Question

a. 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.

b. 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 are those letter of credit which cannot be cancelled under any circumstances unless the consent of all the parties which are involved in the contract have been taken.

In this case it can be seen that irrevocable letter of credit which have been issued by the Mongolian Bank to the Malaysian company for payment of services which have been received by mangolian company is revoked and cancelled so this is not in line with the rules and regulation related to irrevocable letter of credit because they should not have been cancelled unless the consent of Malaysian company and Malaysian bank has been taken.

So it can be said that cancellation of irrevocable letter of credit is not in accordance with laws.

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

A)Central depository for multinational companies will be helping them in order to trade various currencies between the subsidiaries and eliminating the needs of any intermediaries

B) Central depository for multinational companies will also be helping them in order to buy large amount of foreign contracts at a cheap price so that will be offering them advantage in regards with cost.