Global financial management question! (1 Viewer)

[louise95]

Hi, if anyone studying this topic could help me with this question i would really appreciate it

Rank each of the payment methods for international transactions below in terms of risk. Justify you ranking.

Clean payment - Letter of Credit - Bill of exchange - Payment in Advance

 

[seremify007]

It's been a while since I did this topic (like... 7 years) but I'd rate them:

Payment in advance (low risk) - lowest risk since you're being paid before you've even done anything so you have no risk of default from the payer/counterparty
Letter of credit - less risky than bill of exchange because the credit risk is from the payer's financial institution/bank (as opposed to the counterparty themself)
Bill of exchange (riskiest) - it's essentially a cheque from one party to the other and exposes the payee to risk of dedault of the payer/counterparty

I'm not sure where I'd place "clean payment" as it really depends on timing.. I think check your textbook as to what they reckon. If it were me I'd probably put it between the payment in advance and letter of credit since a clean payment means you've got money in hand and no longer have any kind of credit or default risk

 

[louise95]

thanks alot!!!!! (sorry for the late reply)