Letters of Credit Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its obligation, however, stating that it was not authorized to guarantee commercial transactions. Explain how an irrevocable L/C would usually facilitate the business transaction between the Russian importer and Ocean Traders of North America (the U.S. exporter). Explain how the cancellation of the L/C could create a trade crisis between the U.S. and Russian firms. Why do you think situations like this (the cancellation of the L/C ) are rare in industrialized countries? Can you think of any alternative strategy that the U.S. exporter could have used to protect itself better when dealing with a Russian importer?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 19, Problem 14QA
Textbook Problem

Letters of Credit Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its obligation, however, stating that it was not authorized to guarantee commercial transactions.

  1. Explain how an irrevocable L/C would usually facilitate the business transaction between the Russian importer and Ocean Traders of North America (the U.S. exporter).
  2. Explain how the cancellation of the L/C could create a trade crisis between the U.S. and Russian firms.
  3. Why do you think situations like this (the cancellation of the L/C ) are rare in industrialized countries?
  4. Can you think of any alternative strategy that the U.S. exporter could have used to protect itself better when dealing with a Russian importer?

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