Amiddle-party,TexasBonds,haveapproachedtheirbankwitharequestfortheissuanceofdemandguarantees to an end-buyer in Africa in respect of the sale of three machines for the total sales value ofUSD2.8m.

ThemachinesaretobepurchasedbyTexasBondsforUSD2.184mfromthemanufacturerinSouthEastAsiaandshippeddirecttoAfrica.

Supplyleadtimeisasfollows:

• Machine1USD0.654mtobeshippedinmonth4
• Machine2USD0.846mtobeshippedinmonth5
• Machine3USD1.300mtobeshippedinmonth7

The end-buyer in Africa is to pay Texas Bonds by export letter of credit, payable 750 days after the dateofshipment.

ThemanufacturerinSouthEastAsiarequiresTexasBondstoarrangetheissuanceofanimportletterofcreditintheirfavour,payable45daysafterthedateofshipment.

TexasBondshavebeenabletonegotiateanadvancepaymentof30%ofthecontractvaluefromtheend-buyer.

Thefollowingdemandguaranteesaretobeissuedinfavouroftheend-buyeroncontractsignature:

• AdvancepaymentguaranteeUSD0.840m(30%)validfor8months
• PerformanceguaranteeUSD0.280m(10%)validfor12months
• WarrantyguaranteeUSD0.280mvalidfor24months

ThebankofTexasBondswishtominimisetheirriskexposureonthistransactionandthereforeneedtoconsiderthebestwayofstructuringthedeal.

Questions:

1. WhataretherisksforTexasBonds?
2. WhataretheoptionsforTexasBonds?
3. Developtermsofpayment.