1. BetaInc, opens a $500,000 time letter of credit with its bank X Bank, in favor of the beneficiary in the United States, Mex Inc. The time letter of credit calls for the draft to be drawn on Bank of America at 90 days after the bill of lading date. Since the draft is drawn on Bank of America, they are taking the credit risk of X Bank.
The goods are shipped on April 14, Beta present documents required under the letter of credit to B of A on April 20, accompanied by a 90-day draft maturing on July 13.
Commission is 1.5% p.a. that would be charged by B of A.
6.4% acceptance discount rate
Mex's line of credit borrowing rate is 9.5% (fyi)
Once the banker's acceptance has been created, the exporter has two choices: What are they? and please calculate
2. MV Inc. is a U.S. manufacturer of heavy construction equipment used in the construction of deep water ports and heavy lift capacity airports. MV is headquartered in LA, CA., and has just received an order from a Pakistani Construction Company not known to you or to MV. The order is for two of your largest earth movers with the total sale price of 30.0 million euros. The Pakistani company requires MV to ship upon completion of manufacture and will pay the e30.0 million to you six months from shipment.
Global Financing (a Commercial Bank of which you are President and Chief Lender) is the international financier hired to put this financial transaction together and make it happen, (so don't make this a career limiting opportunity)!
Cost of funds is 4.75% (LIBOR)
Confirmation fees are 65 basis points
Negotiation fees are 12 basis points
Discount Commission is 30 basis points
Spot euro is $1.4950
90 day euro is $1.4975
180 day euro is $1.5000
Banker's Acceptance rates are 4.96%
Issues to consider:
The Pakistani's cannot pay for 180 days from shipment
MV wants it's money as soon as shipment is made
What are the many different ways you can make money from this transaction without taking any undue risk
How would you cover yourself for Pakistani risk
What other risks do you have (financial and otherwise), explain how to mitigate
Is the euro and the dollar at equilibrium? prove that it is or isn't
How much would you make on the total transaction in dollar and yield terms
Are there any possible investment instruments that can be created out of this transaction, is this also a revenue opportunity?, If so how much.
Assume no ancillary or incidental fees
How would you eliminate the foreign exchange risk, is there any? when?how?, explain and calculate All computations are in U.S. dollars ( you're in the U.S. remember!)
What international instrument can be used to ensure performance of both parties? Describe how it works and what parties are involved in this deal
This question encompasses all the major issues we discussed during the semester, please ensure you consider all risk and financing issues in your answer.