Question

An alternative to using a letter of credit is export credit insurance. What are the advantages and disadvantages of using export credit insurance rather than a letter of credit for exporting (a) a luxury yacht from California to Canada and (b) machine tools from New York to Ukraine?

Answer 1

Answer:

Read the explanation below.

Explanation:

A. Luxury yatch: Not a lot of people buy Yactchs, but a lot of businesses are capable of making them. So more or less the buyer is in position to dictate terms. And asking the buyer to open a letter of credit may result in the loss of sale.

But to protect against the risk of losing payment, the seller can opt for export credit insurance. Here on advantage of export credit insurance is the exporter is more likely to make the sale in a competitive market such as this. If there is a default, the insurance should cushion the blow. However, Canada and California are not known for opaque or radically different legal systems, are not far away, and do not have linguistic or other barriers. In the event of default, the yatch is likely to be returned.

b. Machine tools. Again, one advantage is that the new yorker exporter is more likely to make the sale. The exporter's position however is strong due to the fact not lot of people make machine tools as the are hard to make and have a higher fixed costs.

Thus, letter credit is the most viable option in this case.