Banker’s Acceptances are closely affiliated with international transac

Banker’s Acceptances are closely affiliated with international transaction rather than domestic ones. Describe and provide an example of how this market works and why there is a need for the instrument.

What will be an ideal response?

ANSWER

When firms engage in international trade they are often unfamiliar with the customer and the financial system. Thus, to assure timely and secure transactions, the importing and exporting parties use their banks to act as intermediaries to facilitate the transaction.. The exporter’s bank sends conditions of the contract to the importer’s bank. When the goods have been shipped, the importer can authorize their bank to agree to pay for the goods as per terms of the contract. The exporter can receive immediate payment. However, both banks receive a fee for acting as reliable go-betweens for the transaction. Further, the actual document is a tradeable financial instrument.