The Export Transaction Associated Grain Traders (AGT) is a Canadian company engaged in the production and export of pulses and grains from the prairies. Their annual sales are appx C$1.5b. Recently they received a purchase order from Green Lentils Co. (GLC) based in India for supply of 2,200 tons of Green Lentils at the price of US$640 per ton, FOB Vancouver port. Cost of shipping from Vancouver to Mumbai is US$ 2,800 per 40 containers with FCL capacity of 27,500kgs per container. Insurance and port handling costs add up to $5 per ton. Shipping from Vancouver to Mumbai takes appx 30 days. GLC would have to Import Tariff and Taxes to Customs Authority of India at the rate of 33% on the FOB Price. GLC has orders on hand from Distributors in India to buy Green Lentils at a price of Rs 7,500 per Quintal. They normally pay in 30 days after taking delivery. AGT would have to pay farmers in Alberta and Saskatchewan on average at the rate of CAD 700 per ton immediately on delivery. All-in cost of transportation from their silos in these provinces to Vancouver port terminal average around CAD 1,600 per container. It would take appx 10 days for AGT to move the Lentils from their silos to Vancouver Port, once they accept the order. AGT is willing to accept the purchase order from GLC provided they get paid as soon as they deliver the Lentils at Vancouver port to GLCs designated Freight Forwarder. They would like to limit any additional costs for financing the trade, as their profit margin is already quite thin.

Assumptions USD/CAD spot rate on order acceptance date is 1.25 and Fx Forward points for 10 days and 70 days is 4 points and 8 points respectively. USD/INR spot rate on order acceptance date is 72.5 and Fx Forward points for 10 days and 70 days is 10 points and 80 points respectively. Cost of discounting in Canada is 5% p.a. Cost of discounting in India is 8% p.a. Issuing bank L/C charges are US$1 per every US$100 Advising/Confirming/Negotiating bank L/C charges are US$0.5 per every US$100

QUESTION

3. Supply Chain Finance Options Assuming they agree to transact on open account basis (i.e. without L/C), what options does both AGT or GLC have to finance their cashflow? What would be their respective Net Profit and Margin under these options? Which option would be best, assuming AGT wont accept any proposal that drops their net margin below 5%?