Roll No…………

Plot No. 2, Knowledge Park-III, Greater Noida (U.P.) –201306

POST GRADUATE DIPLOMA IN MANAGEMENT (2019-21)

ASSIGNMENT (TERM -IV)
Subject Name: EXIM VAC
Max Marks: 10

Q1. With the help of diagram, explain the Mechanism of Letter of Credit. (5 Marks)

Q2 Discuss the role and responsibilities of seller and buyer in INCO terms 2020? (5 Marks)

ANSWER-1

Letter of credit is an assurance given by the buyer’s bank to remit the amount to the seller through
seller’s bank on maturity, as per the terms and conditions of document based on the contractual
agreement between buyer and seller. Now in simple words, If LC opened on your name as beneficiary,
you will receive amount though the buyer’s bank (opening bank) on the agreed time. All Letters of
Credit for export import trade is handled under the guidelines of Uniform Customs and Practice of
Documentary Credit of International Chamber of Commerce (UCP 600)

Step 1 The buyer agrees to purchase goods from the seller. This agreement may be a purchase
order, an accepted pro-forma invoice, a formal contract, or an informal exchange of messages.
Agreement is made as to goods being purchased, how and when they are to be shipped and insured,
and how and when payment is to be effected. In this case, the agreement is to use a letter of credit
as the mechanism of payment.
Step 2 The buyer applies to his bank for a letter of credit, by signing the bank's letter of credit
application/agreement form.

Step 3 After approving the application, the issuing bank issues the actual letter of credit instrument
and sends it to the seller (beneficiary).

Step 4 Having received the issuing bank's assurance of payment, the seller ships the goods to the
buyer.

Step 5 The seller prepares the documents called for in the letter of credit and presents them to the
issuing bank.

Step 6 The issuing bank examines the documents. If it determines that the documents comply with
the letter of credit, the issuing bank pays the seller.

Steps 7 & 8 The issuing bank obtains payment from the applicant (buyer) in accordance with the
terms of the applicant’s letter of credit agreement and forwards the documents to the applicant.

Step 9 The applicant uses the documents to pick up the merchandise from the carrier, completing
the letter of credit cycle.

ANSWER-2

FOB Free On Board

The seller bears the costs until the goods are loaded onto the ship, at which point the risks are
transferred as well as responsibility for export clearance and costs at origin. The seller also arranges
the transport although the buyer bears the cost.
The buyer is responsible for the cost of freight, unloading, import clearance and delivery at
destination as well as insurance should they take it out. The transfer of risk occurs when the goods
are on board.

CFR Cost and Freight

The seller is responsible for all costs until the goods arrive at the destination port, including export
clearance, costs at origin, freight and usually unloading costs.
The buyer is responsible for import procedures and transport to destination. They also bear the risks
from the moment the goods are on board, hence, although it is not mandatory the buyer usually
takes out insurance.

CPT Carriage Paid To

The seller bears the costs until the goods are delivered to an agreed place, i.e., they are responsible
for all of the costs at origin, export clearance, the main transport and usually, costs at destination.
The buyer is responsible for import procedures and insurance if taken out as it is not mandatory.
The risk is transferred to the buyer once the goods are loaded onto the first means of transport
arranged by the seller.
DPU Delivered at place Unloaded

The seller bears the costs and risks arising at origin, packing, loading, export clearance, freight,
unloading at destination and delivery at the agreed point.
The buyer is responsible for import clearance procedures.