Undecided Research Paper Example | Topics and Well Written Essays - 2250 words

Undecided - Research Paper Example As international trade is complex and requires greater documentation and control, international commercial banks are actively involved in facilitating it by providing financial instruments that cater to exporters and importers. The role of commercial banks in international trade is of utmost important as they provide reliability and assurance to their clients, and provide an easy process to finance trade. This report will cover many aspects of international trade finance. It will focus on the financial instruments that are used to make payment in international trade, the parties involved in international trade finance, and trade finance methods. ... finances the trade cycle from the production till the goods are bought by the buyer and may require financing from the bank to support the production process. In most international trade transactions, the buyer and the supplier have separate banks that act as intermediaries to the transaction. Cash-in-advance The prepayment method involves cash in advance paid by the buyer to the seller. It is a risky and expensive method for the buyer but it may occur in cases where the seller is a long time business partner or a trustworthy party and the buyer is new in the market. In this scenario, the buyer will transfer the payment through his bank to the exporter’s bank account. This is the safest method of financing for exporters as they do not ship the goods till the payment is received from the importer. Letter of Credit A letter of credit is one of the most commonly used financial instruments in international trade. The letter of credit is a document that the importers bank issues pr omising to pay the exporter upon presentation of the relevant shipping documents such as bill of lading or bill of exchange in accordance with the terms agreed. This provides greater guarantee for the exporter as the bank is a more reliable creditor than any importer and it is easier for the importer as the bank will not release payment till the legal documents have been received. Although, this is riskier for the exporter as compared to the prepayment method, it is a secure was of transferring payment. The letter of credit stands even if the importer is unable to make the payment, thus the issuing bank is liable for the payment to the exporter and not the importer under the letter of credit. In cases where the exporter fears that the issuing bank’s guarantee is not sufficient, which could be