Banks provide means of payment for international trade. Fig. 5.1 shows a letter of credit. $12000 LETTER OF CREDIT Applicant: AA Ltd, Freetown, Sierra Leone Issuing bank: XX Bank, Freetown, Sierra Leone Beneficiary: BB Ltd, New York, USA Receiving bank: ZZ Bank, New York, USA Date of application: 18 July 2021 The letter of credit can be drawn from the Brooklyn branch of the ZZ bank as long as you provide the following two documents: (i) (ii) Fig. 5.1 letter of credit Use Fig. 5.1 to help you answer the following questions.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2021). The mark or mark type is shown in brackets.

1. [1] (a) BB Ltd
2. [2] (b) Bill of lading;
3. [2] (b) Air waybill;
4. [2] (b) Insurance certificate;
5. [2] (b) Certificate of origin;
6. [2] (b) Invoice;
7. [2] (b) Bill of exchange;
8. [2] (b) Receipt;
9. [2] (b) Packing list;
10. [2] (b) License
11. [3] (c) A bank draft is a form of bank borrowing - False
12. [3] (c) Electronic transfer is the fastest way to make an overseas payment - True
13. [3] (c) Banks charge customers for using debit cards in foreign currencies - True
14. [6] (d) Factors: Amount to be paid – for small amounts a credit card may be used but for large amounts a bank draft might be more suitable; Currency - the currency the supplier wants the payment made in; Exchange rate – with fluctuating exchange rates, the company should be seeking the best exchange so as to reduce costs; Security - it is important to know that no fraud or theft can occur; Reputation of money provider – to protect funds; Relationship with the supplier – important to build a relationship with a supplier because a regular supplier might be more flexible with the payment terms; Banking system within the country – whether it is stable and what methods of international payment it accepts; Cost of transfer – e.g. letters of credit are expensive; Ways of sending payment – e.g. through a bank or online
15. [6] (d) Evaluation: Much will depend on the circumstances of the buyer and how quickly the supplier requires payment. The company will need to consider a combination of factors that allow the transaction to be completed to the satisfaction of both the buyer and the seller. Security is likely to be the biggest concern.