Make your own free website on Tripod.com

International Finance and Trade

Assignment to be handed in at the end of the semester



Part A. (40% marks)


Explain what is meant by comparative advantage. Compare the UK and Spain and assess two economic activities/industries in each country where there is a clear comparative advantage. Critically assess the extent to which the pursuit of free trade enriches nations and their citizens. 1000 words max.



Part B. (30% marks)


Held and Sons are steel stockholders in Newcastle whose account is operated on an overdraft basis. Hitherto they have obtained their stocks in the UK but are now forced to look elsewhere for supplies of a specialised steel. They have received the following quotations:


Country Price per ton Terms for payment


Belgium BEF 8,272.5 FOB Antwerp. Open a/c, settlement one month after shipment


Spain ESB 19,875 CFR London Documentary collection, payment due two months after shipment (collection charges for buyer)


France FRF 1,272.75 CIF London Irrevocable documentary credit, payment three months after shipment


Using the additional information below, by calculating the cost of 200 tons of steel, which of quotations a, b and c would be cheapest.


Freight charges from any Western European Port ₤5.50 per ton


Insurance (to be effected on 110% of CRF value or equivalent) 1% payable in sterling


Collection charges (total for both banks) 0.25%


Documentary Credit charges (including acceptance commision) 0.75%


Overdraft interest (one month = 1/12 year) 10%


Ignore all other possible charges.


It is assumed that your customers would have covered any exchange rate risk on day of shipment. In accordance with rates quoted below, and that all payments and charges relative to any particular quotation are debited on the same day.


  • BEF 63.85
  • ESB 147.65
  • FRF 9.28


    Elucidate and demonstrate why, if the UK had adopted the Euro, these quotes would not be easily transparent and hence would prevent Held & Sons from making a simple evaluation of each transaction.



    Part C. (15% marks)


    Assume you are the bank manager in this question


    Facings Limited import high quality granites, marbles and facing stone from the continent of Europe. They have, in the past, paid for these goods by means of documentary collections routed through your bank on 60 days D/A terms. On a previous occasion the goods were found to be severely damaged when they arrived in the UK, and Facings Ltd. refused to pay for them until replacements were received. The suppliers now insist that the customers establish irrevocable letters of credit calling for drafts at 60 days sight on your bank. Facings Ltd. are finding difficulty in obtaining sufficient credit facilities from you to cover the total at any one time. What is the solution to the problem given that their suppliers still insist that irrevocable letters of credit must be established in their favour.


    Required:

  • a solution to the problem which will provide the suppliers with a method of payment which is secure and yet at the same time permits your customers to maintain a high level of imports and give them 60 days credit
  • how the payment instrument you describe would operate so as to protect Facings Ltd. as well as their suppliers
  • analyse the likely consequences for Facings Ltd. should they maintain their position of non payment of the bill of exchange


    300 words max.


    Part D. (15% marks)


    Assume you are the bank manager in this question.


    Your customers are Scotch Mist Ltd. who bottle and sell pure spring water to many overseas customers in the drinks industry. Mr MacPeat, Financial Director, calls to see you to discuss renewal of the company’s banking facilities and asks if you are willing to grant the company finance against the security of export bills of exchange, which until now have been forwarded direct to the overseas buyers.


    Following your discussion you agree 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 if affected.


    Upon presentation of 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 and the second set of documents includes a sight bill of exchange marked D/P and is accompanied by a liner way bill.


  • From the bank’s point of view, what are the problems associated with the two methods of payment described in the last paragraph?
  • What is the difference, if any, between a standard liner bill of lading and a liner way bill?
  • Analyse and recommend what action the bank should take to regularise the circumstances.


    300 words max.


    Check out the Answers!