Question and answer - Assignment Example

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The Incoterm that provides the least amount of risk varies depending on the vantage point.  “Ex Works” provides the least risk for the seller.  This is due to the fact that the buyer is responsible for nine to ten of the eleven charges/fees that are normally associated…
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1. Is there an Incoterm that provides you with the least amount of risk? Why/why not? Answer The Incoterm that provides the least amount of risk varies depending on the vantage point.  “Ex Works” provides the least risk for the seller.  This is due to the fact that the buyer is responsible for nine to ten of the eleven charges/fees that are normally associated with Incoterms.  “Delivered Duty Paid” provides the least risk for the buyer.  This is due to the fact that the seller is responsible for ten of the eleven charges/fees that are normally associated with Incoterms (Incoterms, 2011). 
This answer is too subtle since a lay person may not be able to understand the details provided. I think the writer should have tried to explain briefly what Incoterm is in order for the readers who are not well versed to this subject to understand it. As it is, the answer is evasive and does not directly answer the question that has been asked.  
Answer (2)
I would have to agree that depending where one falls on the spectrum of the chart (EXW (higher risk to buyer) – DDP (higher risk to seller)), how the transaction is negotiated via contract, decides on the risk one inherits.  With that said, as we have discussed this week regarding documents used in export financing and the terms and conditions expressed in them, some of the risks associated with Incoterms 2010, may be mitigated through the use of these documents and as well as wording added to the sales contracts containing these commercial terms/definitions.  One needs to keep in mind that Incoterms doesn’t specify or involve questions as to title or ownership or deal with breach of contract…these questions/details need to be resolved in specific provisions in the contract.
This part of the answer is vague since it does not directly answer the question. The writer is repeatedly saying “documents” used for exporting. What are these documents? This leaves us with many questions than answers.
Using instruments such as a letter of credit or documentary collection, requirements and stipulations may be added by the banks so that their clients and they are covered barring circumstances when it comes to payment.  It makes sense to me that buyers and sellers would opt for something whereas they meet in the middle.  The seller takes care of costs incurred up to loading goods on method of transportation to import country with the buyer picking up responsibility from there or once loaded on transportation in the exporting country.  Using CIF or CFR rules would make sense as costs and risks are closely split.  Granted as a seller, I have something the buyer wants and it would be in my best interests, especially if in high demand, to have the buyer incur a majority of the costs, and of course the opposite may be in play if the seller was trying to get a product out the door and develop a reputation.  All aside, I believe any risks or questions/issues should be addressed in the sales contract as well as mitigated through the use of other instruments as required (i.e. LOC, DC).
This is very sensible since the letter of credit will act as a contract between the exporter and the importer. The bank will act as an intermediary and this will help to reduce the risk likely to be encountered by the exporters over nonpayment of their goods exported. In other words, this strategy acts as a security measure to protect the interests of the exporters.
2. Reflect on the article, The Mandrake Mechanism. What was your reaction to the contents of the article?
Answer (1)
The article, What is the Mandrake Mechanism?, by G. Edward Griffin was a very interesting read and made me reevaluate everything that I thought I knew about the American monetary system.  The article explains how the US monetary system is dependent upon debt and that the Federal Reserve should immediately be abolished.  It is interesting to read that the money I currently have in my checking account is just a bunch of ones and zeroes in a computer system and is not backed by anything substantial (gold for instance).  It was also interesting to read how Congress and Politicians are able to manipulate voters, by threatening to raise taxes or interest rates, even though their threats are empty.  Until each citizen has a thorough understanding of how the Federal Reserve and banking systems work, we will continue to be bamboozled and pay the “hidden tax” unnecessarily.      
Though the article makes many valid points on how banks are dependent upon citizens having debt, and that if there was no debt there would be zero currency in banks, it would have been beneficial for the article to compare and contrast the US monetary system to that of Canada, England, or another wealthy EU country.  Is the Federal Reserve that evil compared to the Bank of England? 
Basically, the answer has captured some of the major points raised in the article. The writer only falls short of explicitly explaining the notion that the federal bank creates money out of nothing. The article clearly states that money today has no gold or silver behind it whatsoever. In other words, people are hoodwinked into believing that there is some standard measure in the form of mineral wealth that is used to determine the value of money but this is not the case in this particular article. I concur with the writer of the above answer that the article should have compared the US monetary system to that of either Canada or UK. The main reason behind this argument is that: How is the value of the currency denoted then if it is not measured using gold deposits. Gold is the generally accepted measure of wealth in different countries across the globe.   
3. What documents used in export financing contain ‘term and condition statements? Please explain your answer fully.
Answer (1)
Terms and conditions or promises contained in writing based upon certain criteria being fulfilled are contained in a document called a letter of credit (purchasing order financing – more so domestically) which is issued by a bank involved in the trade transaction.  This letter may be used in place of documentary collection (D/P, CAD, D/A).  Typically a documentary collection is paid by the buyer with a bank acting as an agent for the seller, whereas in a letter of credit agreement the payee will be the buyer’s bank.  While these documents may alleviate some of the risks inherent to exporters, banks will have an understanding of the importer’s home country, laws and banks will not normally issue these unless they believe they would be reimbursed by the importers.
The bank acts as surety for the exporter and this is very important since the amount of paper work is minimized. Through a letter of credit, the bank underscores to take responsibility of the processes involved in the export process and will facilitate payment to the exporter once the transaction has been completed. I think this agreement is ideal given that it based on bank to bank understanding between the two countries involved. Financial institutions are often guided by the legal framework obtaining in their countries as well as the countries they have partnered in trade.
            “The letter of credit details the condition(s) under which the importer’s bank will pay the exporter for the goods” (Griffin and Pustay, pg. 505).  These letters may require additional documents be supplied such as invoices, customs documents, bill of lading, packing list, and proof of insurance.  Once the requirements are established regarding terms and documents, the bank will send it to the exporter’s bank, which will advice the exporter of the terms of the instrument.  Various instruments may be used based upon various concerns on behalf of the exporter and/or banks.  These various letters of agreements include; advised letter of credit, confirmed letter of credit, irrevocable letter of credit and revocable letter of credit.  Ultimately when goods are sold under these letters of agreement, payment is not dependent upon terms contained in the sales contract between exporter/importer, but the terms of the letter of credit agreement (deals w/the examination of documents and not goods) held by the bank.  Once those requirements have been fulfilled, the bank issuing the letter of agreement will make the payment.
Through the use of letters of credit, it can be seen that risk is alleviated since final payment can only be made after all the terms and conditions have been fulfilled. Therefore, there may be no party that can default in such a situation. I am of the view that this agreement is crucial in as far as trade is concerned since it is binding. The exporters are cushioned from any risk since they do not directly deal with the other partners in the other country. The financial institutions are bound by the agreement and they should act in good faith to each other.
Griffin, Ricky W. and Michael W. Pustay (2015), International Business: A Managerial Perspective, 8th Ed. New Jersey: Pearson.
CreditManagementWorld.Com, (2014). International Letter of Credit. Credit Management World. Retrieved on June 24, 2014 from
Answer (2)
A letter of credit is typically used for international sales transactions and contains term and condition statements. This mechanism allows importers and buyers to offer secure terms of payment to exporters and sellers in which a bank gets involved. Its important to remember that a letter of credit deals in documents not goods and that the basic idea behind this transaction is to shift the risk from the actual buyer to a bank. Basically, a letter of credit is a payment transaction issued by a bank to the seller and is issued on behalf of the applicant or buyer. 
Reference: (2014). Letter of Credit: Corporate Credit & Risk Management Solutions. Retrieved on Jun 27, 2014 from Read More
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