Introduction to Finance

SPECIMEN
FIGURE 6.6
 Irrevocable 
Commercial Letter of Credit

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6.6 Financing International Trade
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letter of credit may be known to the exporter or to his bank. (International bank directories 
provide bank credit information.) The French exporter then ships the perfumes and at the same 
time draws a draft in the appropriate amount on the bank that issued the letter of credit. The draft 
and the other papers required by the commercial letter of credit are presented to the exporter’s 
bank. The bank sends the draft and the accompanying documents to its New York correspondent, 
who forwards them to the importer’s bank in Chicago. The importer’s bank thoroughly inspects 
the papers that accompany the draft to make sure that all provisions of the letter of credit have 
been met. If the bank is satisfi ed, the draft is accepted and the appropriate bank offi
cials sign it. 
The accepted draft, now a banker’s acceptance, may be held until maturity by the accepting bank 
or returned to the exporter on request. If the acceptance is returned to the exporter, it may be held 
until maturity and sent to the accepting bank for settlement or it may be sold to other investors. 
An active market for bankers’ acceptances exists in the world’s money centers.
After having accepted the draft, the Chicago bank notifi es its customer that it has the ship-
ping documents and that arrangements should be made to take them over. As the shop sells 
the perfume, it builds up its bank account with daily deposits until it is suffi
cient to retire the 
acceptance. The bank can then meet its obligation on the acceptance without having advanced 
its other funds at any time.
In releasing shipping documents to a customer, some banks prefer to establish an agency 
arrangement between the fi rm and the bank whereby the bank retains title to the merchand-
ise. The instrument that provides for this is called a