (X) d) buyback 3. A one-time direct and simultaneous exchange of products of equal value is a) barter (X) b) parallel barter c) buyback d) counterpurchase 4. The former Soviet Union bought construction machinery from Japan. In return, the Japanese took Russian timber. This set of parallel cash sales agreements is a) counterpurchase (X) b) clearing agreement c) offset d) buyback 5. This type of countertrade is used when a seller provides machinery and agrees to buy the related output (i.e., made by that machinery). a) counterpurchase b) clearing agreement c) offset d) buyback (X) 6. When a U.S. company is required by China to manufacture its product in China for the right to sell there, this type of countertrade is used. a) barter b) counterpurchase c) compensation trade d) offset (X) 7. This method of countertrade involves a triangular rather than bilateral trade. a) barter b) compensation trade c) offset d) switch trading (X) 8. Countertrade incurs extra costs that must be borne by a) a selling nation b) a buying nation (X) c) both nations 9. Developing countries that impose countertrade have this characteristic. a) increasing balance of trade b) declining debt-service ratios c) declining foreign exchange reserve (X) 1

2 10. Firms that are likely to benefit from countertrade are: a) small firms b) high-technology firms c) firms that are not vertically integrated d) firms that have extensive trade operations (X) 11. Countertrade is a) cumbersome b) difficult to get financing from banks c) costly d) a psychological problem e) all of the above (X) 12. The U.S. government permits these parties to participate in countertrade arrangements. a) U.S. firms (X) b) U.S. government agencies c) both private and public entities 13. This quotation term includes the unloading at the overseas port with the appropriate duty paid. a) FOB b) ex dock (X) c) ex works d) delivered duty paid 14. To conserve cash, the exporter should not quote a) C&F b) FAS c) FOB d) CIF (X) 15. This term of sale makes it most difficult for an exporter to conserve cash. a) C&F b) FAS c) FOB d) CIF (X) 16. If an exporter wants to minimize currency convertibility problems, this term of sale should be used. a) CIF b) FOB (X) c) C&F d) delivered duty paid 17. This document is used for quotation rather than payment purposes. a) commercial invoice b) pro forma invoice (X) c) insurance certificate d) bill of lading 18. This method is used when goods are shipped but ownership is retained by the seller. a) consignment (X) b) bankers acceptance c) bill of exchange d) letter of credit 19. This method of financing poses a high degree of risk to the seller. a) consignment (X) b) cash in advance 2

3 c) bill of exchange d) letter of credit e) bankers acceptance 20. This term of payment is the one most desired by importers. a) bill of exchange b) letter of credit c) open account (X) d) cash in advance 21. This financial instrument is an unconditional order in writing from an exporter to an importer to pay at a determined time (e.g., three months). a) consignment b) time draft (X) c) sight draft d) letter of credit 22. This method of payment makes goods available to a buyer before payment. a) letter of credit b) sight draft c) time draft (X) d) documents against payment 23. Which of the following cannot be discounted? a) bill of exchange b) time draft c) bill of lading (X) d) letter of credit 24. Compared to a bill of exchange, a letter of credit is discounted at a) a higher rate b) a lower rate (X) c) the same rate 25. This method of payment presents the least risk to an exporter. a) sight draft b) time draft c) open account d) letter of credit (X) 26. This is not a characteristic of a letter of credit. a) high risk (X) b) lack of flexibility c) being cumbersome d) complexity 27. This financial instrument is a document, issued by a bank at a buyer's request in favor of a seller, promising that the bank will pay an agreed amount of money upon its receipt of certain documents. a) sight draft b) time draft c) bill of exchange d) letter of credit (X) 28. This kind of letter of credit gives the exporter maximum security and minimum delay in receiving payment. a) revocable and confirmed b) revocable and unconfirmed c) irrevocable and confirmed (X) d) irrevocable and unconfirmed 29. This kind of letter of credit is a performance bond that guarantees a seller s obligation under a contract or agreement. 3

4 a) back-to-back b) transferable c) irrevocable d) standby (X) TRUE OR FALSE 1. Countertrade is a goods-for-goods deal. (T) 2. In an offset, a foreign supplier is required to manufacture the product locally as an exchange for the right to sell the product there. (T) 3. The relationship between a country s credit rating and its propensity to countertrade is very strong. (F) 4. Vertically integrated firms are likely to benefit from countertrade. (T) 5. A country that requires countertrade as a trade condition is able to shift the extra costs of doing business to the seller. (F) 6. A country that requires countertrade as a trade condition must alone bear the cost of inefficiency. (T) 7. Countertrade does not increase the cost of doing business. (F) 8. For a barter or countertrade to be completed, it requires a "double coincidence of wants." (T) 9. Recognizing the importance of countertrade, the U.S. government encourages federal agencies to promote countertrade. (F) 10. It is the policy of the U.S. government to encourage U.S. government agencies and U.S. firms to use countertrade when doing business with less developed countries. (F) 11. Problems of countertrade are more psychological rather than real obstacles. (T) 12. Ex dock should not be used in quotations for export. (T) 13. If currency convertibility is a problem, FOB terms are desirable for both the buyer and the seller. (T) 14. Importers prefer FOB price quotes to CIF price quotes. (F) 15. When a sight draft is used, the risk to an exporter is that a buyer can refuse the goods shipped. (T) 16. A bankers' acceptance is not a negotiable instrument. (F) 17. Banks prefer to handle a transferable letter of credit instead of being involved with a backto-back letter of credit. (T) 18. Both the letter of credit and bill of exchange can be discounted. (T) 4

5 19. A revocable and unconfirmed letter of credit gives the exporter maximum security and minimum delay in receiving payment. (F) 20. The existence of a letter credit is not a substitution for proper business investigation concerning buyers. (T) 5

CHAPTER 20 INTERNATIONAL TRADE FINANCE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 20 INTERNATIONAL TRADE FINANCE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Discuss some of the reasons why international trade is more difficult and risky