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Which of the following methods of payment represents the least level of risk for exporters? (A) Bill of exchange (B) Letter of credit (C) Open account (D) Pre-payment - HSC - SSCE Business Studies - Question 13 - 2001 - Paper 1
Question 13
Which of the following methods of payment represents the least level of risk for exporters? (A) Bill of exchange (B) Letter of credit (C) Open account (D) Pre-payme... show full transcript
Worked Solution & Example Answer:Which of the following methods of payment represents the least level of risk for exporters? (A) Bill of exchange (B) Letter of credit (C) Open account (D) Pre-payment - HSC - SSCE Business Studies - Question 13 - 2001 - Paper 1
Step 1
Identify the Payment Methods
Answer
The options provided are:
- Bill of exchange: A written order binding one party to pay a fixed sum of money to another party at a future date.
- Letter of credit: A financial document issued by a bank on behalf of a buyer, guaranteeing payment to the seller upon presenting specified documents.
- Open account: A payment term where goods are shipped and delivered before payment is due, usually placing more risk on the exporter.
- Pre-payment: A method where the buyer pays for the goods before they are shipped.
Step 2
Analyze the Risk Levels
Answer
In terms of risk:
- Bill of exchange carries some risk as it is dependent on the buyer's willingness and ability to pay at the agreed future date.
- Letter of credit significantly reduces risk as it assures payment to the exporter as long as they meet the documented terms. This is a highly secure method for exporters.
- Open account is quite risky as the exporter ships goods without assurance of payment, making it favorable to buyers.
- Pre-payment represents the least risk for exporters as they receive payment before the goods are delivered, ensuring that they will not incur losses.
Step 3