Question Tag: documentary credit

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ITF – OCT 2022 – L3 – Q6 – Issuing Bank’s Undertaking under UCP 600 Article 7

State the issuing bank's undertaking as per UCP 600 Article 7 a (i-v), b, and c.

Question

State the “Issuing Bank’s Undertaking” as enshrined in Article 7 a (i – v), b and c when it issues a credit on behalf of its customer under the current International Chamber of Commerce (ICC) Publication in respect of Uniform Customs and Practice for Documentary Credit – UCP 600.

[Total Marks 20]

Answer

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Tags: Article 7, documentary credit, Honour, Issuing Bank Undertaking, Reimbursement, UCP 600
Level: Level 3

ITF – OCT 2022 – L3 – Q2 – Forward Cover for Documentary Credit Receivables in JPY to EUR

Calculate the Euro amounts received by the beneficiary on presentation dates after arranging forward cover for JPY receivables under a documentary credit, including close outs for differences in actual shipments.

Question

Farm Technologies Ltd is an agrochemical company in Tokyo, Japan dealing in wholesale distribution. The company has entered into a contract to import agricultural chemical products from Bayer AG in Leverkusen, Germany. The suppliers have insisted on the use of documentary credit which has been agreed by Farm Technologies Ltd. Some of the major terms under this credit are as follows:

• In favour of : Bayer AG, Leverkusen.

• For the account of : Farm Technologies Ltd, Tokyo

• Expiring : November 25

• Amount :About JPY12,900,000

• Covering : About 600 metric tons of agrochemicals to be shipped in

two approximately equal installments, one during the first half of July and one during the first

half of August

• Price : JPY21, 500 per metric ton CIF Tokyo.

Drawings under the credit will be as follows:

• 95% of the value of a provisional invoice upon presentation of documents strictly in order.

The remaining 5% will be available against final invoice accompanied by an independent weight and analysis certificate showing the final weight and chemical analysis.

On 25 May the beneficiary asks you to cover their receivables forward in the foreign exchange market as follows:

i. Arrange forward cover immediately in respect of each of the value of 300 metric tons shipment.

ii. Upon presentation of documents, close out any differences between the forward contract amounts and the actual values claimed.

iii. Ignore forward cover for the balance to be claimed in October.

The documents were presented in order on the following dates:

15 July: Documents showing shipment of exactly 294 metric tons

10 August: Documents showing shipment of exactly 315.79 metric tons

31 October: Final invoice claiming an agreed figure of JPY48, 950. This figure represents the

net settlement of the remaining 5%.

You were asked in early May to confirm this irrevocable documentary credit on behalf of a Japanese correspondent bank.

REQUIRED

Using the following rates of exchange between Euro and JPY displayed by Commerzbank, Frankfurt, where you work at the Trade Finance Department, calculate the Euro sums Bayer AG will receive on the appropriate presentation dates.

25 May Spot 134.95 135.45

1 month forward 1.30 yen 1.15 yen premium

2 months forward 2.15 yen 1.95 yen premium

3 months forward 2.50 yen 2.30 yen premium

6 months forward 4.75 yen 4.65 yen premium

15 July Spot 130.00 132.00

10 August Spot 140.50 142.25

31 October Spot 133.80 135.25

Note:

For the purpose of this question, Commerzbank and the beneficiary assume that shipments and presentation of documents will be made on the same day.

Ignore letter of credit charges as these are for buyer’s account.
Ignore any close out of figures of less than 100 yen.

[Total Marks 20]

Answer

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Tags: Close Out, documentary credit, Forward Exchange Cover, JPY to EUR Conversion, Provisional Invoice, Shipment Installments
Level: Level 3

CBLP – OCT 2022 – L4 – Q4 – Parties in Documentary Credit

Identify and explain roles of parties in a documentary credit transaction.

Question

Identify the parties in a documentary credit and explain their roles in the transaction.

[Total marks:20]

Answer

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Tags: documentary credit, International trade, letters of credit, parties, Roles
Level: Level 4

Topic: Legal Aspects of contract Guarantees and Performance Bonds
Series: OCT 2022

ITF – APR 2024 – L3 – Q8 – Post-Shipment Finance Products

Explain briefly the post-shipment finance products: Export Bill Negotiation, Export Bill Discounted, Advance against Banker's Acceptance, and Advance against an Export Bill sent for Collection.

Question

Post-Shipment Finance refers to an Advance or Loan extended to the exporter on the strength of documentation after goods have been shipped to the importer. It is more popular in Cross Border Trade transactions. This facility is extended to the exporter either on with or without recourse basis and is also applicable to both Documentary Credit and Non-Documentary Credit transactions.

REQUIRED With the above in view, explain very briefly, the following Post-Shipment Finance Products: A. Export Bill Negotiation B. Export Bill Discounted C. Advance against Banker’s Acceptance D. Advance against an Export Bill sent for Collection

Answer

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Topic: Advance against banker's acceptance, Export bill negotiation, FINANCIAL SERVICES FROM BANKS AND OTHER SOURCES
Series: APR 2024

ITF – APR 2024 – L3 – Q5 – Implications of Documentary Credit for Importer

Define documentary credit under UCP 600, its implication for the importer, risks to parties, required documents, and precautions for receiving correct goods

Question

Your customers, Roofing Technologies (RT), located at Tema Industrial Area, are specialist manufacturers of roofing sheets. The company is finding it difficult to obtain supply of raw materials as their main Ukraine Suppliers have completely shut down due to the war with Russia.

The company has now identified a South African supplier, who can meet the raw material needs of RT, but only against Secure Methods of Payment. Goods will be shipped under CIF Terms. Tema Port. In a meeting with the Chief Operating Officer today, you have been asked to establish an Irrevocable Letter of Credit in favour of the South African suppliers. Your customers advised you during the meeting that they do not understand the implications of this Secure Method of Payment to the new suppliers as they were used to Documents Against Acceptance with their Ukraine Suppliers.

In order to give them proper understanding, you are required to provide answers to the following:

a) Define Documentary Credit under UCP 600. What implication does the definition have on Roofing Technologies? [2 marks each] [4 Marks]

b) Mention two (2) risks each to RT and the beneficiary. [1 mark each] [4 Marks]

c) Mention three (3) documents (excluding Bill of Exchange) which RT should call for. Mention one (1) detail on each document which RT would expect to find if the bank agreed to establish the Letter of Credit. [2 marks each] [6 Marks]

d) Mention three (3) precautions that RT can take to ensure that they receive the right goods, while at the same time satisfying the seller’s needs. [2 marks each] [6 Marks]

[Total Marks 20]

Answer

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Tags: documentary credit, documents required, precautions for right goods, risks to importer and beneficiary, UCP 600
Level: Level 3

Topic: Uniform Customs and Practice for Documentary Credits UCP 600
Series: APR 2024

ITF – APR 2024 – L3 – Q3 – Cost Comparison of Steel Quotations from Different Countries

Calculate the cost of 100 tons of steel for three quotations from Norway, Denmark, and Turkey, including exchange, charges, and interest, to determine the cheapest option.

Question

Question: QUESTION 3 Held and Sons are Stockholders in London whose account is operated on Overdraft basis. Hitherto, they have obtained their Stocks in the UK, but they are now forced to look elsewhere for supplies of specialised steel. They have received the following quotations:

Country	Price Per Ton	Payment Terms
a. Norway	NOK 2,125 FOB, Oslo	Open Account: Settlement one month after shipment.
b. Denmark	DKK 1,560 CFR, London	Draft drawn payable two months after shipment (Collection Charges for buyer).
c. Turkey	TRY 2112 CIF, London	Irrevocable Documentary Credit payable three months after shipment.

Using additional information set out below, show by calculating the cost of 100 tons of the steel, which of quotations (a), (b) and (c) would be the cheapest for your customer. Freight charges from any European Port £5 per ton Insurance (to be effected on 110% of CIF value) 1% payable in £ Collection Charges (total for both banks) ¼ % Documentary Credit Charges (including Acceptance Commission) ¾ % Overdraft Interest for one month (considered as 1/12 of a year) 15% pa. Ignore all other possible charges. It is to be assumed that your customers would have covered any Exchange Risk on the day of shipment, in accordance with rates quoted below, and that all payments and charges relative to any particular quotation are debited on the same day.

Spot One Month Two Months Three Months Norway 12.20 – 12.50 10 – 12c disc 15 – 18c disc 20 – 23c disc Denmark 8.90 – 9.10 8 – 5c pm 10 – 8c pm 14 – 11c pm Turkey 11.80 – 12.05 12 – 9c pm 14 – 11c pm 16 – 12c pm

[Total Marks 20]

Answer

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Tags: CFR, CIF, collection charges, documentary credit, FOB, Forward Rates, freight, Insurance, overdraft interest, steel quotations
Level: Level 3

Topic: Collection of cheques and bills of exchange
Series: APR 2024

ITF – OCT 2022 – L3 – Q6 – Issuing Bank’s Undertaking under UCP 600 Article 7

State the issuing bank's undertaking as per UCP 600 Article 7 a (i-v), b, and c.

Question

[Total Marks 20]

Answer

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Tags: Article 7, documentary credit, Honour, Issuing Bank Undertaking, Reimbursement, UCP 600
Level: Level 3