International Business Exports/Imports

Rick Politician
87345
5/14/2007
I BUS 300
Chapter 15 Homework
a.

The 14 Steps

1. Philippines importer orders lumber from Tennessee exporter and asks exporter if they will ship with letter of credit.
2. Tennessee exporter agrees to letter of credit and add info like price and delivery terms
3. Philippines importer applies to Philippine Bank for letter of credit issued in favor of Tennessee exporter for the lumber the Philippine company wants to buy.
4. Philippine Bank issues letter of credit in favor of Philippine importer and sends to Tennessee Mutual in U.S., the exporter’s bank.
5. Tennessee Mutual lets Tennessee exporter know that they are opening the letter of credit in the exporter’s favor.
6. The Tennessee company exports the lumber to the Philippine importer on a common carrier.  The Tennessee exporter receives bill of lading from carrier.
7. The Tennessee exporter shows a 90-day time draft drawn on the Philippine Bank in accordance with the letter of credit and the bill of lading to Tennessee Mutual.  The exporter endorses the bill of lading so title to the goods in transferred to Tennessee Mutual.
8. Tennessee Mutual sends the draft and bill of lading to the Philippine Bank.  The Philippine Bank accepts the draft and agrees to pay the draft in 90 days.
9. The Philippine Bank sends the signed draft back to Tennessee Mutual.
10. Tennessee Mutual tell the Tennessee exporter that it has received the signed bank draft and it will be payable in 90 days.
11. The Tennessee exporter sells the draft to Tennessee Mutual at a discount and receives the discounted draft value.
12. The Philippine Bank lets the Philippine importer know that they have the documents.  The importer agrees to pay the Philippine bank in 90 days and the bank releases the documents so the importer can take the lumber.
13. Within 90 days the Philippine importer pays the Philippine Bank so the bank has money to pay the maturing draft.
14. Within the 90 days Tennessee Mutual presents the acceptance to the Philippine Bank and the Philippine Bank pays the money to Tennessee Mutual.

 

 

 

 

b.

If the California company gets export credit insurance, it would be partially protected from the Canadian company defaulting to pay for the yacht.  The political risk would not really be a factor due to the stability of Canada’s political situation and their excellent trade relationship with the U.S.  Unfortunately, the insurance lowers the profits the yacht club will earn.

Exporting machine tools to Ukraine from New York would create need more of a need for export credit insurance.  Due to the instability of the Ukraine’s political and economic situation, the letter of credit may not offer the New York firm the comfort they need when dealing with the Ukrainian firm since there is more of a chance that the Ukrainian company would be unable to pay. The insurance premiums may be higher to compensate for the risk, but the insurance would probably be worth the New York company’s money.