Explain briefly the advantages and disadvantages of exporting, licensing and foreign direct investment as alternative forms of involvement in foreign markets.

An import-export merchant contracts on 31^st December to buy 1,500 tonnes of a certain product from a supplier in country X at a price of X$ 11,820 per tone. Shipment will be made direct to a customer in country Y to whom he has sold the product at Y$ 462 per tone. Of the total quantity, 500 tonnes will be shipped during January and the balance by the end of February. Payment to the suppliers is to be made immediately on shipment, whilst one months credit from the date of shipment is allowed to the country Y customer.

The merchant arranges with his bank to cover these transactions in sterling on the forward exchange market, the exchange rates at 31^st December being those given below:

X$ Y$

Spot 107.45 107.75 3.84 3.88

1 month forward 55 105c dis 2 - 1c pm

2 months forward 75 175c dis 4 3c pm

3 months forward 106 250c dis 6 - 5c pm

Exchange commission is 0.1% per tone [maximum of 10] on each transaction.

Required:

1. Calculate (to the nearest pound) the profit the merchant will make on the transaction.
2. Explain how calculations of further exchange profit or loss would be made if:
3. The February shipment were cancelled;
4. The February shipment was delayed until April.

21 21 21 21