Question 4 Assume that you are a trade finance officer for HSBC Bank in Kuala Lumpur. Your duties, besides advising new customers in trade financing, also includes the hedging of foreign currencies for use in international trading purposes. Below are some of the possible scenarios that may occur at work: (a) Mr. Tan, the manager of Tan \& Lim Metal Works Sdn. Bhd. (TLMW), will receive payment from a Swiss company for the sum of CHF2.5 m as full payment for the recent purchase of iron construction rods from TLMW. However, the initial contract stipulated that payment will only be made 90 days from the date of shipment. Looking at his calendar today, Mr. Tan realized that 30 days had gone by, from the time the goods were shipped out, without him doing anything regarding the impeding payment from the Swiss company (payment to be made to TLMW in Swiss francs). Using the information below, how should you advise Mr. Tan? (5 marks) Spot rates: USD/GBP =1.81201.8138 CHF/USD =1.22091.2222 MYR/USD=3.77503.8250 Forward premium =8.02% (b) A potential client approaches you for more information regarding the differences between forward exchange contracts and currency options. How would you explain this to this person? (6 marks) (c) Assume that the forex information and answers in part (a) above are used. The only difference in this question is that Mr. Tan did not receive the payment from the Swiss company at the maturity date of the agreement. Furthermore, the Swiss company now only informs Mr. Tan that they wish to request for a further 30days extension on the payment arrangement. Using the information below, how should you advise Mr. Tan? (8 marks) Spot rates (on maturity): USD/GBP=1.77851.7812MYR/USD=3.77503.8250CHF/USD=1.22551.2270 30-days forward =2c3c discount (d) A potential client is confused between the following letters of credit - transferable letters of credit and back-to-back letters of credit. How would you explain these different letters of credit to this person? (6 marks) Question 4 Assume that you are a trade finance officer for HSBC Bank in Kuala Lumpur. Your duties, besides advising new customers in trade financing, also includes the hedging of foreign currencies for use in international trading purposes. Below are some of the possible scenarios that may occur at work: (a) Mr. Tan, the manager of Tan \& Lim Metal Works Sdn. Bhd. (TLMW), will receive payment from a Swiss company for the sum of CHF2.5 m as full payment for the recent purchase of iron construction rods from TLMW. However, the initial contract stipulated that payment will only be made 90 days from the date of shipment. Looking at his calendar today, Mr. Tan realized that 30 days had gone by, from the time the goods were shipped out, without him doing anything regarding the impeding payment from the Swiss company (payment to be made to TLMW in Swiss francs). Using the information below, how should you advise Mr. Tan? (5 marks) Spot rates: USD/GBP =1.81201.8138 CHF/USD =1.22091.2222 MYR/USD=3.77503.8250 Forward premium =8.02% (b) A potential client approaches you for more information regarding the differences between forward exchange contracts and currency options. How would you explain this to this person? (6 marks) (c) Assume that the forex information and answers in part (a) above are used. The only difference in this question is that Mr. Tan did not receive the payment from the Swiss company at the maturity date of the agreement. Furthermore, the Swiss company now only informs Mr. Tan that they wish to request for a further 30days extension on the payment arrangement. Using the information below, how should you advise Mr. Tan? (8 marks) Spot rates (on maturity): USD/GBP=1.77851.7812MYR/USD=3.77503.8250CHF/USD=1.22551.2270 30-days forward =2c3c discount (d) A potential client is confused between the following letters of credit - transferable letters of credit and back-to-back letters of credit. How would you explain these different letters of credit to this person? (6 marks)
