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ANSWERS!

Part B.

Belgium


In one month’s time the importer will make the following payments:


  • To the supplier 8,272.5 . 200 at 63.85 = 25,912.29
  • To the shipping line, freight costs 200 . 5.5 = 1,100.00
    27,012.29
  • Therefore CFR value to the insurance company is: 27,012 . 110/100 . 1/100 = 297.14
  • Total cash paid one month after shipment: 27,309.43
  • Plus: Two month’s interest at 10% for comparison purposes: 27,309.43 . 0.1 . 2/12 = 455.16
  • Total 27,764.59



    Spain


    On the date of shipment the importer will arrange a two month forward contract for the bank to sell ESB 3,975,000 at 147.65 = 26,921.77


    In two month’s time the following payments will be made:


  • To the supplier 26,921.77
  • To the bank for collection charge 67.30
  • To the insurance company 26,921.77 . 100/100 . 1/100 = 296.13
  • Total paid two month’s after shipment 27,285.52
  • Plus: one month’s interest for comparison purposes: 27,285.52 . 10/100 . 1/12 = 227.38
  • Total 27,512.90


    France


    In three month’s time the following payments will be made:


  • To the supplier FRF 1272.75 . 200 at 9.28 = 27,429.96


  • Plus: Documentary credits charges to bank at 0.75% = 205.72


  • Total 27,635.68



    The student should show these calculations and then explain it is the precise incoterms that apply to each trade which does not allow easy comparison or evaluation of the quotes even if the prices had been given in a single currency.



    Part C & D


    Both questions require short, precise and clear answers. There is very little scope for debate because the procedures are subject to international banking rules (Uniform Rules on Collections, Uniform Custom and Practice for Documentary Credits). The questions require careful thought to identify the correct answer. Students often tell me they spend several hours trying to accomplish the task, often unsuccessfully, as some of the scripts are likely to indicate.


    Question C requires students to recognise that the adoption of standard documentary credits is not a solution because, as the question states, the customers are finding difficulty in obtaining sufficient credit facilities from you to cover the total at any one time. The student should recognise the potential risk to the bank if normal documentary credits are allowed to cover the regular trade. The solution is for the bank to offer standby credits to back up trade where the documents are controlled by the rules applying to documentary collections. In this way the 60 day trade credit can be maintained and the suppliers have the knowledge that they have the instrument to effect payment if a situation similar to that described in the question (on a previous occasion the goods were found to be severely damaged when they arrived in the UK, and your customers refused to pay for them until replacements were received) arises again. Good students may point out that the appropriate way to gain recompense for the damaged goods is through the commercial insurance but not through the security of the documentary credit. Some students may suggest a revolving credit and some marks will be awarded for this. Good students will explain the banking liabilities and the customers responsibilities associated with both types of documentary credit.


    Question D requires a precise knowledge of the procedures which control documents and in particular in whose hands they belong. The question requires the recognition that the holder of the bill of lading has title to the goods and when goods are subject to D/A terms under a documentary credit the seller is prepared to lose control of the goods before payment is effected. The question tells the student upon presentation the documents relating to the first two transactions, the first set of documents contains one bill of exchange drawn at 60 days sight D/A. The student should recognise that the requirement of the bank is compromised by the terms of the documentary credit. The student should recognise that the collection should be amended to D/P terms. The second part of the question also requires a thorough understanding of differences between bills of lading and way bills. In the context of the question the student is told the second set of documents includes a sight bill of exchange marked D/P and is accompanied by a liner way bill. The student should recognise that these documents together with these instructions compromise the bank’s agreement to grant finance to the company, providing that the bills of exchange, together with the appropriate documents, are collected through your office and that control of the goods is retained by you until payment is affected. The student should suggest that a bill of lading should replace the liner way bill. Discussion of the differences is expected.