United Sports could also buy export credit insurance from FCIA for a 1.5% premium.

It finances the $100,000 receivable from Phang from its credit line at 6% per annum interest.

No compensating bank balance would be required.

a. What is United Sports’s annualized percentage all-in cost of financing?

b. What are Phang’s costs?

c. What are the advantages and disadvantages of this alternative compared to the bankers’ acceptance financing in Problem 16.9 ? Which alternative would you recommend?

Data from Problem 16.9

United Sports is considering bidding to sell \($100,000\) of ski equipment to Phang Family Enterprises of Seoul, South Korea. Payment would be due in six months. Since United Sports cannot find good credit information on Phang, United Sports wants to protect its credit risk. It is considering the following financing solution.

Phang’s bank issues a letter of credit on behalf of Phang and agrees to accept United Sports’s draft for \($100,000\) due in six months. The acceptance fee would cost United Sports \($500,\) plus reduce Phang’s available credit line by \($100,000.\) The bankers’ acceptance note of \($100,000\) would be sold at a 2% per annum discount in the money market. What is the annualized percentage all-in cost to United Sports of this bankers’ acceptance financing?