SCHOOL OF INTERNATIONAL BUSINESS
ASSIGNMENT COVER SHEET
STUDENT DETAILS
Student name: Nguyen Huu Minh Tuan Student ID number: 22049896
UNIT AND TUTORIAL DETAILS
Unit name: International Finance Unit number: IF-T322WSB-1
Tutorial group: Tutorial day and time: 3:00 a.m Wesnesday
Lecturer or Tutor name: Vũ Việt Quảng
ASSIGNMENT DETAILS
Title: Presentation Submission for Session 11
Length: 1964 words Due date: 26/11/2022 Date submitted: 26s/11/2022
Home campus (where you are enrolled): Viet Nam
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prior permission from the Lecturer / Tutor / Unit Coordinator for this unit.
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concerned.
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Student’s
signature: Tuan
Note: An examiner or lecturer/tutor has the right to not mark this assignment if the above
declaration has not been signed.
ARO 00380 08/15
CHAPTER 16. INTERNATIONAL TRADE FINANCE
QUESTION 1
Assume Nikken Microsystems has sold Internet servers to Telecom España for €700,000.
Payment is due in three months and will be made with a trade acceptance from Telecom
España Acceptance. The acceptance fee is 1.0% per annum of the face amount of the note.
This acceptance will be sold at a 4% per annum discount. What is the annualized percentage
all-in cost in euros of this method of trade financing?
Summary
Entities
Method of Payment Trade acceptance
Exporter (receiver) Nikken Microsystem
Issuer Telecom España
Action
1. Nikken Microsystem sold to Telecom España
2. Telecom España paid by the Trade acceptance value €700,000 due in 3 months
● Incur Acceptance fee (1%)
3. Nikken Microsystem sold the Trade acceptance before maturity
● Incur Discount rate (4%)
Solution
What is the annualized percentage all-in cost in euros of this method of trade financing?
Export receivable €700,000
Acceptance fee (3 months) (1) 1,750
Discount rate (3 months) (2) 7,000 8,750
Net proceeds €691,250
Note:
(1) = 1% x €700,000 x 3/12 = €1,750
(2) = 4% x €700,000 x 3/12 = €7,000
(1)+(2)
Annualized percentage all-in cost = x 12/3 = 5.063%
Net proceeds
QUESTION 2
Nikken Microsystems (B). Assume that Nikken Microsystems prefers to receive U.S. dollars
rather than euros for the trade transaction described in Problem 1. It is considering two
alternatives:
(1) sell the acceptance for euros at once and convert the euros immediately to U.S. dollars at
the spot rate of exchange of $1.00/€ or
(2) hold the euro acceptance until maturity but at the start sell the expected euro proceeds
forward for dollars at the 3-month forward rate of $1.02/€.
a. What are the U.S. dollar net proceeds received at once from the discounted trade
acceptance in alternative 1?
b. What are the U.S. dollar net proceeds received in three months in alternative 2?
c. What is the break-even investment rate that would equalize the net U.S. dollar proceeds
from both alternatives?
d. Which alternative should Nikken Microsystems choose?
Summary
Scenario 1 1. Sell the Trade acceptance before maturity
● Incur Discount rate (4%) from Question 1
2. Convert Euros to U.S. dollars at a spot rate of $1.00/€
Scenario 2 1. Hold the Trade acceptance until maturity
2. Convert Euros to U.S. dollars at a 3-month forward rate of
$1.02/€
Solution
a. What are the U.S. dollar net proceeds received at once from the discounted trade
acceptance in alternative 1?
Scenario 1
Export receivable €700,000
Acceptance fee (3 months) (1) 1,750 1,750
Euro Net proceeds €698,250
Exchange rate ($/€) 1.00
Dollar Net proceeds (2) $698,250
Note:
(1) = 1% x €700,000 x 3/12 = €1,750
(2) = €691,250 x 1.00 = $691,250
b. What are the U.S. dollar net proceeds received in three months in alternative 2?
Scenario 2
Export receivable €700,000
Acceptance fee (3 months) (1) 1,750 1,750
Euro Net proceeds €698,250
Exchange rate ($/€) 1.02
Dollar Net proceeds (2) $712,215
Note:
(1) = 1% x €700,000 x 3/12 = €1,750
(2) = €698,250 x 1.02 = $712,215
c. What is the break-even investment rate that would equalize the net U.S. dollar proceeds
from both alternatives?
The Break-even investment rate in this case will help the Exporter receive similar net U.S
proceeds from both alternatives. We can use the equation of Forward Premium to compute
the break-even rate since it shows the difference between Spot rate (Alternative 1) and
Forward rate (Alternative 2)
Forward −Spot 1.02−1
fp = x 12/Month x 100 = x 12/3 x 100 = 8%
Spot 1
As a result, the break-even investment rate is 8%
d. Which alternative should Nikken Microsystems choose?
If Nikken Microsystems uses the Break-even rate of 8%, there will be no difference between
the two options, so the company should use Alternative 1 (using Spot rate) because in the
commodities market, Nikken Microsystems can execute a contract quickly in order to
relinquish goods. The spot rate is seen to be more liquid and can be exchanged for cash
today
QUESTION 5
Nakatomi Toyota buys its cars from Toyota Motors (U.S.) and sells them to U.S. customers.
One of its customers is EcoHire, a car rental firm that buys cars from Nakatomi Toyota at a
wholesale price. The final payment is due to Nakatomi Toyota in six months. EcoHire has
purchased $200,000 worth of cars from Nakatomi, with a cash down payment of $40,000
and the balance due in six months without any interest charged as a sales incentive.
Nakatomi Toyota will have the EcoHire receivable accepted by Alliance Acceptance for a 2%
fee, and then sell it at a 3% per annum discount to Wells Fargo Bank.
a. What is the annualized percentage all-in cost to Nakatomi Toyota?
b. What are Nakatomi’s net cash proceeds, including the cash down payment?
Summary
Entities
Method of Payment Trade acceptance
Exporter (receiver) Nakatomi Toyota
Issuer EcoHire
Action
1. Nakatomi Toyota sold to EcoHire (after buying from Toyota Motors at first)
2. EcoHire paid in advance $40,000, then continue to pay using a Trade acceptance
value of $200,000 due in 6 months
● Incur Acceptance fee (2%)
3. Nakatomi Toyota sold the Trade acceptance before maturity
● Incur Discount rate (3%)
Solution
a. What is the annualized percentage all-in cost to Nakatomi Toyota?
Export receivable $200,000
Cash down payment (*) 40,000
Acceptance fee (6 months) (1) 1,600
Discount rate (6 months) (2) 2,400 44,000
Net proceeds $156,000
Note:
(*): sum of money that a buyer pays in the early stages of purchasing an expensive good or
service
(1) = 2% x $160,000 x 6/12 = $1,600
(2) = 3% x $160,000 x 6/12 = $2,400
$ 1,600+ $ 2,400
Annualized percentage all-in cost = x 12/6 = 5.12%
$ 156,000
b. What are Nakatomi’s net cash proceeds, including the cash down payment?
Total cash proceeds = Net proceeds + Cash down payments
= $120,000 + $40,000
= $160,000
QUESTION 7
Sunny Coast Enterprises has sold a combination of films and DVDs to Hong Kong Media
Incorporated for US$100,000, with payment due in six months. Sunny Coast Enterprises has
the following alternatives for financing this receivable:
(1) Use its bank credit line. Interest would be at the prime rate of 5% plus 150 basis points
per annum. Sunny Coast Enterprises would need to maintain a compensating balance of 20%
of the loan’s face amount. No interest will be paid on the compensating balance by the
bank. (2) Use its bank credit line but purchase export credit insurance for a 1% fee. Because
of the reduced risk, the bank interest rate would be reduced to 5% per annum without any
points.
a. What are the annualized percentage all-in costs of each alternative?
b. What are the advantages and disadvantages of each alternative?
c. Which alternative would you recommend?
Summary:
Entities
Method of Payment Bank credit line
Exporter (receiver) Sunny Coast Enterprises
Issuer Hong Kong Media Incorporated
Figures
Face amount (US$) $100,000
Maturity date (months) 6 months
Scenario 1 Interest rate Prime rate (%) 5%
Basis point (point) 150 points (= 1.5%)
Balance requirement 20% (of Face amount)
Scenario 2 Interest rate 5%
Credit insurance 1% (of Face amount)
Solution
a. What are the annualized percentage all-in costs of each alternative?
Scenario 1
Export receivable $100,000
Bank interest expense (1) 3,250
Compensating balance requirement (2) 20,000 23,250
Net proceeds $76,750
Note:
(1) Bank interest rate = Prime rate + Basis point = 5% + 1.5% = 6.5%
Bank interest expense = 6.5% x $100,000 x 180/360 = $3,250
(2) = 20% x $100,000 = $20,000
(1)
Annualized percentage all-in costs = x 12/6 = 8.23%
Net proceeds
Scenario 2
Export receivable $100,000
Bank interest expense (1) 5,000
Export credit insurance fee (2) 1,000
Compensating balance requirement (3) 20,000 26,000
Net proceeds $74,000
Note:
(1) = 5% x $100,000 = $5,000
(2) = 1% x $100,000 = $1,000
(3) = 20% x $100,000 = $20,000
(1)+(2)
Annualized all-in percentage cost = x 12/6 = 16.21%
Net proceed
Note: Compensating balance requirement is not counted in Annualized all-in percentage
cost because it is not the cost incurred when discounting the Acceptance
b. What are the advantages and disadvantages of each alternative?
c. Which alternative would you recommend?
QUESTION 12
Swishing Shoe Company of Durham, North Carolina, has received an order for 50,000
cartons of athletic shoes from Southampton Footware, Ltd., of England, payment to be in
British pounds sterling. The shoes will be shipped to Southampton Footware under the terms
of a letter of credit issued by a London bank on behalf of Southampton Footware. The letter
of credit specifies that the face value of the shipment, £400,000, will be paid 120 days after
the London bank accepts a draft drawn by Southampton Footware in accordance with the
terms of the letter of credit. The current discount rate in London on 120-day bankers’
acceptances is 12% per annum, and Southampton Footware estimates its weighted average
cost of capital to be 18% per annum. The commission for selling a banker’s acceptance in the
discount market is 2.0% of the face amount.
a. Would Swishing Shoe Company gain by holding the acceptance to maturity, as compared
to discounting the bankers’ acceptance at once?
b. Does Swishing Shoe Company incur any other risks in this transaction?
Summary
Entities
Method of Payment Letter of credit
Exporter (receiver) Swishing Shoe Company
Issuer + Accepted bank Southampton Footware + London bank
Figures
Scenario 1 1. Swishing Shoe Company sells to Southampton Footware
2. Southampton Footware paid using a Letter of credit valuing
£400,000
3. Swishing Shoe Company holds until maturity
● Incur Discount rate at WACC (18%)
Scenario 2 1. Swishing Shoe Company sells to Southampton Footware
2. Southampton Footware paid using a Letter of credit valuing
£400,000
● Incur Acceptance fee (2%)
Note: the Acceptance fee is 2% of the Face value
3. Swishing Shoe Company sold the Trade acceptance before
maturity
● Incur Discount rate (12%)
Solution
a. Would Swishing Shoe Company gain by holding the acceptance to maturity, as compared
to discounting the bankers’ acceptance at once?
Scenario 1
1 1
Discount rate at WACC for 120 days = =
1+ WACC x days /360 1+ 18 % x 120 /360
= 0,9434
Present value of the invoice = 0,9434 x Export receivable = 0,9434 x £400,000
= £377,360
Scenario 2
Export receivable £400,000
Acceptance fee (120 days) (1) 8,000
Discount rate (120 days) (2) 16,000 24,000
Net proceeds £376,000
Note:
(1) = 2% x £400,000 = £8,000
(2) = 12% x £400,000 x 120/360 = £16,000
The difference between net proceeds from two scenarios is £377,360 - £376,000 = £1,360
b. Does Swishing Shoe Company incur any other risks in this transaction?
Point 1
Swishing's gain should be calculated in present value terms. Swishing will receive £376,000
today by discounting the banker's acceptance. The present value of the £400,000 to be
received in 120 days, discounted at Swishing's WACC of 18%, is £377,358.49. The difference
is £1,358.49. Swishing would gain, in terms of present value cash, £1,358.49 by waiting 120
days to receive the face amount of the acceptance.
Point 2
In this transaction Swishing has assumed the foreign exchange transaction risk; that is, the
risk that the pounds sterling to be received from the export will be worth fewer dollars
when received. In part this risk is a function of the time that Swisher must wait to exchange
the pounds sterling for dollars. If Swishing discounts the banker's acceptance at the time of
sale, it receives dollars at once at the exchange rate then in effect. If Swishing waits 120
days to receive the pounds sterling, Swisher assumes the added risk that the exchange rate
will deteriorate between the time of sale and the time of collection. (Of course, Swishing
might gain if the pound would buy more, rather than less, dollars in 120 days.)
