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Difficulty: MediumMeans of Payment in Foreign Trade

An electronics manufacturer in Tokyo contracts to export microchips to a merchant in Nigeria. To eliminate the commercial default risk of the buyer as well as foreign exchange transfer risks associated with the buyer's overseas bank, the seller requires a commercial bank in Japan to add its own binding payment guarantee upon presentation of compliant trade documents. Which payment instrument fulfills this requirement?

  1. Confirmed Irrevocable Letter of CreditAnswer
  2. B
    Bill of Lading
  3. C
    Unconfirmed Irrevocable Letter of Credit
  4. D
    Documentary Collection under Documents Against Acceptance

Answer

Confirmed Irrevocable Letter of Credit
A Confirmed Irrevocable Letter of Credit provides maximum protection for an exporter because a bank in the exporter's country adds its own legal undertaking to guarantee payment upon submission of compliant documents, thereby removing buyer default and foreign issuing bank risk.

Step-by-Step Solution

1
Analyze the financial protection required by the seller
The seller demands payment security backed not only by the buyer's bank, but also by an independent financial institution in the seller's home country (Japan).
Adding a local bank's commitment protects the exporter against foreign bank failure, credit default, and sovereign transfer restrictions.
2
Identify the corresponding instrument in foreign trade
A Confirmed Irrevocable Letter of Credit involves a confirming bank giving its explicit, uncancelable commitment to honor compliant documents.
Confirmation adds an additional layer of financial security on top of an irrevocable letter of credit.

Key Concept

Confirmed Irrevocable Letter of Credit in foreign trade
Estimated Time:1m 0s
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Topics

Means of Payment in Foreign Trade

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