Tuesday, August 25, 2009

how Acceptances Arise (2)

The foreign bank which has now acquired the time draft from the exporter will forward it to the bank issuing the original letter of credit. The issuing bank checks to see that the draft is correctly drawn and then stamps "accepted" on its face. two things happen as a result of this actions: (1) a banker‘s acceptance- a high-quality, negotiate money market instrument-has been created; and (2) the issuing bank has acknowledged a debt which must be paid in full at maturity. Frequently, the issuing bank will discount the new acceptance for the foreign bank which sent it and credit that bank‘s correspondent account. The acceptance may then be held as an asset or sold to a dealer. Meanwhile, shipping documents are handed to the importer against a trust receipt, permitting the importer to pick up and distribute the goods. However, under the terms of the letter of credit, the importer must deposit the proceeds from selling these goods at the issuing bank in sufficient time to pay for the acceptance. When the time draft matures, the acceptance will be presented for payment by its holder.
it should be clear that all three principal parties to the acceptance transaction-the exporter, importer, and issuing bank-benefit from this method of financing international trade. The exporter receives funds with little or no delay. the importer, however, may delay payment for a time until the related bank line of credit expires. the issuing bank regards the acceptance as a readily marketable financial instruments which can be sold before maturity to an acceptance dealer in order to cover short-term cash needs. However, there are costs associated with all of these benefits. A discount fee is charged off the face value of the acceptance whenever it is discounted in advance of maturity. And the accepting bank earns a commission, which may be paid by either exporter or importer.

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