202: International Trade and Finance

Diploma in Islamic Banking Examination, April 2019

#1.(b) Discuss the following International Trade Payment Methods along with its advantages and
disadvantages in view of the Importer and Exporter- 4×3=12
i) Advance Payment; ii) Open Account; iii) Collection iv) Letter of Credit
Answer:
i) Advance Payment:
Definition:
Advance Payment is a payment done by an importer to the exporter before shipment.
Ways for advance payment:
For international sales, wire transfers and credit cards are the most commonly used cash-in-advance
options accessible to exporters. With the advancement of the Internet, escrow services turning into another
cash-in-advance option for small export transactions.
Advantages:
This method is most beneficial from exporter perspective as he receives funds in advance. The payment
may be received either as soon as the order is confirmed or any time before shipment. The exporter may be
willing to impose the term as a per-condition only when he knows that the goods are in overwhelming
demand and the goods are of rare-nature. Advance payments may be also used to negotiate a reduced price
or to cover initial supply costs.
Disadvantages:
However with a buyer’s point of view, advance payment carries little risk, as he advances payment
before dispatch of goods. Advance payment of term in exports and imports is picked by a purchaser only
when he knows the seller in details on genuineness as a seller.
ii) Open Account:
An open account transaction in international trade is a sale where the goods are shipped and delivered
before payment is due, which is typically in 30, 60 or 90 days.
Advantages and disadvantages:
Obviously, this option is advantageous to the importer in terms of cash flow and cost, but it is
consequently a risky option for an exporter. Because of intense competition in export markets, foreign
buyers often press exporters for open account terms. In addition, the extension of credit by the seller to the
buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may lose a sale to
their competitors. However, though open account terms will definitely enhance export competitiveness,
exporters should thoroughly examine the political, economic, and commercial risks as well as cultural
influences to ensure that payment will be received in full and on time. It is possible to substantially mitigate
the risk of non-payment associated with open account trade by using trade finance techniques such as
export credit insurance and factoring. Exporters may also seek export working capital financing to ensure
that they have access to financing for production and for credit while waiting for payment.
iii) Collection:
Collection is a method of payment in which goods are shipped and a Bill of Exchange is drawn on the
buyer for sight payment or for acceptance.
Types of collection:
1. Clean Collection (by Financial Documents only)
2. Documentary Collection (by Financial Documents accompanied by Commercial
iv) Letter of Credit:
Advantages of Letter of Credit for the buyer:
i. Ensure that payment credited to seller is done only after the transfer of ownership of goods.
ii. Lack need to consumption of cash capital to purchase goods that will be delivered after the
expiration of a certain time.
iii. Possibility of awareness from correctness and validity of seller through its bank before opening credit.
Advantages of Letter of Credit for seller:
i. Possibility of having commitment a bank instead of personal credit for goods buyer.
ii. Possibility of having credit facilities from banks against credit opened in his favor in order to provide and
export of order goods.
iii. If the seller can sell goods on credit, the bank documents may discount sell on credit in a bank or money
market and use cash.
Disadvantages of Letter of Credit for bank:
i. Attracting currency transactions for selling currency collected of the bank.
ii. Earning while providing credit for opening and settle letter of credit and taking commissions and in
obtain a prepaid credit issuance and payment of shipping documents.
2. Define any 5 (five) of the following: 5×4=20
i) Back to Back letter of credit
ii) Shipping Documents
iii) Negotiation
iv) Transferable Letter of Credit (April 2019)
v) Export Development Fund
vi) Transhipment
vii) World Trade Organization (WTO)
viii) Authorized Dealer in Foreign Exchange
Answer:
i) Back to Back letter of credit:
Definition:
 Back-to-Back Letter of Credit is a negotiable instrument in which the seller gets a Letter of Credit from
the buyer and the seller further transfers the Letter of Credit to its supplier. In simple words, the seller first
gets the Letter of Credit from the buyer to ensure timely payment and further the same seller hands over
the Letter of Credit to someone from whom he buys goods or materials.
Examples of Back-to-Back LC:
Suppose a garment manufacturer ABC sells its product to XYZ. In return, XYZ did not make the
payment. Instead, he gave ABC a Letter of Credit. This Letter of Credit is an assurance to ABC that if XYZ
fails to make timely payment, ABC can use the negotiable instrument to get its claim from the bank. To
process the order of XYZ, ABC purchases raw material from its supplier, PQR. ABC does not make any
payment to it. Instead, it hands over the original Letter of Credit received from XYZ after changing the
beneficiary name with its intermediary bank. Now PQR is assured that it will receive the payment for the
material purchased by ABC This transfer of Letter of Credit from one seller to another seller is Back-to-
Back Letter of Credit (BBLC).
Parties in Back-to-Back Letter of Credit:
 Issuing Bank  Transferring Bank  Accepting Bank
 Confirming Bank  Applicant
 Beneficiary  Advising Bank
Procedure for Back-to-Back Letter of Credit:
The issuing bank upon getting the instructions from the customer agrees to issue Letter of Credit, which is
transferable to the first beneficiary. This means that the first beneficiary can transfer the letter of credit to
its customer or third party or secondary beneficiary. The transferring bank i.e. the bank issuing the letter of
credit shall issue a “Transferred Letter of Credit”. The “Transferred Letter of Credit” looks identical to the
original Letter of Credit. The first beneficiary holding the original Letter of Credit gives the “Transferred
Letter of Credit” to the secondary beneficiary.
ii) Shipping Documents
A generic term for the various types of forms required for overseas shipments, such as commercial
invoices, transport documents, packing lists, origin certificates, etc.
Here are the top 5 shipping documents all shippers should be familiar with.
1. Bill of Lading
If there were only one shipping document you need to know like the back of your palm, the Bill of
Lading would be it. The Bill of Lading, also known as B/L, is a contract of carriage between the shipping
line and the cargo owner. It’s a document issued by the carrier to acknowledge the receipt of your cargo for
shipment on board their vessels.
2. Packing list
Just like the Bill of Lading, the packing list is a mandatory document in shipping merchandise. The packing
list informs your freight forwarder, importer, customs office, and carrier, of the goods you’re sending
without needing to physically verify the contents.
3. Commercial invoice
Any international transaction that involves importing/exporting goods must come with a proof of sale
known as the commercial invoice. In large part, it’s similar to a standard invoice. But unlike a standard
invoice, it includes details regarding the freight shipment for customs clearance purposes and is one of the
most important documents.
4. Certificate of origin
According to the ICC, the certificate of origin (COO) is ‘an important international trade document that
certifies that goods in a particular export shipment are wholly obtained, produced, manufactured or
processed in a particular country. They also serve as a declaration by the exporter.’
5. Letter of Credit
The letter of credit is a formal, binding agreement of payment between buyer and seller. The international
purchase process is a long one, given the long delay from the time the seller ships his cargo off to the time it
reaches the safe hands of the buyer. This makes it hard to determine when payment should be made,
especially if importers are unable to verify the authenticity of the purchase.
iii) Negotiation
The activities (including discussions, transfer of information, compromise, etc.) leading to a settlement or
agreement concerning a business transaction.
Each party to the negotiation must gain enough from the process to make it worthwhile to themselves and
concede a sufficient amount to keep counterparts interested.
As per Article 2 of UCP 600, 'Negotiation means the purchase by the nominated bank of drafts (drawn on
a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or
agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due
to the Nominated Bank.' If it is decided to purchase the bill we may create the Bai As Sarf by passing the
following voucher:
iv) Transferable Letter of Credit
v) Export Development Fund
Export Development Fund (EDF)
Export Development Fund (EDF) is a special credit window created by Bangladesh Bank to provide
short-term finance in foreign currency for import of raw materials by opening L/C at sight by the export
oriented garment industries.
At the request of Bangladesh Government with a view to developing its export, the International
Development Organization (IDA) established an export development fund in Bangladesh Bank (Loan –
2000 BD). In this respect a treaty was signed with IDA on 26 April 1989 and the project started its activity
from October’ 89.
vi) Tran-shipment
What is Transshipment :
The shipping activity that involves the transportation of goods to an intermediate location or a third
party before reaching the final destination is known as transhipment.
Reasons for transshipment
This is a system that is used for a variety of reasons, which include:
 It’s impossible to move the shipment from origin to the final destination in one go
 Different shipping methods being used throughout the entire journey
 Bulk shipments go to the transhipment centre before being split up into different loads
 Can be cheaper than sending goods directly especially when shipping to remote locations
 Multiple shippers might combine forces on a transhipment to cut costs
Risk in transhipment :
There are risks involved and government officials often monitor transhipment locations to fight fraud. Some
of the problems include greater risks of damages or losses, so special insurance is required for added
protection. When a journey is broken into sections there is an increased risk of problems occurring as more
vulnerabilities are created. However, it can provide a cost effective solution to some when a direct shipment
isn’t required.

vii) World Trade Organization (WTO)

What Is the World Trade Organization:
Created in 1995, the World Trade Organization (WTO) is an international institution that oversees the
global trade rules among nations. It superseded the 1947 General Agreement on Tariffs and Trade (GATT)
created in the wake of World War II.
 The World Trade Organization is a global organization made up of 164 member countries that deals
with the rules of trade between nations.
 The goal of the WTO is to ensure that trade flows as smoothly and predictably as possible.
 The WTO was born out of the General Agreement on Tariffs and Trade (GATT), which was
established in 1947.
How It Functions
Decisions are made by consensus, though a majority vote may also rule (this is very rare). Based in Geneva,
Switzerland, the Ministerial Committee, which holds meetings at least every two years, makes the top
decisions.
There is also a goods council, services council, and intellectual property rights council, which all report to a
general council, in addition to many working groups and committees.
If a trade dispute occurs, the WTO works to resolve it.
Functions:
Among the various functions of the WTO, these are regarded by analysts as the most important:
 It oversees the implementation, administration and operation of the covered agreements (with the
exception is that it does not enforce any agreements when China came into the WTO in Dec 2001).
 It provides a forum for negotiations and for settling disputes.
 The WTO shall facilitate the implementation, administration and operation and further the objectives of
this Agreement and of the Multilateral Trade Agreements, and shall also provide the framework for the
implementation, administration and operation of the multilateral Trade Agreements.
 The WTO shall provide the forum for negotiations among its members concerning their multilateral
trade relations in matters dealt with under the Agreement in the Annexes to this Agreement.
 The WTO shall administer the Understanding on Rules and Procedures Governing the Settlement of
Disputes.
 The WTO shall administer Trade Policy Review Mechanism.
 With a view to achieving greater coherence in global economic policy making, the WTO shall cooperate,
as appropriate, with the international Monetary Fund (IMF) and with the International Bank for
Reconstruction and Development (IBRD) and its affiliated agencies.[52]

viii) Authorized Dealer in Foreign Exchange

What Is an Authorized Forex Dealer?
An authorized forex dealer is a type of financial institution that has received authorization from a relevant
regulatory body to act as a dealer involved with the trading of foreign currencies.
 Authorized forex dealers have been given proper authorization by relevant regulatory bodies to
facilitate forex trading.
 The National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
authorize forex dealers in the United States.
 Forex trading is the buying or selling of currencies, in pairs, attempting to profit from the price changes
of those currencies.
Role of Authorized Dealers in Foreign Exchange:
Authorized dealers also play an important role in foreign exchange transactions. Authorizations in the form
of licenses to deal in foreign exchange are granted to banks which are well equipped to undertake foreign
exchange transactions in India. Authorizations have also been granted to certain financial institutions to
undertake specific types of foreign exchange transactions incidental to their main business.
Turnover in the Foreign Exchange market has two components, merchant transactions, i.e. transaction
undertaken by importers and exporters and inter-bank transactions. The Inter-bank transactions are much
larger as compared to the merchant transactions. The transactions are either Foreign currency / Indian
Rupee or Foreign Currency / Foreign Currency.
The nature of transactions in case of merchant transactions in Spot, Forward and Forward Cancellation
whereas in case of inter-bank transactions, it is Spot, Swap and Forward.
#3(a) Define Letter of Credit (L/C). Discuss the parties involved in L/C along with their roles and
responsibilities. 12
Answer: April 2019.
#3(b) What is ‘Add Confirmation’? What are the roles and responsibilities of a Confirming Bank? 8
Add Confirmation:
Article Two of the Uniform Commercial Practice (“UCP”) 600 defines “Confirmation” as a definite
undertaking of the confirming bank, in addition to that of the issuing bank, to honor or negotiate a
complying presentation.
Confirming bank:
In a letter of credit transaction, the bank that assumes responsibility to the seller (usually the exporter) for
payment from the issuing bank (buyer´s bank) so long as the terms and conditions of the letter of credit
have been met by the seller/exporter. See letter of credit.
Roles and responsibilities of a Confirming Bank:
a. Provided that the stipulated documents are presented to the confirming bank or to any other nominated
bank and that they constitute a complying presentation, the confirming bank must:
i. honour, if the credit is available by
a. sight payment, deferred payment or acceptance with the confirming bank;
b. sight payment with another nominated bank and that nominated bank does not pay;
c. deferred payment with another nominated bank and that nominated bank does not incur its
deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at
maturity;
d. acceptance with another nominated bank and that nominated bank does not accept a draft drawn
on it or, having accepted a draft drawn on it, does not pay at maturity;
e. negotiation with another nominated bank and that nominated bank does not negotiate.
ii. negotiate, without recourse, if the credit is available by negotiation with the confirming bank.
b. A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to
the credit.
c. A confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a
complying presentation and forwarded the documents to the confirming bank. Reimbursement for the
amount of a complying presentation under a credit available by acceptance or deferred payment is due at
maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming
bank's undertaking to reimburse another nominated bank is independent of the confirming bank's
undertaking to the beneficiary.
d. If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so,
it must inform the issuing bank without delay and may advise the credit without confirmation.
#4(a) What is SWAP? 3
Answer: (April 2019)
#4(b) Discuss ‘Direct Quotation’ and ‘Indirect Quotation’ with example. 4
Direct Quotation:

A direct quote is a foreign exchange rate involving a quote in fixed units of foreign currency against variable
amounts of the domestic currency. It is when the one unit of foreign currency is expressed in terms of
domestic currency.
A direct quote can be calculated using the following formula:
DQ = 1/IQ
Where:
DQ = Direct Quote
IQ = Indirect Quote
Ex: As of February 2018, a direct quote of the U.S. dollar against the Canadian dollar in the United States
was U.S. $0.79394 = C $1 while in Canada, a direct quote for would be C $1.25953 = U.S. $1.
Indirect Quotation:

The term indirect quote is a currency quotation in the foreign exchange market that expresses the variable
amount of foreign currency required to buy or sell fixed units of the domestic currency. An indirect quote is
also known as a “quantity quotation,” since it expresses the quantity of foreign currency required to buy
units of the domestic currency. In other words, the domestic currency is the base currency in an indirect
quote, while the foreign currency is the counter currency.
Ex: Consider the example of the Canadian dollar (C$), which we assume is trading at 1.2500 to the US
dollar. In Canada, the indirect form of this quote would be C$1 = US$0.8000 (i.e. 1/1.2500).

#4(c) A customer intends to sell an export documents for USD 1, 00,000 at sight basis. Calculate
applicable rate for purchasing the above documents under Bai-as-Sarf and total value to be paid to
the customer under the following facts: 13
i)Spot Rate: USD/BDT-82.80-83.80
ii)Transit Period: 21 days (01 yr. 360 days)
iii)Collection Charge: 0.20%
iv)Bank Profit: @ 6% pa.
v)Postage Charge: Tk. 0.15 per USD
vi)Foreign Correspondent Charge: Tk. 0.10 per USD

#5(a) Discuss about the functions of ‘Dealing Room’ in Foreign Exchange Market. 8
Dealing Room – What is it all about?
Dealing Room refers to Treasury Front office which deals with local & foreign banks in respect of
buying & selling of foreign currencies in foreign exchange market. Here foreign exchange market means a
market where banks, individuals, firms buy & sell foreign currencies or exchange one currency for another.
A dealing room is a centralized establishment, usually of a commercial bank, which is willing to
make/offer a two way dealing price for different currencies at all times, even when they may not wish to
deal, but all during prescribed business hours. Banks trading actively in the forex market and offering
variety of products usually segregate their dealing room functions into two or three (which has become the
current trend in large dealing rooms):
1) front office – that undertakes the actual dealing/trading operations in the interbank market;
2) mid office – if established, is entrusted with the job of risk management and accounting policies,
MIS; market research, etc; and
3) back office – which is made accountable for settlement of transactions, reconciliation and
accounting.

Today, dealing rooms of major banks are known to house as many as 50 to 100 dealers, all operating
simultaneously from the same dealing room on different currencies/markets/ products. The current trend is
towards integrated dealing rooms that are capable of offering foreign exchange services along with
derivatives such as swaps, options etc. Indeed, major banks have moved a step further by establishing
integrated dealing rooms which are imultaneously operating in forex, derivatives and money markets. Such
integration is believed to afford better ‘real-time’ interaction between all the three markets, which is felt
necessary to take well-informed trading decisions for maximizing profit.

Dealing Room Equipment's:

 Telephone.  Time Keeper.
 Telex.  Computer.
 Voice Recorder.

#5(b) Describe the activities and responsibilities of Treasury Mid Office and Treasury Back Office
as per Bangladesh Bank Foreign Exchange Risk Management Guidelines. 12
Answer:
 Treasury Mid Office
Activities of Treasury mid Office:
  Limits monitoring and managing limit
  Adherence to various internal as well as regulatory policies
  Minimization of all risks
  Monitoring & management of various foreign exchange and money market positions
  Monitoring & management of various cash flows and cash positions
  Proposals/ renewals for various internal limits
  Monitor for trader’s adherence to various internal and regulatory limits
  Monitor for trader’s adherence to various counter-party limits
  Prepare, monitor and manage all balance sheet gaps
  Report any occurrence of crossing limit
  Various internal and regulatory reporting
Responsibilities of Treasury mid Office:
Head of Treasury MID Office:
 Overall responsibility of all treasury Mid office activities
 Responsible for all relevant Risk reporting
 Measure for compliance with Regulatory/Internal limits and escalate any excesses
 Escalate regulatory and internal policy breaches by Front and back office
 Monitor Treasury Risk issues (both front and back office) with Management
 Responsible for accuracy and timeliness of all reports as well as MIS
Manager - Risk Reporting:
 Monitor limit utilization against all internal and  Measuring the of balance sheet gaps
regulatory risk limits  Measuring the mark to market gain/loss
 Reporting of limit excesses, etc.  Identify and escalate cancelled/amended deals
 Stop loss/ cumulative loss limits monitoring and  Identify and escalate rate exceptions against off
reporting market rates
 Monitoring of daily P&L  Generate various MIS Reports.
Manager - Risk Management:
 Monitor Key risk indicators of front and back prior to introducing any new treasury product
office  Ensure compliance with all action plans
 Identify future risk and design solutions as  Prepare report detailing the risk management
necessary strategy for Treasury
 Confirm risk management capabilities of the bank  Responsible for accuracy and timeliness of all MIS
Banks may have the same individual looking after multiple functions of Treasury, and in some
banks’ treasury back office may perform treasury mid office functions too.
 Treasury Back Office
Activities of Treasury Back Office:
R Input, verification and settlement of deals
R Receiving and sending of deal confirmation certificates
R Preparation of currency positions (of previous day-end) and report to traders prior to commencement
of day’s dealings
R Reconciliation of currency positions
R Rate appropriateness function for all deals done
R Revaluation of all foreign exchange positions at a pre-determined frequency
R Managing discrepancies and disputes
R Daily calculation for adherence to statutory maintenance
R Reconciliation of nostro accounts
R Reconciliation of vostro accounts
R Claim/ pay good value date effect of late settlements
Responsibilities of Treasury Back Office:
Head of Treasury Back Office:
R Overall responsibility of all treasury back office activities
R Responsible for all relevant regulatory reporting
R Ensure compliance with Regulatory limits and escalate any excesses
R Escalate reconciliation related issues
R Discuss Treasury Risk issues with the Management
R Responsible for accuracy and timeliness of all Back office reports and MIS
Manager – Local Currency Reconciliation:
R Reconcile all local currency accounts on a day to day basis
R Immediately advise money market trader and balance sheet manager of any discrepancy
R Track for reconcilement of any unmatched item
R Claim or arrange payment of good value date effects for any late settlements
R Send chasers for any unsettled items until it is settled
Manager –Nostro Reconciliation:
R Reconcile all nostro accounts on a day to day basis
R Immediately advise USD/BDT or cross currency trader of any discrepancy
R Track for reconcilement of any unmatched item
R Claim or arrange payment of good value date effects for any late settlements
R Send chasers for any unsettled items until it is settled
Manager – Vostro Reconciliation:
R Reconcile all vostro accounts on a day to day basis
R Immediately advise money market trader and balance sheet manager of any discrepancy
R Track for reconcilement of any unmatched item
R Claim or arrange payment of good value date effects for any late settlements
R Send chasers for any unsettled items until it is settled
Manager – Foreign Currency Position Reconciliation:
R Receive copies of USD/BDT and cross currency traders’ position blotters
R Reconcile all foreign currency positions between accounted for records and USD/BDT & cross currency
traders blotters on a day to day basis
R Immediately advise USD/BDT or cross currency trader of any position discrepancy
R Investigate and match unreconciled amounts
R Advise USD/BDT and cross currency traders of correct currency positions prior to commencement of
day’s dealing activities
Manager – Local Currency Position Reconciliation:
R Receive copies of position blotters from money market trader
R Reconcile all local currency positions between accounted for records and money market traders blotters
on a day to day basis
R Immediately advise money market trader of any position discrepancy
R Investigate and match unmatched amounts
R Advise money market trader of correct positions prior to commencement of day’s dealing activities
Manager – Foreign Currency Settlements:
R Settle for all foreign currency deals done by USD/BDT, cross currency and the Fcy money market
traders
R Send and receive confirmations of all deals done by USD/BDT, cross currency and Fcy money market
traders
R Check nostro statements for settlements of major items
R Advise traders of any discrepancy in settlement for the prior dealing day
R All related accounting entries
R Generate various MIS
Manager – Local Currency Settlements:
R Settle for all local currency deals done by Lcy money market traders
R Send and receive confirmations of all deals done by Lcy money market traders
R Check local currency statements for settlements of major items
R Advise traders of any discrepancy in settlement for the prior dealing day
R All related accounting entries
R Generate various MIS
Manager – Vostro Settlements:
R Settle for all vostro transaction for the prior dealing day
R Check vostro statements for settlements of R All related accounting entries
major items R Generate various MIS
R Advise dealers of any discrepancy in settlement
Manager – Regulatory reporting:
R Send all required regulatory reports as per reporting schedule and as specifically required by the
regulators
R Respond to various queries from regulators regarding reports
R Coordinate with other departments in receiving required information for reporting purpose
R Create awareness among various related departments of the importance of effective and accurate
reporting

#6(a) Define Incoterms. State all Incoterms under Incoterms-2010. 5

Incoterms
Incoterms® is an abbreviation for “International Commercial Terms.” This term represents a very
useful way of communication and it’s actually aimed at reducing confusion between buyers and sellers. So
what is an incoterm? An incoterm represents a universal term that defines a transaction between importer
and exporter, so that both parties understand the tasks, costs, risks and responsibilities, as well as the
logistics and transportation management from the exit of the product to the reception by the importing
country.
Incoterms are a set of three-letter standard trade terms most commonly used in international contracts
for the sale of goods.
 Incoterms are all the possible ways of distributing responsibilities and obligations between two parties.
It is important for buyer and seller to pre-define the responsibilities and obligations for transport of the
goods.
There are currently 11 incoterms in use.
EXW – Ex Works (… named place of delivery)
The Seller’s only responsibility is to make the goods available at the Seller’s premises. The Buyer bears full
costs and risks of moving the goods from there to destination.
FCA – Free Carrier (… named place of delivery)
The Seller delivers the goods, cleared for export, to the carrier selected by the Buyer. The Seller loads the
goods if the carrier pickup is at the Seller’s premises. From that point, the Buyer bears the costs and risks of
moving the goods to destination.
CPT – Carriage Paid To (… named place of destination)
The Seller pays for moving the goods to destination. From the time the goods are transferred to the first
carrier, the Buyer bears the risks of loss or damage.
CIP– Carriage and Insurance Paid To (… named place of destination)
The Seller pays for moving the goods to destination. From the time the goods are transferred to the first
carrier, the Buyer bears the risks of loss or damage. The Seller, however, purchases the cargo insurance.
DAT – Delivered Ar Terminal (… named terminal at port or place of destination)
The Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the
Buyer’s disposal at a named terminal at the named port or place of destination. “Terminal” includes any
place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal.
The Seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named
port or place of destination.
DAP – Delivered At Place (… named place of destination)
The Seller delivers when the goods are placed at the Buyer’s disposal on the arriving means of transport
ready for unloading at the names place of destination. The Seller bears all risks involved in bringing the
goods to the named place.
DDP – Delivered Duty Paid (… named place)
The Seller delivers the goods -cleared for import – to the Buyer at destination. The Seller bears all costs and
risks of moving the goods to destination, including the payment of Customs duties and taxes.
FAS – Free Alongside Ship (… named port of shipment)
The Seller delivers the goods to the origin port. From that point, the Buyer bears all costs and risks of loss
or damage.
FOB– Free On Board (… named port of shipment)
The Seller delivers the goods on board the ship and clears the goods for export. From that point, the Buyer
bears all costs and risks of loss or damage.
CFR– Cost and Freight (… named port of destination)
The Seller clears the goods for export and pays the costs of moving the goods to destination. The Buyer
bears all risks of loss or damage.
CIF – Cost Insurance and Freight (… named port of destination)
The Seller clears the goods for export and pays the costs of moving the goods to the port of destination.
The Buyer bears all risks of loss or damage. The Seller, however, purchases the cargo insurance.

#6(b) Why the Incoterms so important in International Trade? 5

Answer:
Importance of Incoterms:
Incoterms Reduce Risk:
The use of Incoterms eliminates inconsistencies in language by giving all parties the same definition of
specific terms within a trade agreement. As a result, the risk of problems during shipment is reduced since
all parties clearly understand their responsibilities in performing trade under the given contract.
Failure to Use Incoterms Leads to Problems
Parties in international shipping must understand how Incoterms vary. Failure to understand the correct
definition of each Incoterm used will lead to problems throughout the subsequent supply chain.
Furthermore, misused Incoterms may affect payment of goods, delivery schedules, increased costs, poor
inventory control, and negative customer interactions. From distribution centers to shipping recipients,
improper or missing Incoterms dramatically disrupts the flow of goods and damages a given company’s
reputation.
Incoterms Affect Monetary Gain and Competitive Advantage
Since Incoterms define the monetary and procedural aspects of all international shipping practices,
Incoterms are essential to ensuring proper, timely payment of goods and services. When Incoterms are not
used correctly, a supply chain entity is not fully accepting payment for all goods and services. This occurs as
changes and misunderstandings in differing cultures clash over responsibilities.
Similarly, Incoterms ensure all parties are able to maintain a competitive advantage in the international
supply chain.
Incoterms Change and Vary in Responsibility
Incoterms play the strongest role in ensuring all international trade is performed in a standardized,
thorough manner. Without Incoterms, buyers and sellers would suffer from constant changes in language
and difficulties in shipping practices. Fortunately, Incoterms clarify obligations and help shippers maintain
standard practices throughout the process. Essentially, Incoterms are comparable to the fuel in a shipping
vessel; the products cannot move appropriately without them.
#6(c) Discuss responsibilities of both Buyer and Seller under any 5(five)Incoterms. 10
Answer:
7. Discuss about Shari’ah Compliant Products uses by Islamic Banks for Pre-shipment and Post-shipment
Finance under Export. 20
Answer:
Export finance can be classified into two categories-
R Pre-shipment finance
R Post shipment finance
Different Islamic modes are there for financing export at two different stages as mentioned above.
Pre-shipment Finance
Pre-shipment finance as the name suggest, given to finance the activities of an exporter prior to the
actual shipment of the goods for export. The purpose of such finance to meet Working Capital needs
starting from the point of purchasing raw materials to transportation of goods to foreign country. Pre-
shipment finance is given for the following purposes.
1) Finance for local procurement of goods.
2) Procuring and processing of goods.
3) Packing and transportation of goods.
4) Payment of insurance premium
5) Payment of utility bill
6) Payment of wages and salary
7) Freight charge.
Pre-shipment finance can be made under the following Islamic Modes as follows:
Pre shipment finance:
1) Back to bank lc
2) Bai Murabaha TR
3) Bai Salam
4) Musharaka
Post-shipment Finance
1) Bai as sarf (FDB)
2) Musharaka Documentary bills Inland
3) Quard against substitute cash assistance

8. Distinguish between the concept of any 5 (five) of the following: 5×4=20

a)Short Position and Long Position
b)Sight Payment and Deferred Payment
c)Spot Rate and Forward Rate
d)Independent Floating and Managed Floating
e)Bill of Lading and Charter Party Bill of Lading
 f)Nostro Account and Vostro Account
g)Suppliers Credit and Buyers Credit
h)Documents against Payment (DP) and Documents against Acceptance (DA)

Diploma in Islamic Banking Examination, October 2019

1. a) What do you mean by UPAS L/C? Briefly narrate the rules and procedures of opening UPAS L/C
and settlement thereof.
b) Define EDF and MFCI. What are the procedures for disbursement and realization/settlement of EDF
& MFCI?

2. a) Explain the advantages of comparative cost advantage theory over absolute cost advantage theory of
international trade.
b)Name the international economic transactions which are included in the current A/C and financial
A/C of BOP of a country.
c)Distinguish between partial convertibility and full convertibility of currency. What is the overall
status of currency convertibility at this moment in Bangladesh?

3. a) State the role of banks in international trade.

b)Discuss the following International Trade settlement methods, its advantages and disadvantages for
importers and exporters:
i)Payment in advance.
ii)Open Account.
iii)Documentary Collection.
iv)Documentary Credit.

4. a) State the purposes of “Transport Documents” in a documentary credit operation. State the
information which must be contained in a “Bill of Lading”.
b)How do you determine the “Date of Shipment” in case of various transport documents in accordance
with UCP-600.
c)Indicate the title of contract of carriage applicable for various transport documents.
d)State the reasons for which the “Date of issuance of transport document” is important.

5. a) Explain following terms in light of UCP-600

i)Negotiation.
ii)Honor.
iii)Complying presentation.
 iv)Nominated bank.
v)Clean transport document.
vi)Transferring bank.
vii)Blank back bill of lading.
viii)Multimodal transport.
c)Explain the following “Incoterms” indicating the responsibilities of exporter and importer in relation
to cost and risk:
i) DDP ii) CPT iii) FCA iv) CFR.

6. Distinguish between the following pairs of concepts: 5x4=20

a)Nostro A/C Vs Vostro A/C.
b)Bill of Lading Vs Bill of Entry.
c)Cash L/C Vs Back to Back L/C.
d)Deferred Payment Vs Acceptance.
e)Short Position Vs Long Position.

7. a) What is SWAP? 3
b) Discuss the Direct Quotation and Indirect Quotation with example. 4
c)A customer intends to sell an export documents for USD10,000 at sight basis. Calculate applicable
rate for purchasing the above documents under Bai-as- 13 sarf and total value to be paid the customer
under the data:
i) Spot Rate USD/BDT : 83.80-84.80
ii) Transit period: 21 days (1 Year 360 days)
iii) Collection charge : 0.20 %
iv) Bank profit :@6%PA
v) Postage charge : Tk.0.15 per USD
vi) Foreign correspondent charge: Tk.0.10 per USD

8. Write short notes on any 5 (Five) of the following: 5x4=20

a) SWIFT
b) Financial engineering
c) Future market
d) ACU
e) Factoring
f) Agency arrangements
g)Trade based money laundering
h) Suppliers credit