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    Question

    The Credit guarantees are on risk sharing basis, which

    implies that
    A The buyer and seller share the risk of default of any one of them. Correct Answer Incorrect Answer
    B The buyer shares the defaulted amount with the insurance company. Correct Answer Incorrect Answer
    C The seller shares the risk with the financier. Correct Answer Incorrect Answer
    D The financer shares the risk with the insurance company. Correct Answer Incorrect Answer
    E None of these Correct Answer Incorrect Answer

    Solution

      A credit guarantee is a form of insurance that helps to protect the interests of a seller from the chance of non-payment by a buyer. This type of coverage is often utilized when goods are imported, affording the exporter a degree of protection that would be difficult to achieve  otherwise.  In  some  cases,  this  type  of  guarantee  is  extended  through  a governmental organization. At other times, the credit guarantee is made available through banks that manage import and export transactions.  The exact structure of a credit guarantee depends on the governmental regulations that govern the transaction. In a situation where both the buyer and the seller are located in the same nation, it is not unusual for this type of coverage to be issued in what is known as a letter of guarantee. This is simply a legal document that affirms that if the buyer fails to tender the agreed-upon compensation for a purchase, that the insurer will honour the debt. A letter of guarantee may be in the form of a personal guarantee provided by an interested third party, or by a financial entity that has extended a line of credit to the buyer.

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