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MGT604 - Management of Financial Institutions - Lecture Handout 30

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Letter of Credit and International Trade

A letter of credit is a document issued mostly by a financial institution which usually provides an irrevocable payment undertaking (it can also be revocable, confirmed, unconfirmed, transferable or others e.g. back to back: revolving but is most commonly irrevocable/confirmed) to a beneficiary against complying documents as stated in the Letter of Credit. Letter of Credit is abbreviated as an LC or L/C, and often is referred to as a documentary credit, abbreviated as DC or D/C, documentary letter of credit, or simply as credit (as in the UCP 500 and UCP 600). Once the beneficiary or a presenting bank acting on its behalf, makes a presentation to the issuing bank or confirming bank, if any, within the expiry date of the LC, comprising documents complying with the terms and conditions of the LC, the applicable UCP and international standard banking practice, the issuing bank or confirming bank, if any, is obliged to honor irrespective of any instructions from the applicant to the contrary. In other words, the obligation to honor (usually payment) is shifted from the applicant to the issuing bank or confirming bank, if any. Non-banks can also issue letters of credit however parties must balance potential risks.

The LC can also be the source of payment for a transaction, meaning that an exporter will get paid by redeeming the letter of credit. Letters of credit are used nowadays primarily in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another. They are also used in the land development
process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Since nowadays almost all letters of credit are irrevocable, (i.e.
cannot be amended or cancelled without prior agreement of the beneficiary, the issuing bank, and the confirming bank, if any). However, the applicant is not a party to the letter of credit. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheque. Typically, the documents a beneficiary has to present in order to avail him of the credit are commercial invoice, bill of lading, insurance documents. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped.

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MGT613 - Production / Operations Management - Lecture Handout 28

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Learning Objectives

Acceptance sampling is an important form of inspection applied to lots or batches of items before or after a process, to judge conformance with predetermined standards. Similarly Sampling plans are the plans that specify lot size, sample size, number of samples, and acceptance/rejection criteria

  • Single-sampling
  • Double-sampling
  • Multiple-sampling

Single Sampling Characteristics

  • One random is drawn from each lot.
  • Every item in the sample is examined
  • Each item after examination is classified good or defective.
  • If the sample contains more than a specified number of defectives say c, then that lot is rejected.

Double Sampling Plan Characteristics

  • Takes care of limitation of Single Sampling Plan by taking another sample if results of the initial sample are inconclusive.
  • If results from second sample also indicate poor quality than the lot is rejected or otherwise decision reached on the basis of both samples.
  • A double sampling plan specifies the lot size, the size of the initial sample, accept/reject criteria for the initial sample, the size of the second sample and a single acceptance number.
  • With double sampling plan, 2 values are specified for number of defective items, a lower level c1 and an upper level c2. E.g. if we have c1 equal to 2 and c2 to 7, if number of defects is smaller than c1 than sampling is terminated and lot is accepted.
  • If defects are greater than c2, than lot is rejected.
  • If it’s between c1 and c2 then second sample is selected and compared to a third value c3 which can be 8 and if the cumulative defects from 1 and 2 does not exceeds c3, the lot is accepted.

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