Question 1 15 points a Describe the role a letter of credit

Question 1 (15 points) a. Describe the role a letter of credit plays in an international commercial transaction. b. List and describe three other documents that are critical to complete a commercial transaction where a letter of credit is used to complete payment to the seller. Question 2 (25 points) A firm based in India agrees to buy 10 million Euros worth of goods from Indian firm. You know that the Euro has been weakening against the Rupee and expect this trend to a firm based in Italy. The Indian firm agrees to pay in Euros in 60 days. You are the CFO of the continue for at least the next 60 days. Den e en yor tn makes the payment in 60 days, it minimizes its risk of loss converting Rupees to Euros. (15 points) icioa tile 6 poine) c. Briefly describe the difference between hedging and speculation. (5 points) Question 3 (20 points) Describe the importance of a functional legal system to foreign investors. Provide three examples of how a functional legal system is important to foreign investors. Describe the importance of political stability to foreign investors. Provide two examples of how political stability is important to foreign investors.

Solution

1a. A letter of credit (LC) is a payment mechanism that is used in international trade and facilitates international commercial transaction. A letter of credit involves a written commitment from a bank on behalf of one of the party involved in the transaction that payment will be made to a third-party.

Letter of credit plays an important role in facilitating international commercial transaction by ensuring that payment is received by the concerned party. The seller is allowed to reduce his risk of non-payment with regards to the goods that has been sold and delivered by him. Risk of the buyer is replaced with that of the banks. In a way, by reducing the risks of non-payments, letter of credit has made it possible to do business on a global scale for many entities.

A letter of credit facilitates international commercial transaction both by helping the sellers and the buyers. As mentioned earlier the risk of non-payment for the sellers is reduced. Thus trade from seller is encouraged as seller gets the opportunity to get financing for the time between the shipment of the goods and receipt of payment. Trade from buyer is also encouraged as buyer has greater control over the time period for shipping of the goods. The buyer is also able to avoid or reduce pre-payment.

1b. Three other documents that are critical to complete a commercial transaction where a letter of credit is used are – transport documents, insurance documents and commercial documents.

Transport documents are those documents that are concerned with the shipping of the goods from the seller to the buyer. The documents considered are bill of lading, non-negotiable sea waybill and charter party bill of lading.

Insurance documents are those documents that are concerned with the insurance of the goods being shipped. The documents considered are insurance policy, insurance certificate and open cover.

Commercial documents are documents that are concerned with the commercial aspect of the transaction. The documents considered are proforma invoice, international sale contract, commercial invoice, and inspection certificate.