Letters of Credit: Variations

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Letters of Credit: Variations

The flexibility of the letter of credit is one of its great strengths. The basic sight letter of credit can be modified in a number of ways to fit the needs of the customer.

Letters of credit may be either revocable or irrevocable, but the latter is used more frequently. The revocable letter of credit carries a risk to the seller. It may be amended or cancelled at any moment without prior notice to the beneficiary. The irrevocable letter of credit can neither be amended nor cancelled without agreement of all parties.

Letters of credit may call for drafts payable after a specified number of days after sight. The documents are prepared by the shipper exactly as before, except that now he draws the usance draft payable, for example, at ninety days after sight. This arrangement has been previously agreed at the buyer’s request and is indicated in the underlying contract and letter of credit application. The documents are negotiated, but instead of paying the seller, the bank accepts the draft – thus making it a banker’s acceptance – and returns it to the seller. He may hold it until maturity and then present it to the bank to receive the full amount; or he may sell it in the current market for banker’s acceptances, receiving a discounted amount.

Such usance letters of credit enable the buyer receive financing. He obtains the documents immediately upon negotiation from the bank by signing a trust receipt. He does not have to pay for the merchandise until the specified time has elapsed.

In some instances, the seller may be forced to meet competition by offering credit terms for as long as several years. This is particularly true for large capital goods equipment, such as electric generators. With a deferred letter of credit, the documents are forwarded to the importer’s bank, while a sight draft is presented at a later date. This gives the importer the opportunity to clear the goods prior to paying for them. In this case the seller is financing the buyer, but he still knows that the opening bank will pay upon future presentation of the draft. Normally, deferment would not exceed a period of one year.

The red clause letter of credit derives its name from the old custom of writing this particular clause in red ink to make it more noticeable. It is often used when the letter of credit is opened by the importer in favour of his agent. For example a United States importer may have an agent in Philippines who will purchase copra from various farmers and then ship it. The agent needs cash to purchase the crop. The importer requests in his application that the letter of credit contains a clause (the red clause) permitting the agent to draw funds from a Philippine bank that are guaranteed by the importer through his bank. The agent can take the letter of credit to the Philippine bank and draw funds by signing a receipt, which the local bank forwards to the United States bank for reimbursement. When the agent has shipped the copra, he presents the required documents to the Philippine bank for a normal drawing by way of drafts from which the amount of the advance is deducted. The advantage of this red clause, of course, is that it is a simple device enabling an agent to draw the necessary funds in advance of the shipment.

A letter of credit may be utilized only by the named beneficiary. There are instances, however, when the importer instead wishes to make the letter of credit transferable to another person or company to be designated by the original beneficiary. The importer instructs the opening bank to prepare a transferable letter of credit addressed to the beneficiary “and/or transferee”; the beneficiary may then negotiate with a supplier and then notify the bank that he has transferred it to yet another specified party. Then the bank accepts drafts, invoices, and other documents drawn by, or in the name of the new beneficiary. If the opener wishes to permit the beneficiary to transfer the letter of credit to more than one party, the opening bank issues the letter of credit to the named beneficiary “and/or transferee’s”. Each can utilize only a portion of the letter of credit, so that the total drawings do not exceed the maximum amount. This kind of letter of credit also allows partial shipments.

The revolving letter of credit is used when a series of identical shipments is made over a fixed period of time, such as monthly. The opening bank might prefer to open a letter of credit for each shipment. However to avoid issuing a new letter of credit each month, the bank may include a proviso in the original letter of credit that permits the letter of credit to be reinstated once the opening bank notifies the beneficiary. When the bank has paid, and has been reimbursed by its customer, the importer, the revolving letter of credit is reinstated by the opening bank with a new shipping date.

The back-to-back letter of credit is considerably more complex. It is actually two letters of credit that are identical, except for the amounts. The first letter of credit is usually opened in favour of an agent, who then obtains a second letter of credit from his bank by depositing the first letter of credit. He also gives his bank advance invoices and a draft. When the beneficiary under the second letter of credit draws the specified amount, the second bank substitutes the invoices and draft in its possession. Leaving all the other documents exactly as they are, it draws on the first letter of credit to reimburse itself for the payment it has made. Any slight difference in the amounts reflects the agent’s fee. Such back-to-back letters of credit may be used to shield the identity of the ultimate buyer or to comply with regulations of foreign countries. Ultimately, this letters of credit permit an intermediary to utilize the credit standing of the principal for a specific transaction.

Occasionally, the bank is requested by a desirable customer to issue a traveler’s letter of credit, sometimes also called a circular letter of credit. This simply provides a traveler with access to large sums as he makes a trip. The only document required is a draft drawn by him. This kind of the letter of credit is in much less demand these days because most people prefer the convenience of traveler’s checks and credit cards.

The standby letter of credit is not used to cover a specific shipment. Instead, it is utilized in the event that a third party does not do something. For example, it may be used in a place of a bid bond or a performance bond, in a construction project, or perhaps to guarantee the repayment of a third party’s promissory note. A foreign subsidiary of a United States company may desire to borrow from a foreign bank. The foreign bank may require the United States parent company to guarantee that if the subsidiary does not pay its loan at maturity, the foreign bank can draw on a United States bank that has opened a standby letter of credit on behalf of the parent company. When establishing a standby letter of credit, the United States bank should not become involved in any dispute concerning performance or quality of workmanship. The standby letter of credit should be very simple and, in the above example, should require only a sight draft and a statement by the foreign bank that it was not paid.

Because of the many recent abuses in the handling of standby letters of credit, United State banks are now required to include the totals of standby letters of credit with other forms of customer debt in determining the bank’s legal lending limit to the customer.

All the letters of credit discussed so far are examples in which a United States bank opens a letter of credit on behalf of one of its local customers. These can be broadly described as import letters of credit.

Many foreign banks are not well known internationally. Because of this, a foreign bank usually sends its letters of credit through a United States bank – rather then directly to the beneficiary – and asks the United States bank to advise or confirm them. This results in advised letters of credit and confirmed letters of credit.

When the foreign bank asks the United States bank to advise their letter of credit, the United States bank verifies the authenticity of the signatures of the opening bank from its signature book and perhaps answers any questions about the bank that the exporter may have. This is, however, merely a courtesy to the correspondent bank, and it conveys no commitment on the part of the United States bank to pay drafts.

When a letter of credit is confirmed, all of the risks of the issuing bank are then borne by the confirming bank for a fee. If the foreign bank should go out of business, the confirming bank is still obligated to honour the drafts. However, because major international banks in the United States and elsewhere encourage international trade and are quite knowledgeable about the financial soundness of smaller banks, major banks are very willing to confirm letters of credit as part of their correspondent banking relationships.




I. Answer the questions.

1. What is one of great strengths of the letter of credit?

2. What modifications of the basic sight letter of credit can you name?

3. What does the red clause letter of credit derive its name from?

4. Who may a letter of credit be utilized by?

5. When is the revolving letter of credit used?

6. Why is the back-to-back letter of credit considered to be more complex?

7. What is the specifics of the standby letter of credit?

II. Translate the following sentences into Ukrainian. Put questions to any two of them.

1. The basic sight letter of credit can be modified in a number of ways to fit the needs of the customer.

2. With a deferred letter of credit, the documents are forwarded to the importer’s bank, while a sight draft is presented at a later date. This gives the importer the opportunity to clear the goods prior to paying for them.

3. The back-to-back letter of credit is actually two letters of credit that are identical, except for the amounts: the first letter of credit is usually opened in favour of an agent, who then obtains a second letter of credit from his bank by depositing the first letter of credit.

4. Because of the many recent abuses in the handling of standby letters of credit, United State banks are now required to include the totals of standby letters of credit with other forms of customer debt in determining the bank’s legal lending limit to the customer.

5. If the foreign bank should go out of business, the confirming bank is still obligated to honor the drafts.

III. Translate the following sentences into English.

1. Акредитив може бути відзивним чи безвідзивним, але останній використовується частіше.

2. Акредитив з червоною умовою отримав свою назву від давнього звичая писати цю особливу умову червоними чорнилами, щоб зробити її більш помітною.

3. Револьверний акредитив використовується тоді, коли протягом встановленого часового періоду виконується ряд ідентичних поставок.

4. Іноземний банк зазвичай відсилає свої акредитиви через банк США і просить останнього гарантувати чи підтвердити їх, оскільки багато іноземних банків не дуже відомі у світі.

5. Відтоді як акредитив підтверджено, всі ризики банку, який видав цей акредитив, несе банк, який надає підтвердження.

IV. Name the following definitions.

1. The letter of credit, which may be amended or cancelled at any moment without prior notice to the beneficiary.

2. The letter of credit, which can neither be amended nor cancelled without agreement of all parties.

3. With this type of letter of credit, the documents are forwarded to the importer’s bank, while a sight draft is presented at a later date.

4. Letter of credit addressed to the beneficiary

V. Define the following types of letters of credit:

- red clause letter of credit,

- revolving letter of credit,

- back-to-back letter of credit,

- circular letter of credit,

- standby letter of credit,

- advised letter of credit,

- confirmed letter of credit.

VI. Make and fill in the table listing types and main features of letters of credit mentioned in the text.

VII. Find in the text and translate all sentences with Infinitives; define functions of the Infinitives (a subject, attribute, object, adverbial modifier, part of a predicate).

VIII. Make sentences with the Complex Subject / Complex Object basing on the text.

IX. Sum up what the text says about different types of letters of credit.







Text 1


1. Translate the following words and word combinations:

individual, rational, efficient, management as a body, administration, to initiate actions, approach to, in response to, best suited, to perform a job, encourage cooperation, define objectives, human relations theory, partly accomplished objectives, to give primacy to, challenging work, to meet human needs.

2. How do you imagine the main representatives of basic schools of management i.e. people who created the history of management?


Practitioner – 1) професіонал, практик; 2) діяч; 1) профессионал, практик, 2) деятель

Rational – раціональний, розумний; рациональный, разумный

Apparent – явний, очевидний; явный, очевидный

Articulation – озвучування; озвучивание

Pattern – схема, структура, зразок, характер; схема, образец, характер

Motion study – дослідження рухів; исследование движений

Concrete – бетон; бетон

Brick – цеглина; кирпич

Control chart – схема управління; схема управления

Reward employees – нагороджувати службовців; награждать служащих

Lasting contribution – тривалий внесок; длительный вклад

Frustrated – розчарований, марний, даремний; разочарованный, тщетный

Output – продуктивність, виробка; продуктивность, выработка

Deemphasize – зменшувати; уменьшать

Evolve – еволюціонувати, розвиватися; эволюционировать, развиваться

Current stage – поточний етап; текущий, данный этап

Responsive – чутливий; чувствительный

Exercise control – здійснювати контроль; осуществлять контроль

Competent – компетентний, (діє)здатний; компетентный, (дее)способный

Concern – 1) інтерес; 2) турбота, піклування; 1) интерес, 2) забота

Recognition – визнання, усвідомлення; признание, осознание

Diverse – різноманітний; разнообразный

Decision-making – прийняття рішень; принятие решений

Basic Schools of Management

The term management is used in different meanings. It is possible to identify the following four: management as an administration, management as a science, management as a decision-making, management as an organ, a body.

Management is the individual or group of individuals responsible for studying, analyzing, formulating decisions, and initiating appropriate actions for the benefit of an organization. In administration, management is the functions of planning, coordinating, and directing the activities of an organization.

The oldest and perhaps most widely accepted school of management among practitioners has been called the Classical School of management thought. This is the approach to management thought that arose mainly from efforts between 1900 and 1940 to provide a rational and scientific basis for the management of organizations.

In response to the growth of large organizations in the late nineteenth century and during the early twentieth century, there was an intensified interest in management as a process and as a science. It was apparent to many that management could be made more effective and efficient. The primary contributions of the Classical school of management include the following:

1. Application of science to the practice of management.

2. Development of the basic management functions: planning, organizing, influencing, and controlling.

3. Articulation and application of specific principles of management.

But no one has had more influence on managers in the twentieth century than Frederic W.Taylor, an American engineer. He set a pattern for industrial work which many others have followed, and although his approach to management has been criticized, his ideas are still of practical importance.

Taylor founded the school of Scientific Management just before the 1914-1918 war. His philosophy can be summarized in the following four principles:

1. Develop and use the scientific method in the practice of management (find the “one best way” to perform work).

2. Use scientific approaches to select employees who are best suited to perform a given job.

3. Provide employees with scientific education, training, and development.

4. Encourage friendly interaction and cooperation between management and employees but with a separation of duties between managers and workers.

Taylor was supported in his efforts by Henry Gantt, Frank and Lillian Gilbreth, and Harrington Emerson. All of them became famous in their own rights. Frank and Lillian Gilbreth concentrated on motion study to develop more efficient ways to pour concrete, lay bricks, and perform many other repetitive tasks. Lillian became a professor at Purdue University and was considered the First Lady of Management.

Henry Gantt developed a control chart that is used to this day in production operations. Harrington Emerson set twelve principles of efficiency. Certain of them state that a manager should carefully define objectives, use the scientific method of analysis, develop and use standardized procedures, and reward employees for good work.

Taylor made a lasting contribution to management thinking. The weakness of his approach was that it focused on the system of work rather than on the worker. With this system the worker becomes a tool in the hands of management. Another criticism is that it leads to reducing the skills of workers. Because the tasks are simplified, workers become frustrated. For all these reasons, a reaction has set in against the ideas of Frederic W.Taylor. This reaction was the work of Elton Mayo and the Human Relations Movement.

There was a series of performance studies undertaken at the Chicago Hawthorne Plant of Western Electric between 1924 and 1933. These investigations showed the importance of the social system of an organization and became the foundation of human relations theory.

The basic conclusions reached as a result of the interviewing program of the experiments were that the psychological needs of individuals have a significant impact on group performance. The reasonable satisfaction of the needs and desires of employees will lead to greater output. Any management approach that ignores or deemphasizes the human element may result in only partly accomplished objectives.

Since these experiments, there has been an increased interest in and application of behavioral science in management. The human relations approach has evolved into Modern Behaviorism. The term “modern behaviorism” refers to the current stage of evolution of the behavioral school of management, which gives primacy to psychological considerations but treats fulfillment of emotional needs mainly as a means of achieving other, primarily economic goals.

Behavioral scientists have often criticized classical management theory and scientific management as not being responsive enough to the human needs. The behaviorists’ specific criticism includes the following: jobs have been overly specialized; people are underutilized; managers have exercised too much control and have prevented employees from making decisions they are competent to make; managers have shown too little concern about subordinates’ needs for recognition and self-fulfillment.

Modern behaviorists say employees of today desire diverse and challenging work. This desire has placed increased pressure on management to be responsive to change and to provide an environment designed to meet human needs.



I. Answer the questions.

1. What are the main ideas of the classical school of management?

2. Who made major contributions to management thinking?

3. Who was Taylor supported in his efforts by?

4. What were the principles of Taylor’s philosophy?

5. What were the disadvantages of Taylor’s approach to management?

6. How can you define the human relation movement?

7. What does the term “modern behaviorism” refer to?

8. Why have behavioral scientists often criticized classical management theory and scientific management?

9. What does behaviorists’ specific criticism include?

10. What has placed increased pressure on management today?

II. Translate into Ukrainian:

an intensified interest, primary contributions, to set a pattern, to found a school,scientific method, training, to encourage friendly interaction and cooperation, principles of efficiency, standardized procedures, behavioral science, psychological considerations, to be underutilized, to be overly specialized.

III. Translate into English in writing:

1. Емпірична школа (The Empirical School) стала новим етапом у розвитку уявлень про управління. В основі поглядів сторонників цієї школи було уявлення про те, що неможливо дати будь-які рекомендації щодо управління, якщо не була зібрана достатня кількість конкретних даних, що стосуються конкретної ситуації. Саме з цієї причини дана школа була названа емпіричною. Емпіризм– це особливий підхід до знань, згідно з яким особлива увага приділяється дослідним даним, які потім узагальнюються та пояснюються.

2. Школа соціальних системрозглядає організацію як складне утворення, що виникає в результаті взаємодії людей.Людина в цій складній системі соціальних зв’язків грає дуже важливу роль. При цьому будь-яка організація має свої цілі, які ніколи не дорівнюють цілям однієї особистості. Позиція школи соціальних систем полягає у твердженні, що потреби людини вступають у протиріччя з потребами організації.

IV. Choose proper definitions to the terms.


Terms Definitions
1)Classical management   2)Scientific management     3)Human relations movement 4)Behavioral school a) emerged following the Hawthorne studies, where human relationists believed that employee satisfaction is a key determinant of performance. b) popularized in the work of Frederic W.Taylor that includes approaches to increased efficiency, cost reductions, and maximum utilization of human and material resources. c) the first schools of management thought, including scientific management, functionalism, and bureaucracy. d) a modern school of management theory propounded by those who view management as a psychological process. Advocates of this school are particularly concerned with such topics as needs, drives, motivation, leadership, personality, behaviour, work groups, and the management of change.

V. Complete the following chart.


Person Noun Verb Adjective
manager management manage managerial or managing

VI. Replace the italicised adverbial clauses of time and cause by the appropriate form of the Participle.

1. When I had finally made up my mind I told my colleagues about my new plans.

2. When he had been dismissed he began to look round for a new job.

3. As I had never seen anything like that before I was eager to see the central office of the commercial enterprise.

4. When our manager spoke to the employees he always tried to make his meaning clear.

5. When manager had finally opened the safe after many unsuccessful attempts he found that most of the papers had gone.

VII. Sum up what the text says about basic schools of management.

Text 2


1. Translate the following words and word combinations:

external, internal, board of directors, to determine an organization’s success, to be likely to influence, to satisfy customers, to compete with competitors for customers, to identify present and potential customers, to discover customers’ preferences, to succeed in the marketplace, direct and indirect influence.

2. What do you think influences managers’ performance?



Indirect – посередній, непрямий, побічний; посредственный, непрямой, побочный

Task environment – робоче середовище; рабочая среда

Layer – рівень; уровень

Surrounding – середовище, оточення; среда, окружение

Dimension – аспект; аспект

Regulator – інспектор, регулятор; инспектор, регулятор

Labour – робітники, робоча сила; профспілка; рабочие, рабочая сила, профсоюз

Strategic ally – стратегічний союзник; стратегический союзник

Gradual – поступовий, послідовний; постепенный, поступательный, последовательный

Failure – невдача, провал; неудача, провал, крах

Supplier – постачальник; поставщик

Move – дія; действие

Countermove – протидія; противодействие

Nullify – анулювати, скасовувати; анулировать, отменять

Raw material – сировина; сырье

Drive – енергія, напористість, внутрішній поштовх; энергия, напористость, внутренний толчок

To have implications – бути причетним до; быть причастным к

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