Tuesday, August 25, 2009

how Acceptances Arise (1)

trade acceptance usually begin when an importer goes to a bank to secure a line of credit to pay for A shipment of goods from aboard. Once the line of credit is approved, the bank will issue an irrevocable letter of credit in favor of the foreign exporter. this document authorizes the exporter to draw a time draft for a specified amount against the issuing bank.
because the latter of credit authorizes the drawing of a time draft and not a sight draft ( which is payable immediately upon presentation), the exporter must wait until the draft matures (perhaps as long as six months) to be paid. however, such a delay is unacceptable for most export firms. they must meet payrolls, purchase inventories, pay taxes, and safety other near-term obligations.moreover, the time draft will generally be redeemed in the home currency of the issuing bank, and this particular currency may not be needed by the exporter. A french exporter holding a time draft from U.S. Bank, for example, would be paid in dollars on its maturity date, even though the exporter probably needs francs to pay his employees and meet other expenses. typically, then, exporters will discount the time draft with their own bank, negotiating a reasonable price for it. the exporters then receive immediate payment in local funds and avoid the risks of trading in foreign currencies.

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