Module: | MODULE A: INTERNATIONAL BANKING
Q105: Consider the following statements regarding Revolving Letters of Credit:
Statement 1: A Revolving Letter of Credit automatically reinstates its original financial amount after a drawing, without requiring a formal amendment from the issuing bank.
Statement 2: In a cumulative revolving credit based on time, if a designated time period passes without a drawing, the unused financial amount is permanently lost and cannot be carried forward.
Statement 3: A revolving credit can be structured to revolve either by a specific time period or by a specific monetary value.
Statement 2: In a cumulative revolving credit based on time, if a designated time period passes without a drawing, the unused financial amount is permanently lost and cannot be carried forward.
Statement 3: A revolving credit can be structured to revolve either by a specific time period or by a specific monetary value.
✅ Correct Answer: B
The correct option is B. Only 1 and 3 are correct.
Concept Definition: A Revolving Letter of Credit is a single financial instrument that covers multiple shipments over a long period.
Instead of the buyer opening a new Letter of Credit for every single delivery, the original credit amount automatically replenishes itself after it is used.
Structural Breakdown: The revolving mechanism can be based on time, such as 100000 Dollars available every month for a year, or based on value, where the amount reinstates immediately after the previous shipment is paid for, regardless of the calendar month.
Historical/Related Context: This instrument significantly reduces administrative burdens and banking fees for regular, ongoing commercial supply contracts between a buyer and a trusted seller.
Time based revolving credits can be either cumulative or non cumulative.
Causal Reasoning: Statement 1 correctly describes the core automatic reinstatement mechanism, which bypasses the standard, time consuming amendment process.
Statement 3 correctly identifies the two primary methods of revolution, which are time and value.
Statement 2 is incorrect.
In a cumulative revolving credit, if a time period is missed, the unused amount rolls over and is added to the next period.
It is only in a non cumulative revolving credit that the unused amount is permanently lost.
Concept Definition: A Revolving Letter of Credit is a single financial instrument that covers multiple shipments over a long period.
Instead of the buyer opening a new Letter of Credit for every single delivery, the original credit amount automatically replenishes itself after it is used.
Structural Breakdown: The revolving mechanism can be based on time, such as 100000 Dollars available every month for a year, or based on value, where the amount reinstates immediately after the previous shipment is paid for, regardless of the calendar month.
Historical/Related Context: This instrument significantly reduces administrative burdens and banking fees for regular, ongoing commercial supply contracts between a buyer and a trusted seller.
Time based revolving credits can be either cumulative or non cumulative.
Causal Reasoning: Statement 1 correctly describes the core automatic reinstatement mechanism, which bypasses the standard, time consuming amendment process.
Statement 3 correctly identifies the two primary methods of revolution, which are time and value.
Statement 2 is incorrect.
In a cumulative revolving credit, if a time period is missed, the unused amount rolls over and is added to the next period.
It is only in a non cumulative revolving credit that the unused amount is permanently lost.