QUESTIONS These questions are available in MyFinanceLab. 1. Unaffiliated Buyers. Why might different documentation be used for an export to a non-affiliated foreign buyer who is a new customer as compared to an export to a non-affiliated foreign buyer to whom the exporter has been selling for many years? 2. Affiliated Buyers. For what reason might an exporter use standard international trade documentation (letter of credit, draft, order bill of lading) on an intrafirm export to its parent or sister subsidiary? 3. Related Party Trade. What reasons can you give for the observation that intrafirm trade is now greater than trade between non-affiliated exporters and importers? 4. Documents. Explain the difference between a letter of credit (L/C) and a draft. How are they linked? 5. Risks. What is the major difference between "currency risk" and "risk of noncompletion"? How are these risks handled in a typical international trade transaction? 6. Letter of Credit. Identify each party to a letter of credit (L/C) and indicate its responsibility. 7. Confirmed Letter of Credit. Why would an exporter insist on a confirmed letter of credit? 8. Documenting an Export of Hard Drives. List the steps involved in the export of computer hard disk drives from Penang, Malaysia, to San Jose, California, using an unconfirmed letter of credit authorizing payment on sight. 9. Documenting an Export of Lumber from Portland to Yokohama. List the steps involved in the export of lumber from Portland, Oregon, to Yokohama, Japan, using a confirmed letter of credit, payment to be made in 120 days. 10. Governmentally Supplied Credit. Various governments have established agencies to insure against nonpayment for exports and/or to provide export credit. This shifts credit risk away from private banks and to the citizen taxpayers of the country whose government created and backs the agency. Why would such an arrangement be of benefit to the citizens of that country? PROBLEMS These problems are available in MyFinanceLab. 1. Nikken Microsystems (A). Assume Nikken Microsystems has sold Internet servers to Telecom Espaa for 700,000. Payment is due in three months and will be made with a trade acceptance from Telecom Espaa Acceptance. The acceptance fee is 1.0% per annum of the face amount of the note. This acceptance will be sold at a 4% per annum discount. What is the annualized percentage all-in cost in euros of this method of trade financing? 2. Nikken Microsystems (B). Assume that Nikken Microsystems prefers to receive U.S. dollars rather than euros for the trade transaction described in Problem 1. It is considering two alternatives: (1) sell the acceptance for euros at once and convert the euros immediately to U.S. dollars at the spot rate of exchange of $1.00/ or (2) hold the euro acceptance until maturity but at the start sell the expected euro proceeds forward for dollars at the 3-month forward rate of \$1.02/ . a. What are the U.S. dollar net proceeds received at once from the discounted trade acceptance in alternative 1 ? b. What are the U.S. dollar net proceeds received in three months in alternative 2 ? c. What is the break-even investment rate that would equalize the net U.S. dollar proceeds from both alternatives? d. Which alternative should Nikken Microsystems choose? 3. Motoguzzie (A). Motoguzzie exports large-engine motorcycles (greater than 700cc) to Australia and invoices its customers in U.S. dollars. Sydney Wholesale Imports has purchased $3,000,000 of merchandise from Motoguzzie, with payment due in six months. The payment will be made with a bankers' acceptance issued by Charter Bank of Sydney at a fee of 1.75% per annum. Motoguzzie has a weighted average cost of capital of 10%. If Motoguzrie holds this acceptance to maturity, what is its annualized percentage all-in cost? 4. Motoguzzie (B). Assuming the facts in Problem 3 , Bank of America is now willing to buy Motoguzzie's bankers' acceptance for a discount of 6% per annum. What would be Motoguzzie's annualized percentage all-in cost of financing its $3,000,000 Australian receivable? 6. Forfaiting at Umaru Oil (Nigeria). Umaru Oil of Nigeria has purchased $1,000,000 of oil drilling equipment from Gunslinger Drilling of Houston, Texas. Umaru Oil must pay for this purchase over the next five years at a rate of $200,000 per year due on March 1 of each year. Bank of Zurich, a Swiss forfaiter, has agreed to buy the five notes of $200,000 each at a discount. The discount rate would be approximately 8% per annum based on the expected 3-year LIBOR rate plus 200 basis points, paid by Umaru Oil. Bank of Zurich would also charge Umaru Oil an additional commitment fee of 2% per annum from the date of its commitment to finance until receipt of the actual discounted notes issued in accordance with the financing contract. The $200,000 promissory notes will come due on March 1 in successive years. The promissory notes issued by Umaru Oil will be endorsed by their bank, Lagos City Bank, for a 1% fee and delivered to Gunslinger Drilling. At this point, Gunslinger Drilling will endorse the notes without recourse and discount them with the forfaiter, Bank of Zurich, receiving the full $200,000 principal amount. Bank of Zurich will sell the notes by rediscounting them to investors in the international money market without recourse. At maturity, the investors holding the notes will present them for collection at Lagos City Bank. If Lagos City Bank defaults on payment, the investors will collect on the notes from Bank of Zurich. a. What is the annualized percentage all-in cost to Umaru Oil of financing the first $200,000 note due March 1,2011? b. What might motivate Umaru Oil to use this relatively expensive alternative for financing? 7. Sunny Coast Enterprises (A). Sunny Coast Enterprises has sold a combination of films and DVDs to