Question

 

1. Ikang Berhad is a company based in Terengganu, Malaysia, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem. Ikang Berhad had an irrevocable L/C issued by a Mongolian bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Mongolian company. This bank backed out of its obligation, however, stating that it was not authorized to guarantee commercial transactions. Explain the function of irrevocable L/C for the case above. (2 mark)
2. Any business with widely dispersed operating subsidiaries can gain operational benefits by centralized cash management. Describe TWO (2) advantages of having central depository for multinational companies.

Answer 1

A) Irrevocable letter of credit is a letter of credit in which bank will guarantee the other party who is a foreign national, that it will be paying on the behalf of party to the third party and these irrevocable letter of credit cannot be cancelled under any circumstances until and unless it has been agreed by both the parties mutually.

In this case, it can be seen that letter of credit which has been issued by the Mongolian bank has been cancelled and this irrevocable letter of credit should not have been cancelled because the Mongolian bank should have taken the consent of the Malaysian company.

The cancellation of the contract is not Valid because there should have been a mutual agreement for the cancellation and the consent of both the parties should have been taken so cancellation is not in accordance with the laws.

B).advantages of having Central depository for multinational companies are as follows-

I. It will help the company in earning higher amount of interest on the higher amount of cash because of higher accumulation of cash.

II. it will also mean that the companies will be buying the foreign currency is in larger lot size which will be offering them a big advantage because of lower price.