A capital good exporter in INDIA received an export order from USA for value of USD...

A capital good exporter in INDIA received an export order from USA for value of USD 800,000 for supply of handicrafts. In terms of the market practice, buyer wants 90 days credit.

Questions: Analyze various options raising finance from any of the financial institutions. Find Best Option

Option 1 : Request the buyer to open a confirmed letter of credit. Raise finance against the LC bills (LC bills discounting) in the domestic market either in INR or USD whichever is favorable.

Discounting Charges , INR = 8.75%, USD=4.45%. Confirmation charges on seller = 1.50%

Option 2 : There will be no letter of credit. You have only the confirmed order from the buyer. Cover the risk with any credit risk insurance agency like ECGC. Avail finance from the local bank either in USD or INR as per your requirement.

Discounting Charges , INR = 10.75%, USD=5.45%.Credit Risk Insurance Cost = 1.50%

Option 3: International Factoring agency is quoting 8.00% discounting charges without recourse. Factoring agency’s funding will be in USD denominated. Currency exposure will be taken over by the factoring agency.

USD/INR –SPOT 68.80 , 3 month forwards premium USD/INR 90 paise

Expert Solution

Out of these three options capital good exporter from India should go for third option i.e. using international factoring agency who will covering risk associated with this transaction by forward contract.
By this way 90 days credit will be easily possible, and seller have not to worry about recovery of debt factoring agency will recover amount at maturity from buyer.
all documents , processing ,reminders for recovery ,notice etc, will be now handled by agency that will save money ,effort and time of seller.
As comparing with another two-options cost associated with this option is comparatively low i.e. discounting charges are 8% which is less as compared other two options.
Credit risk will be transferred to factoring agency by paying them discounting charge. and seller can get their amount immediately which he can use in further productive use and don’t need to wait for 90 days.
Credit risk and currency exposure can be transferred to international factoring agency.

jeff jeffy answered 1 year ago

At the end of September, Northern Manufacturing received another special order from USD International. This special...

At the end of September, Northern Manufacturing received another special order from USD International. This special order offers to buy 750 ft2 of leather for $12.75 per square feet in October. However, since accepting this special order will exceed the leather processing capacity of Northern Manufacturing, another machine will be required to increase the capacity to 4,000 ft2 per month which will increase the fixed manufacturing costs by $3,000. Upon review of October’s production data of Northern Manufacturing, you have...

An importer in India imports minerals from Oman enters into a contract with Omani exporter to...

An importer in India imports minerals from Oman enters into a contract with Omani exporter to deliver OMR 20000 worth of minerals on 1st September 2019 payment to be received within one month from the date of delivery. The exchange rate in spot market on the date of transaction is OMR0.00555=1 INR. The minerals were delivered on 1st November 2019. Assuming that the forward contract price of OMR/INR is at a forward discount of 8% for 1st December and the...

Find the currency of your home country (India) and describe its value relative to the USD....

Find the currency of your home country (India) and describe its value relative to the USD. . Is it under or over-valued compared to the USD? What problems or benefits do you think this relationship might cause for your country? Why? What problems or benefits do you think this relationship might cause for the US? Governments often intervene (manipulate) in foreign exchange markets to give their currency a more favorable rate. Do some research on the web to see what...

Write first 3 ranked stock exchange from USA and one from Turkey, China, Japon and India....

Write first 3 ranked stock exchange from USA and one from Turkey, China, Japon and India. Can you explain the power of USA stock exchange with “home-bias”. If home bias is a factor that affects stock exchange market can we say that there is no possibility for emergingmarkets to compete with USA stock exchange. Discuss your answer.

Last year, Jimmy graduated from First City University and received USD 5,000 from his father as a graduation...

Last year, Jimmy graduated from First City University and received USD 5,000 from his father as a graduation gift. Jimmy, , recently heard from a friend who earns a profit from investing in the bond market during this pandemic time. JImmy does not know much about investing or how people actually “make money by investing”. He asked you to help him in making a wise investment plan. Required: Before investing any money, explain to Jimmy about the risk involved. Calculate the expected...

An Australian importer has received goods from India and will pay 2 million Indian rupees (INR)...

An Australian importer has received goods from India and will pay 2 million Indian rupees (INR) in one year. The importer expects that the value of the INR will appreciate by 20.57% against the Australian dollar from today’s spot rate of 0.2527 in one year. How much Australian dollar the importer will make a loss due to appreciation of INR after one year? (enter the whole number with no sign or symbol)

What lessons can India take from its BRICS partners in order to ensure economic stability and...

What lessons can India take from its BRICS partners in order to ensure economic stability and growth?

Is profit (the difference between output value and input cost) a good metric for investment capital...

Is profit (the difference between output value and input cost) a good metric for investment capital allocation? What are externalities?

A US multinational received an order for airplane parts from Australia for delivery in one year....

A US multinational received an order for airplane parts from Australia for delivery in one year. The total invoice is A$1,000,000 and payable in six months. The expected spot prices to prevail in six months range from $0.55 to $0.85. The following information is available: Spot rate $0.70/AUD 6-month forward rate $0.68/AUD. Interest rate in US4.00% Interest rate in Australia8.00% Call option premium$0.12E=$0.70 Put Optionpremium$0.10 E=$0.70 How can the firm hedge using forward rates? Show the payoffs for the expected spot rates....

Bert Asiago, as salesperson at Convertco, received an order from a potential new customer for 50,000...

Bert Asiago, as salesperson at Convertco, received an order from a potential new customer for 50,000 units of the company's single product. The price came in at $25 below the regular selling price of $65. Asiago knows that Convertco has the capacity to produce the product without affecting regular sales. He spoke to Bia Morgan, the controller, who informed him that at the $40 selling price, it's $42 of variable costs won't be covered. She recommends rejecting the order. Bert...

Question