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Unit – 7 : Factoring and Forfaiting
1. Factoring is a service that is connected with the financing and collection of account receivables in domestic and international trade.
2. Forfaiting is a means of finance (credit) an exporter of goods avails from an intermediary called the forfaiter against the export receivables but without the obligation to repay the credit. It is used in international trade.
3. The items in the books of a bank which are not mentioned in the balance sheet, is known as off-balance sheet items. These are not assets or liabilities but may get converted into assets/liabilities upon happening of certain events. That’s why off balance sheet items are aka contingent liabilities.
4. Bank Guarantee is a contract of Guarantee means a contract to perform the promise or discharge the liability of a third person in case of his default.
5. There are 3 persons in case of a Bank Guarantee - the guarantor/surety, Principal debtor, and the creditor/beneficiary.
6. Bank Guarantee is a contingent liability.
7. A Letter of Credit is an undertaking given by the buyer’s bank on behalf of the buyer to the seller, stipulating that if specified documents are presented within a stipulated date, the bank establishing the credit will pay the amount of the bill drawn in terms of such Letter of Credit.
8. There are 4 persons in case of a Letter of Credit – buyer, opening bank/branch, seller, and negotiating bank/branch.
9. A forward exchange contract is a firm contract between the bank and its customers for the purchase/sale of a specified quantity of a stated foreign currency at a predetermined rate. On the due date when the contract is executed, the transaction will be at the contracted rate of exchange instead of the rate then prevailing, thus it is method of protecting oneself against exchange rate fluctuations.
10. FRA (Forward Rate Agreement) and IRS (Interest Rate Swap) are such instruments that can provide effective hedge against interest rate risks.
11. An FRA is a financial contract between 2 parties to exchange interest payments for a notional principal amount on the settlement date for a specified period from start date to maturity date.
12. An IRS is a financial contract between two parties exchanging or swapping a stream of interest payments for a notional principal amount on multiple occasions during a specified period. Such contracts involve exchange of fixed to floating or floating to floating rate of interest.
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