CASE ONE 15 marks

You are the trade finance officer at your company. Your sales person has brought you two sale opportunities, and you can only pick one to work on.

Opportunity #1: Customer is located in the United States. Sale will be for $1,250,000 USD, open terms N180 days. It will take you 60 days to produce the products for this customer. Costs during Production are 100K per week.

Opportunity #2: Customer is located in Mexico. Sale will be for $1,500,000 (as of todays exchange rate), in Mexican Pesos. The buyer will post a $200,000 Letter of Credit, and wants the balance to be on open terms, Net 30. It will take you 14 days to produce the products. Costs during Production are 50K per week.

Background:

- You have no cash and will need to borrow money to complete the transaction.

- Line of credit borrowing is at 5% annually.

- FX forward contracts are 1.5% of value for total value of the sales contract.

- Letter of Credit Discount Rates will be 2.5% of value.

- Accounts Receivable Insurance premium for open terms are 0.65% of the total receivable for USA, and 1.65% for Mexico.

Question:

1. International trade exposes risks that are generally more complex than those found in the domestic market. Discuss three risks the export must consider for each situation above. Identify one potential way mitigate to each of the risks identified. Which risk would you consider most threating to the transaction? (4 marks)

2. Provide a financing timeline for each opportunity. Then please identify which opportunity you would recommend the company take. (6 Marks)