An importer plans to purchase goods from an exporter. The
exporter will not grant credit, so the importer turns to its bank.
They execute an acceptance agreement, under which the bank will
accept drafts from the importer. In this manner, the bank extends
credit to the importer, who agrees to pay the bank the face value
of all drafts prior to their maturity. The importer draws a time
draft, listing itself as the payee. The bank accepts the draft and
discounts it-paying the importer the discounted value of the draft.
The importer uses the proceeds to pay the exporter. The bank can
then hold the bankers acceptance in its own portfolio or it can
sell it at discounted value in the money market. In an alternative
arrangement, the exporter may agree to accept a letter of credit
from the importer's bank. This specifies that the bank will accept
time drafts from the exporter if the exporter presents suitable
documentation that the goods were delivered. Under this
arrangement, the exporter is the drawer and payee of the draft.
Typically, the bank will not work directly with the exporter but
with the exporter's correspondent bank. The exporter may realize
proceeds from the bankers acceptance in several ways. The bank may
discount it for the exporter; the exporter may hold the acceptance
to maturity; or it may sell the acceptance to another party