100 Documentary Credit Answers

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Basics of Documentary Credits and Their Role in International Trade

Questions:

1. What is a Documentary Credit (DC)?
2. How does a DC facilitate international trade?
3. What are the primary needs of importers in international trade?

Answers:

1. A Documentary Credit (DC) or Letter of Credit, is a financial instrument issued by a bank at the request of a buyer, guaranteeing payment to a seller upon fulfillment of specified terms.

2. It reduces risk by assuring payment if goods or services are delivered as agreed, facilitating trust in international trade.

3. Importers need assurance that they will receive the goods as specified and on time.


Types of Documentary Credits and Their Features

Questions:

1. What are confirmed Documentary Credits?
2. How does a transferable DC work and when is it used?
3. Can you explain the concept of a red clause in a DC?

Answers:

1. Confirmed Documentary Credits provide an additional guarantee from the exporter's bank, ensuring payment even if the importer's bank defaults.

2. A transferable DC allows the beneficiary to transfer part or all of the credit to another party, often used in intermediary trade deals.

3. A red clause DC includes an advance payment provision, allowing the exporter to receive funds before shipment.



Document Preparation, Discrepancies, and Drawing of a DC


Questions:

1. What are the key documents required in a DC transaction?
2. How should an exporter prepare documents for a DC?
3. What common discrepancies occur in DC document preparation?


Answers:

1. Key documents typically include commercial invoices, transport documents, insurance documents, and any specific certificates required by the DC.

2. Exporters should prepare documents exactly as specified in the DC, ensuring all details match the terms and conditions.

3. Common discrepancies include mismatches in product descriptions, incorrect or missing dates, and inconsistencies between documents.


Risks, Fraud, and Advanced Concepts in Documentary Credits

Questions:

1. What are the five types of risks associated with Documentary Credits?
2. How can parties involved mitigate these risks?
3. What are the differences between open account terms and cash in advance?


Answers:

1. The five types of risks are: Credit risk, country risk, bank risk, foreign exchange risk, and performance risk.

2. Risk mitigation includes thorough due diligence, using confirmed LCs, seeking insurance, and staying informed about country and bank stability.

3. Open account terms involve shipping goods before payment is made, while cash in advance requires payment before shipment.

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