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letter of credit

You have a $100,000 sale in Egypt.

1. Please explain the advantages and disadvantages associated with using:

a) a letter of credit,
b) a bill of exchange (or draft),
c) and the Export-Import Bank of the United States.

2. Explain which one you would use for the sale in Egypt.

3. Please cite all references.

Solution Preview

Letter of Credit: (from The Fraud Rule in the Law of Letters of Credit by Xiang Gao) Article 2 of the Uniform Customs and Practice for Documentary Credits (UCP) provides that a letter of credit means:
any arrangement, however named or described, whereby a bank (the 'Issuing Bank') acting at the request and on the instructions of a customer ('the Applicant') or on its own behalf,
I. is to make a payment to or to the order of a third party ('the Beneficiary'), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or
II. authorises another bank to effect such payment, or to accept such bills of exchange (Draft(s)), or
III. authorises another bank to negotiate, against stipulated document(s), provided that the terms and conditions of the Credit are complied with.

There are many types of letters of credit. Some of the most important ones are:
(These are from http://www.expertlaw.com/library/finance/letter_of_credit.html)
(a) Confirmed letter of credit: A letter of credit, issued by a foreign bank, which has been verified and guaranteed by a domestic bank in the event of default by the foreign bank or buyer.
(b) Commercial letter of credit: A commercial letter of credit assures the seller that the bank will provide payment for any goods or merchandise shipped to the bank's customer, assuming the seller provides any required documentation of the transaction and its shipment of the purchased goods.
(c) Irrevocable letter of credit: An irrevocable letter of credit includes a guarantee by the issuing bank that if all of the terms and conditions set forth in the letter are satisfied by the beneficiary, the letter of credit will be honored.
(d) Revocable letter of credit: An revocable letter of credit may be cancelled or modified after its date of issue, by the issuing bank.
(e) Standby letter of credit: In the event that the bank's customer defaults on a payment to the beneficiary, and the beneficiary documents proof of its loss consistent with any terms set forth in the letter, a standby letter of credit may be used by the beneficiary to secure payment from the issuing bank.

There are various different types of risk associated with a letter of credit. Some of the important ones are:
(a) Sovereign Risk: the government may intervene to prevent the ...

Solution Summary

This letter of credit is assessed.

$2.19