TFFE 98th Banking Professional Exam: Understanding Terminology
Distinguish between any four of the following
(a) Balance of Trade (BOT) and Balance of Payment (BOP)
(1) Balance of Trade (BOT) records only exports and imports of goods, whereas Balance of Payment (BOP) records all economic transactions with the rest of the world.
(2) BOT covers only visible trade, whereas BOP covers goods, services, income, transfers and financial transactions.
(3) BOT is a part of the Current Account, whereas BOP includes both the Current Account and the Financial Account.
(4) BOT has a narrower scope, whereas BOP has a much wider scope.
(5) A country may have a trade deficit in BOT, but it can still have a favourable BOP due to remittances or foreign investment.
(b) Documents Against Payment (D/P) and Documents Against Acceptance (D/A)
(1) Under D/P, documents are released after payment, whereas under D/A, documents are released after acceptance of a bill of exchange.
(2) Under D/P, the buyer pays immediately, whereas under D/A, the buyer pays on a future date.
(3) Under D/P, the buyer gets the goods after making payment, whereas under D/A, the buyer gets the goods before making payment.
(4) D/P provides better protection to the exporter, whereas D/A gives more credit facilities to the buyer.
(5) D/P involves lower payment risk for the exporter, whereas D/A involves a higher risk of non-payment.
(c) Sales Contract and Documentary LC
(1) A Sales Contract is an agreement between the buyer and the seller, whereas Documentary LC is a bank’s undertaking to pay the exporter.
(2) A Sales Contract specifies the commercial terms of trade, whereas Documentary LC specifies the banking terms for payment.
(3) A Sales Contract is prepared by the trading parties, whereas Documentary LC is issued by the issuing bank.
(4) A Sales Contract creates obligations between the buyer and the seller, whereas a Documentary LC creates an independent obligation of the issuing bank.
(5) A Sales Contract deals with goods and commercial terms, whereas a Documentary LC deals only with documents.
(d) FOB and FCA
(1) FOB is used only for sea or inland waterway transport, whereas FCA can be used for any mode of transport.
(2) Under FOB, the seller delivers the goods on board the vessel, whereas under FCA, the seller delivers the goods to the carrier at the agreed place.
(3) Under FOB, risk passes when the goods are loaded onto the vessel, whereas under FCA, risk passes when the carrier receives the goods.
(4) FOB is mainly suitable for bulk cargo, whereas FCA is suitable for container and multimodal transport.
(5) FOB requires delivery on board the ship, whereas FCA allows delivery before the goods are loaded onto the vessel.
(e) UPAS LC and Deferred LC
(1) In UPAS LC, the exporter receives payment at sight, whereas in Deferred LC, the exporter receives payment on the maturity date.
(2) In UPAS LC, a financing bank pays the exporter immediately, whereas in Deferred LC, no bank pays before maturity.
(3) In UPAS LC, the importer repays the bank after the usance period, whereas in Deferred LC, payment is made directly on the agreed due date.
(4) In UPAS LC, immediate payment improves the exporter’s cash flow, whereas in Deferred LC, the exporter has to wait for payment.
(5) In UPAS LC, financing cost is usually borne by the importer, whereas in Deferred LC, there is no separate UPAS financing arrangement.
(f) Revocable Credit and Red Clause LC
(1) A Revocable Credit can be amended or cancelled without the beneficiary’s consent, whereas a Red Clause LC cannot be cancelled without the agreement of the parties.
(2) A Revocable Credit provides little protection to the exporter, whereas a Red Clause LC provides additional financial support before shipment.
(3) A Revocable Credit does not allow advance payment, whereas a Red Clause LC allows pre-shipment advances to the beneficiary.
(4) A Revocable Credit is now rarely used under UCP 600, whereas a Red Clause LC is still used where pre-shipment finance is required.
(5) A Revocable Credit is a type of LC based on its revocability, whereas a Red Clause LC is an irrevocable LC with a special pre-shipment financing clause.
