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Module 2-3: Trade Payment Methods Facilitator
2-80
Overview
Start Trade Payment Methods with the overview of the part. Show
the Slide 2-66 and clarify each topic given in the overview.
Objectives
What are you expecting to learn in the Trade Payment Methods
Part?
(Let the participants share their expectations.)
Show the Slide2-67. Inform the participants about the objectives.
Make sure the participants understand each objective clearly.
Please turn to page 2-81 of your manual.
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5 minutes
Question
Objective
5 minutes
Overview
Slide 2-66
Slide 2-67
Module 2-3: Trade Payment Methods Facilitator
2-81
Scenario
Let the participants read the scenario, and then discuss it from
different perspective. Give concrete examples from SECI region.
Introduction
Show the Slide 2-68 and start process with introducing the Part 3.
Introduce the part and emphasize the distinction of trade between
past and today.
Please turn to page 2-82 of your manual.
Slide
5 minutes
Facilitator
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Scenario
5 minutes
Slide 2-68
Module 2-3: Trade Payment Methods Facilitator
2-82
Trade Payment Methods
Show the Slide 2-69 and continue process with explaining Trade
Payment Methods.
Let the participants discuss their opinions about recent trade
methods. Are these methods facilitating or complicating recent
trade methods?
Cash in Advance
Show the Slide 2-70 and continue process with explaining the
process of the first payment method Cash in Advance.
Attention that paying in advance gives the greatest protection for the
seller and puts the risk on the buyer.
Please turn to page 2-83 of your manual.
Discussion
Slide
Attention
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5 minutes
7 minutes
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Slide 2-69
Slide 2-70
Module 2-3: Trade Payment Methods Facilitator
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Could you give an example to what kind of problems the buyer
could have?
(Ask several of the participants. Give 2 minutes for answers.)
Summarize and write the answers of the participants on the flipchart.
Although this method of payment is not uncommon, the seller
requiring full payment in advance may cause lost sales to a foreign
or domestic competitor who is able to offer more attractive payment
terms. In some circumstances this cash in advance method can be
modified to a partial payment in advance with agreed upon
installments or additional terms available.
Please turn to page 2-84 of your manual.
Facilitator
Flipchart
Question
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Module 2-3: Trade Payment Methods Facilitator
2-84
Advantages and Risks of Cash in Advance Method
Show the Slide 2-71 and continue process with explaining the
advantages and risks of cash in advance method
As a buyer and a seller in which positions do you choose /
accept cash in advance method?
(Ask several of the participants. Give 2 minutes for answers.)
How do you think the seller uses the money received from the
buyer?
(Ask several of the participants. Give 2 minutes for answers.)
Show the Slide 2-72 and explain the suitable situations for Cash in
Advance.
Please turn to page 2-85 of your manual.
Question
Slide
Slide
7 minutes
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Slide 2-71
Slide 2-72
Question
Module 2-3: Trade Payment Methods Facilitator
2-85
Open Account
Show the Slide 2-73 and continue process with explaining the open
account.
An open account transaction means that the goods are
manufactured and delivered before payment is necessary. Attention
that the method provides great flexibility and in many countries
sales are likely to be made on an open account basis if the
manufacturer has been dealing wit the buyer over a long period of
time and has established a secure working relationship.
Please turn to page 2-86 of your manual.
Slide
4 minutes
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Slide 2-73
Module 2-3: Trade Payment Methods Facilitator
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Advantages and Risks of the Open Account Method
Show the Slide 2-74 and continue process with the Advantages and
and Risks of the Open Account Method.
What do you think about how the seller could decrease the
risks of open account method?
(Ask several of the participants. Give 2 minutes for answers.)
Show the Slide 2-75 and explain suitable situations.
Show the Slide 2-76 and explain unsuitable situations.
Give a 10 minutes break.
Please turn to page 2-87 of your manual.
Slide
Slide
Question
7 minutes
Slide
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Slide 2-74
Slide 2-75
Slide 2-76
Break
Module 2-3: Trade Payment Methods Facilitator
2-87
On Consignment
Show the Slide 2-77 and continue process with explaining the On
Consignment process.
With consignment sales, the seller does not receive payment until
the importer sells or resells the goods. Explain On Consignment as
explained in the paragraph.
What are the disadvantages of this method of payment?
(Ask several of the participants. Give 2 minutes for answers.)
Please turn to page 2-88 of your manual.
Slide
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Slide 2-77
Question
Module 2-3: Trade Payment Methods Facilitator
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Advantages and Risks of the On Consignment Method
Show the Slide 2-78 and continue process with explaining the
advantages and risks of the On Consignment Method.
In your business life, have you used on consignment method?
If yes, could you give examples of advantages and risks of that
method from your experiences?
(Ask several of the participants. Give 2 minutes for answers.)
Summarize and write the answers of the participants on the flipchart.
Show the Slide 2-79 and explain the suitable situations for on
Consignment.
Please turn to page 2-89 of your manual.
Slide
Question
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Flipchart
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8 minutes
Slide 2-78
Slide 2-79
Module 2-3: Trade Payment Methods Facilitator
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Draft or Documentary Collection
Show the Slide 2-80 and continue process with explaining the Draft
or Documentation Process.
The Draft or Documentary Collection method is employed when
either the cash in advance method is not acceptible to the buyer, or
the open account method is not acceptable to the seller. Explain the
method as explained in the page (Appendix A-17).
What do you think about the reason why the seller or the buyer
may accept draft or documentary collection method instead of
cash in advance or open account?
(Ask several of the participants. Give 2 minutes for answers.)
Please turn to page 2-90 of your manual.
Slide
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Slide 2-80
Module 2-3: Trade Payment Methods Facilitator
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Attention that the buyer, after examine the documents, has three
options.
Explain these options as mentioned in the page.
Please turn to page 2-91 of your manual.
Attention
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Module 2-3: Trade Payment Methods Facilitator
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Sight Drafts
Show the Slide 2-81 and continue process with explaining the Sight
Draft.
Explain the sight draft as explained first paragraph of the page
(Appendix A-18,19).
Please turn to page 2-92 of your manual.
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Slide 2-81
Module 2-3: Trade Payment Methods Facilitator
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Time Drafts
Show the Slide 2-82 and continue process with explaining the Time
Draft process.
If the seller has provided credit terms to the buyer, thereby allowing
the merchandise to be released before payment is received; it is
called a time draft. Explain the time draft as explained at the bottom
of the page. (Appendix A-20)
Advantages and Risks of Draft or Documentary Collection Method
Show the Slide 2-83 and continue proces with explaining the
advantages and risks of Draft or Documentary Collection Method.
Please turn to page 2-93 of your manual.
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Slide 2-82
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Letter of Credit
The Letter of Credit has been a keystone of international trade for
many years. Introduce Letter of Credit as explained in the first
paragraph of the page.
What do you know about Letter of Credit and its differences
from other payment methods?
(Ask several of the participants. Give 2 minutes for answers.)
What is a Letter of Credit?
Explain Letter of Credit as explained at the bottom paragraphs of
the page.
Please turn to page 2-94 of your manual.
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Module 2-3: Trade Payment Methods Facilitator
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Show the Slide 2-84 and continue process with explaining the Letter
of Credit Process.
Show the Slide 2-85 and explain what a Letter of Credit is not. Direct
attention of the participants to post-it box at the same time.
Please turn to page 2-95 of your manual.
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Continue explaining Letter of Credit as explained in the paragraphs.
Direct attention of the participants to the post-it box and explain
“Letter of Credit’s Usefullness in International Trade”.
What do you think about the advantages of the Letter of
Credit’s instructions?
(Ask several of the participants. Give 2 minutes for answers.)
Give a 10 minutes break.
Please turn to page 2-96 of your manual.
Question
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Post-it
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Parties and Terms in Letters of Credits
To understand Letter of Credit exactly, the parties and terms which
are used in Letter of Credit should be examined.
Show the Slide 2-86 and continue process with explaining the
parties of Letter of Credit.
There are four parties in Letter of Credit. Explain these parties as
explained in the paragraphs.
Letter of Credit Terms and Conditions
Show the Slide 2-87 and continue process with explaining Letter of
Credit Terms and Conditions.
Explain the Draft as explained in the last paragraph of the page.
Please turn to page 2-97 of your manual.
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Module 2-3: Trade Payment Methods Facilitator
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A letter of credit should contain a stated expiry date. Explain the
Expiration Date of a Letter of Credit as explained in the second
paragraph of the page.
Most Commercial Letters of Credit contain a Latest Shipping Date.
Explain the subject as explained in the third paragraph of the page.
Who opens L/C and for whom?
(Ask several of the participants. Give 2 minutes for answers.)
Please turn to page 2-98 of your manual.
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Unless the credit stipulates otherwise, the UCP requires that
documents be presented within 21 days of the date of shipment or at
another such period stated in the Letter of Credit. Explain the subject
Latest Date for Presentation as explained in the related
paragraphs.
Any idea about UCP?
(Ask several of the participants. Give 2 minutes for answers.)
Attention that the letter of credit process has been standardized by a
set of rules published by the International Chamber of Commerce
(ICC). These rules are called the Uniform Customs and Practice for
Documentary Credits (UCP) and are contained in ICC Publication
No. 500.
Please turn to page 2-99 of your manual.
Facilitator
Attention
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Basic Procedures for Establishing a Letter of Credit
Show the Slide 2-88 and continue process with explaining Issuance
Letter of Credit.
Explain issuance process of Letter of Credit as explained in the
bulleted sentences of the page (Appendix A-21).
Please turn to page 2-100 of your manual.
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Slide 2-88
Module 2-3: Trade Payment Methods Facilitator
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Show the Slide 2-89 and continue process with explaining Payment
under Letter of Credit Process.
Explain Payment Under a Letter of Credit process as explained in
the bulleted sentences of the page.
Please turn to page 2-101 of your manual.
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Documentary Requirements
Show the Slide 2-90 and continue process with explaining
requirements for Drafts.
Draft is drawn on whom?
(Ask several of the participants. Give 2 minutes for answers.)
Show the Slide 2-91 and explain the requirements for Invoices.
Please turn to page 2-102 of your manual.
Slide
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Question
Slide 2-90
Slide 2-91
Module 2-3: Trade Payment Methods Facilitator
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Show the Slide 2-92 and continue process with explaining
requirements for Insurance Documents.
If other documents are required such as weight lists, consular
invoices, certificates of quantity or quality, and the like, they must be
issued and presented in accordance with the Letter of Credit. Give
information about other documents as explained in the first and
second paragraph of the page.
Amendment of a Letter of Credit
Show the Slide 2-93 and continue process with explaining the
amendment Letter of Credit.
If the seller doesn't agree with the terms of the Letter of Credit, the
buyer will normally receive a Request for an Amendment. Explain
the amendment process as explained at the bottom of the page.
Please turn to page 2-103 of your manual.
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Slide 2-92
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Continue explaining the amendment process.
Could you discuss the advantages and risks of amendment in a
letter of credit?
(Ask several of the participants. Give 2 minutes for answers.)
Summarize and write the answers of the participants on the flipchart.
Please turn to page 2-104 of your manual.
Attention
Question
Flipchart
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Module 2-3: Trade Payment Methods Facilitator
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Advantages and Risks of the Letter of Credit Method
Show the Slide 2-94 and continue process with explaining the
advantages and risks of the Letter of Credit.
Show the Slide 2-95 and continue explaining the advantages and
risks.
A Case about Letter of Credit
In this case a classic situation about Letter of Credit is given.
Continue process with the case.
Please turn to page 2-105 of your manual.
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Module 2-3: Trade Payment Methods Facilitator
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Explain the role of Letter of Credit in this situation.
A letter of credit gives both parties some guarantee of a fair trade
transaction. Explain the position of seller and buyer and their risks.
Please turn to page 2-106 of your manual.
Attention
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Types of Letter of Credit
Show the Slide 2-96 and continue process with the types of Letter of
Credit.
All Letters of Credit are issued in either a "revocable" or an
"irrevocable" form and "confirmed" or "unconfirmed." They should be
read carefully and understood to determine the advantages and to
decide which one is fitting for a particular situation.
Revocable Letter of Credit
Unless stated otherwise all credits are revocable. (Appendix A-22)
Direct attention of the participants to the post-it box and explain
“Revocable Letter of Credit for Importer and Exporter”.
How does the seller prevent “no payment” under revocable
letter of credit?
(Ask several of the participants. Give 2 minutes for answers.)
Please turn to page 2-107 of your manual.
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Irrevocable Letter of Credit
With this type of credit the buyer's bank has given an irrevocable
promise to pay the seller, on his/her proof of compliance with the set
conditions of the Letter of Credit, and the bank without the
authorization of the exporter cannot change this. (Appendix A-23)
Direct attention of the participants to the post-it box and explain
“Irrevocable Letter of Credit for Importer and Exporter”.
Confirmed
A confirmed letter of credit is when a second guarantee is added to
the document by another bank. Explain the subject as explained in
the related paragraph.
Who is going to pay for the confirmation charges?
(Ask several of the participants. Give 2 minutes for answers.)
Unconfirmed
An unconfirmed letter of credit is when the document carriers the
assurance of just the issuing bank. Explain the subject as explained
in the last paragraph of the page.
What do you think in which situations confirmed and in
confirmed Letter of Credit is acceptable?
(Ask several of the participants. Give 2 minutes for answers.)
Give a lunch break.
Please turn to page 2-108 of your manual.
Facilitator
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Module 2-3: Trade Payment Methods Facilitator
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Confirmed and Unconfirmed Credit for Importer and Exporter
Confirmation is never to the importer’s advantage. Direct attention of
the participants to the post-it box and explain “Confirmation from
the Importer’s Viewpoint”.
Inform the participants about the directions for confirmation of the
credit as explained at the related paragraphs. Give concrete
examples for each situation (Appendix A-24,25,26).
Could you compare all types of letter of credit’s (revocable,
irrevocable, confirmed, unconfirmed) advantages and risks for
the seller and the buyer?
(Ask several of the participants. Give 2 minutes for answers.)
Summarize and write the answers of the participants on the flipchart.
Please turn to page 2-109 of your manual.
Facilitator
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Module 2-3: Trade Payment Methods Facilitator
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Special Letters of Credit
Show the Slide 2-97 and continue process with explaining Special
Letters of Credit.
Explain each type of Special Letters of Credit briefly.
Red Clause Letter of Credit provides the seller with cash prior to
shipment to finance production of the goods.
Deferred Payment Letter of Credit gives the buyer a grace period for
payment.
Usually Revolving Letter of Credit arrangements limit the number of
times the buyer may drawn down its line over a predetermined
period.
Back–to–Back Letter of Credit is used by traders to arrangements to
pay the ultimate supplier.
Please turn to page 2-110 of your manual.
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Module 2-3: Trade Payment Methods Facilitator
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Transferable Letter of Credit allows the seller to transfer all or part of
the proceeds of the original Letter of Credit to a second beneficiary,
usually the ultimate supplier of the goods (Appendix A-27).
What is the risk of Transferable L/C?
(Ask several of the participants. Give 2 minutes for answers.)
Assignment of Proceeds is riskier than Transferable Letter of Credit
because the assignee is dependent upon the beneficiary for
compliance.
Export Letters of Credit
Continue process with explaining the export Letter of credit as
explained in the last paragraph of the page (Appendix A-28,29,30).
Please turn to page 2-111 of your manual.
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Module 2-3: Trade Payment Methods Facilitator
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What do you think about the kind of problems exporters could
meet? Could you give examples from your business
environment?
(Ask several of the participants. Give 2 minutes for answers.)
Summarize and write the answers of the participants on the flipchart.
Show the Slide 2-98 and 2-98. Continue process with explaining the
ten common mistakes.
Please turn to page 2-112 of your manual.
Flipchart
Slide 2-98
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Slide 2-99
Module 2-3: Trade Payment Methods Facilitator
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Show the Slide 2-100, 2-101 and continue process with explaining
the checklist.
Let the participants fill the checklist during your explanations.
Please turn to page 2-113 of your manual.
Slide
Attention
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Module 2-3: Trade Payment Methods Facilitator
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Import Letters of Credit
Continue process with explaining the Import Letter of Credit
(Appendix A-31,32).
Could you compare and discuss the advantages and risks that
the complying and uncomplying documents for importer?
(Ask several of the participants. Give 2 minutes for answers.)
Summarize and write the answers of the participants on the flipchart.
Please turn to page 2-114 of your manual.
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Questions Importers Commonly Ask About Letters of Credit
Show the Slide 2-102 and continue process with the questions
importers commonly ask.
When the Letter of Credit expiry date is established, should
enough time be allowed for the goods to get to me or for
payment to be made when extended payment terms have been
negotiated (e.g. 60 days after sight)?
Answer the question with a concrete example.
What are the costs to issue a Letter of Credit?
Answer the question with a concrete example.
Is there anyway that I can protect myself from receiving inferior
quality goods by using a Letter of Credit?
Answer the question with a concrete example.
Please turn to page 2-115 of your manual.
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Slide 2-102
Module 2-3: Trade Payment Methods Facilitator
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How quickly will the exporter take delivery my Letter of Credit?
Answer the question with a concrete example.
Under a Letter of Credit, what kind of recourse available to me if
the goods arrive and they are not the the quantity or quality
agreed upon?
Answer the question with a concrete example.
What happens if my ocean shipment arrives before my
transportation documents?
Answer the question with a concrete example.
Please turn to page 2-116 of your manual.
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Problems that may be encountered and Tips
Show the Slide 2-103 and continue process with notifying the most
common problems of Letter of Credit and tips.
The banks use limited discreation in matching the terms and
conditions of the Letter of the Credit against the documents
presented. Notify this problem with the given example and suggest
the tip as explained in the paragraph.
In some cases the letter of credit fails to anticipate an aspect of the
transaction. Notify this problem with the given example and suggest
the tip as explained in the paragraph.
Please turn to page 2-117 of your manual.
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Module 2-3: Trade Payment Methods Facilitator
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Sometimes it is possible to miss the time limits when presenting the
required documents. Explain the situation and suggest the tip as
given in the paragraph.
Have you had such problems? Do you want add other problems
and tips you know? What should be done to avoid those kinds
of problems?
(Ask several of the participants. Give 2 minutes for answers.)
Summarize and write the answers of the participants on the flipchart.
Suggest solutions if it is possible.
Comparison of Various Methods of Payment
The five explained payment methods are used for different situations
and each has some advantages and risks.
Please turn to page 2-118 of your manual.
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Show the Slide 2-104 and continue process with comparing the
Payment Methods as shown in the table.
Give a 10 minute break.
Please turn to page 2-119 of your manual.
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Module 2-3: Trade Payment Methods Facilitator
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Case: Fruit Juice for Europe
���� After this exercise the participants will be able to analyze the
payment terms in a trade operation.
���� Give each participant one copy of case.
���� Let the participants read the case.
���� Ask the case questions to different participants.
���� After all give feedback to the participants and finish the
exercise.
1- b
2- a
3- Agents and distributors
4- No exclusivity. First, they should try.
Please turn to page 2-120 of your manual.
Exercise
16 minutes
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Case: Be Careful with the Contract
���� After this exercise the participants will be able to the role or
irrevocable confirmed documentary credit in trade.
���� Divide the participants into groups of three.
���� Let each group select a leader.
���� Give each group one copy of case.
���� Let the groups discuss and find solutions for the situation in the
case.
���� After group discussion let the group leaders to explain their
group solutions.
���� After all give feedback to the participants and finish the
exercise.
The comments for feedback can be found in Appendix B.
Please turn to page 2-121 of your manual.
Exercise
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Module 2-3: Trade Payment Methods Facilitator
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Case: Real Documentary Credits
���� After this exercise the participants will be able to analyze the
terms of payment.
���� Give each participant one copy of case.
���� Let the participants read the case.
���� Ask the case questions to different participants.
���� Finally, give feedback to the participants and finish the exercise.
Credits of this kind definitely are not what are normally expected as
documentary credits, and they should be discouraged. There is the
fact, on the other hand, that the credit clearly stated that 60% of its
amount was without responsibility or engagement on the part of the
issuing bank. Any objection by the beneficiary to such a credit
should be made on receipt, not after the credit applicant’s non-
payment of the amount not covered by the credit.
Give a 10 minutes break.
Role Play: International Trade Deal
���� Divide participants into groups and give each group one copy of
case (Appendix B).
���� Let participants study their roles.
���� Ask groups to play their role and fill in the necessary documents
(in the appendix A) according to their role.
Please turn to page 2-122 of your manual.
Exercise
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Summary
Summarize the important points of Part 3 and continue process with
the progress check .
Two questions often arise in international trade. The first, for sellers, is: “If I ship the
goods, am I certain to be paid for them?” The second, for buyers, is: “If I send the money, will I
be certain to receive the goods?” No transaction should take place unless the answers are
definitely “yes”. Yet the two seem to contradict each other.
The seller can answer “yes” if the seller receives payment in advance, and the buyer
can answer “yes” if the buyer makes payment after delivery, but both of these solutions fail to
protect the other party from nonperformance.
Therefore, importers and exporters are well advised to arrange their contractual terms
to avoid court litigation. They have to use fully discussed payment terms and select the one that
satisfies both parties.
According to the transaction, the most convenient payment terms should be chosen but
in general we conclude that the most popular ones are a letter of credit and documents against
payment.
Please turn to page 2-123 of your manual.
Summary
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Module 2-3: Trade Payment Methods Facilitator
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Please turn to page 2-124 of your manual.
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Progress Check
Let the participants take the test and explain the correct answer for
each question after completion of the test.
1. In a documentary collection, the banks;
a. Evaluate the quality of the goods before shipment
b. Act as intermediaries in the collection process
c. Finance the buyer and the seller
d. Dictate the terms
e. Only check the drafts
2. An exporter receives a P/O (purchase order) and payment for 100 kg. of
knitting yarn. This is an example of which type of payment option?
a. Cash in advance
b. On consignment
c. Open account
d. Letter of credit
e. Draft or documentary collection
3. If the bank holds shipping documents in custody and delivers them to the
buyer upon receipt of payment, what type of document of payment term
is this?
a. Letter of credit
b. Cash in advance
c. Cash against goods
d. Documents against collection
e. Open account
Check
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Module 2-3: Trade Payment Methods Facilitator
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4. An exporter receives a P/O (purchase order) for 1000 pullovers and
ships the goods and the documents directly to the buyer before receiving
payment for the goods. Which payment option is this?
a. Cash against documents
b. On consignment
c. Time draft
d. Cash in advance
e. Open account
5. An “open account” transaction gives all of the advantages to the;
a. Consignee
b. Seller
c. Bank
d. Forwarder
e. Buyer
6. Identify the payment option(s) which place(s) the seller in the risky
position of nonpayment by the buyer (select all that apply)?
I. Cash in advance III. Irrevocable letter of credit at sight
II. Open account IV. On consignment
a. I and II
b. Only II
c. II and IV
d. Only I
e. Only III
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7. What kind of payment option(s) should the seller consider when his/her
products are in low demand (select all that apply)?
I. Cash in advance III. Open account
II. Letter of credit IV. Documents against payment
a. Only II
b. II and III
c. Only III
d. III and IV
e. Only IV
8. Identify the risk(s) faced by the seller when collecting payment from an
overseas buyer (select all that apply).
I. Country III. Industrial
II. Political IV. Foreign exchange
a. Only I
b. Only III
c. II and III
d. III and IV
e. I and IV
9. What payment option(s) should the seller consider when he/she is willing
to extend credit to the buyer?
a. Cash in advance
b. Letter of credit at sight
c. Draft or documentary collection
d. Documents against payment
e. Documents against acceptance
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10. The seller is best protected by which of the following payment terms;
a. Open account
b. Revolving letter of credit
c. Confirmed, irrevocable letter of credit
d. Red clause letter of credit
e. Transferable letter of credit
11. In a letter of credit transaction, the bank deals;
a. Only with goods, not with documents
b. Only with documents, not with goods
c. With documents and goods
d. With quantity and quality of goods
e. Only with payment
12. The exporter is about to close a deal with the importer but he/she does
not know the issuing bank well. So what kind of letter of credit should be
opened to satisfy the exporter and minimize the risk?
a. Confirmed
b. Avalized
c. Straight
d. Red – clause
e. Back – to – back
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13. In some cases the seller may need some advance payment in order to
make the deal possible. A L/C may assure that certain sums be paid in
advance of the presentation of documents and any advance paid will be
deducted from the total credit available when the credit is paid. What sort
of L/C is this?
a. Back – to – back
b. Confirmed
c. Red clause
d. Straight
e. Transferable
14. If you are intermediary purchasing materials under L/C for resale to a
final purchaser and you do not want to disclose your source to the buyer,
what kind of L/C should you use?
a. Back – to – back
b. Red clause
c. Back – to - back
d. Revolving
e. Confirmed
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