CASE STUDY 2 - Trade Financing Alternatives

Read the following mini case carefully and answer all questions that follow.

Usaha Tegas Sdn Bhd (UTSB) currently enjoys the following credit facilities from a bank:

Type of facilities	Limit (RM)	Pricing
Overdraft (O/D)	3,000,000	BLR + 2.0% p.a.
Overdraf
Letter of credit (L/C)	5,000,000	0.1% per month
Surat Kredit
Trust receipt (T/R)	5,000,000	BLR + 2.0% p.a.
Resit Amanah
Bankers acceptance (B/A)	5,000,000	2.0% p.a. acceptance commission
Penerimaan Jurubank
Shipping guarantee (S/G)	5,000,000	0.1% flat
Jaminan Perkapalan
Export credit facilities (ECR)	5,000,000	EXIM bank rate + 1% p.a.
Kemudahan Kredit Eksport
Foreign bills purchased (FBP)	2.500,000	FCR + 1.5% p.a.
Pembelian bil asing

BLR/ BLR	6.0 % p.a.
BA discount rate for 90 days/ Kadar pendiskaunan BA untuk 90 hari	5.2 % p.a.
AUD/RM spot exchange rate/ Kadar pertukaran spot AUD/RM	2.9650

UTSB imports 1,000 metric tonnes of refined sugar worth AUD1,254,250 from an Australian supplier against a 3-month letter of credit. It is considering utilizing the available banking facilities for a 90-day financing. Based on the latest additional information below, and as the Trade Finance Manager of Bank UUM Berhad, the banker for UTSB, you are to advise your client whether to choose an OD or an RC or a BA or a TR financing. In determining which financing to choose, you do the following analysis as per given format.

i. Compute the value of imports in RM (2 Marks)

ii. Based on available information, compute the cost of L/C to UTSB (2 Marks)

iii. Cost of using Alternative Financing Facilities; OD or an RC or a BA or a TR. (5 x 4 Marks)

iv. Your recommended alternative and why? (1 Mark)