MARKING SCHEME

Q1. (a) Mention and explain five methods of payment in international trade.

(b) Explain two export-import financing methods

Answer

(a)I. Prepayment(advanced payment): the exporter will not ship the goods until
the payment has been made. 2 marks

ii. Open Account: the exporter ships the goods and expects the buyer to remit
payment later. 2 marks

iii. Consignment: the exporter ships the goods to the importer while still retaining
actual title to the merchandise. The importer will pay after the goods have been
sold to the third party. 2 marks

iv. Draft (Bill of exchange): a draft is simply an order written by an exporter

requesting an importer to pay a specific amount of money at a specific time.

2 marks

Diagrams or steps on how a draft operates 2 marks

v. Letter of credit: a letter of credit(L /C) is an instrument issued by a bank on

behalf of the importer promising to pay the exporter upon presentation of
shipping documents in compliance with the terms stipulated therein. 2 marks

Diagrams or steps on how a letter of credit operates 2 marks

(b)I. Account receivable: in this an exporter can obtain a loan from his bank
secured by account receivable for exporting his goods through either open
account or time draft. The exporter is responsible for paying the debt

ii. Banker’s Acceptance: this is a bill of exchange or time draft drawn on and
accepted by a bank. It is the accepting bank obligation to pay the holder of the
draft at maturity. If the holder cannot waits to maturity date he can sell it to the
third party.

iii. Factoring: this is the sale of short-term export account receivable at a discount
to a third party. The importer pays the factor.

iv. Forfaiting: this is the sale of medium term foreign account receivable at
discount to a third party.

v. Counter- trade: this comes in so many forms- barter, compensation

arrangement, counter purchase, etc.

3 marks for each of 2 points mentioned and explained above

Total 20 marks

Q2. (a) International capital market consists of international bond market and
international equity market. Briefly explain each of these markets.

(b) Mention and explain four functions of foreign exchange market.

Answers

(a). International Bond Market: the international bond market consists of all
bonds sold by issuing companies, government or other organisations outside their
own countries. 3 marks

Types of International Bonds

Euro bond: a bond issued outside the country in whose currency it is

denominated. In other words a bond issued by a Venezuelan company,
denominated in US dollar and sold in Britain, France, Germany (but not available
in USA or to its residents). The governments of countries in which they are sold do
not regulate them. 3 marks

Foreign Bonds: bonds sold outside the borrower’s country and donominated in
the currency of the country which they are sold. For example a yen - denominated
bond issued by a German car maker BMW in Japan’s domestic bond market is a
foreign bond. Foreign bonds are subject to the same rules and regulations as
domestic bonds of the country in which they are issued. 3 marks

International Equity Market: this consists of all stocks bought and sold outside the
issuer’s home country. Both companies and governments frequently sell shares in
the international equity market. Buyers include other companies, banks, mutual
funds, pension funds and individual investors. 3 marks

(b) Functions of Foreign Exchange Market

I. Currency Conversion: this deals with conversion of one currency to another. For
example conversion of Naira to US dollar 2 marks

ii. Currency Hedging: this is the practice of insuring against potential losses that
result from adverse change in exchange rates. 2 marks

iii. Currency Arbitrage: this is instantaneous purchase and sale of currency in

different markets for profits. 2 marks

iv. Currency Speculation: this is the purchase and sale of currency with the
expectation that its value will change and generate profits. 2 marks

Total 20 marks