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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 methods of payment and their associated risk levels
Answer
There are four methods of payment to consider:
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Bill of exchange: Involves a document that ensures payment will be made in the future, carrying some risk for exporters as it depends on the buyer to honor the bill.
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Letter of credit: A secure payment method issued by a bank, it guarantees payment upon compliance with the terms set within the letter, significantly reducing risk for the exporter.
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Open account: Exporters ship goods and provide documents to the buyer with an agreement for payment at a later date. This method presents a high risk since payment is anticipated after shipment.
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Pre-payment: The buyer pays in advance, which eliminates risk for the exporter, as they receive payment before goods are shipped.
Step 2
Determine which method represents the least risk for exporters
Answer
Among these options, the Letter of credit represents the least risk for exporters, as it provides a guarantee of payment backed by a financial institution. However, given the options listed, the answer for the least risk would be Pre-payment (D), where exporters receive payment upfront before shipment.