International trade finance

International trade finance

Case Study for re-sit academic year 2014/15
(For the purposes of the associated tasks assume today’s date is 1st June, 2015)

Please see assessment briefing for details of the specific task based on the following case study.
Phase 1
Excelsior Lighting Ltd (ELL) has been established for 15 years. Historically the company manufactured lighting in the UK and sold direct to businesses such as hotels, restaurants and retail industries, supplying lighting to them for use in their premises.
Over recent years ELL has refocused the supply side of the business in order to remain competitive. Although the company still manufactures some of its products, it now imports some products from a small number of Taiwanese factories. All purchases from Taiwan are against sight letter of credit in US dollars on a C&F basis and are made against confirmed orders.
The Managing Director of the company, Colin Daniels, is looking to expand the business by venturing into the export market.
Phase 2          6 months later
The company is now attempting to finalise contractual details of its first export order from a hotel chain in Singapore.
The hotel chain, SAL Hotels, has offered to buy from ELL by giving them a 60 day sight letter of credit. They have indicated that they would be happy for ELL’s bank to add its confirmation to the export letter of credit.  They have also requested that they want to be invoiced in Singapore Dollars and have invited quotations on either CIF, C&F or FOB basis.
The whole of this order will be sourced direct from one of the Taiwanese factories that ELL already deals with. Goods will be purchased against a sight letter of credit in US dollars on a C&F basis. The goods will be shipped from Taipei direct to Singapore.
As working capital is fairly tight, Mr Daniels enquires with the company’s bank if he can finance the export sale through the use of either a transferable letter of credit or a back to back credit facility.
Phase 3          18 months later
ELL has been very successful in the export market and is selling to around 30 overseas clients. As at today’s date ELL has £2.5 million outstanding against overseas sales against a mixture of payment terms including confirmed and unconfirmed export letter of credits, documentary collections including both DA and DP terms and some open account trade. The growth in sales has meant that the facility is currently under pressure as everything is financed through the company’s overdraft which is secured against a debenture.
Mr Daniels is keen to improve the company’s year end account by reducing the gearing of the company. He is particularly keen to explore opportunities to finance his export sales through the provision of off balance sheet finance.
The company has just completed negotiations for the purchase of brand new automated assembly equipment from US-Eng Manufacturing Solutions., Dallas, USA. Details of the contract are as follows:

Purchaser:        Excelsior Lighting Ltd
Seller:            US-Eng Manufacturing Solutions
Sale Price:        US$ 2,500,000 FCA Dallas
Payment dates:    15% upon contract signature
75% upon shipment (Latest date for shipment 14th July, 2015)
10% 6 months after shipment

Mr Daniels says that the contract is to be signed today. However, he is concerned about how Excelsior Lighting Ltd can best protect its position in respect of this contract as the performance and reliability of the new equipment is crucial to the future prosperity of the company.

The following exchange rates are available today (1st June, 2015):

GBP 1 : US$ Spot
1.6750
1.6895
1 month forward         0.10 c. pm         0.05 c. pm
2 months forward         0.15 c. pm         0.10 c. pm
3 months forward         0.20 c. pm         0.15 c. pm
4 months forward         0.25 c. pm         0.20 c. pm
5 months forward         0.30 c. pm         0.25 c. pm
6 months forward         0.35 c. pm         0.30 c. pm
7 months forward         0.40 c. pm         0.35 c. pm
8 months forward         0.45 c. pm          0.40 c. pm
9 months forward         0.50 c. pm         0.45 c. pm

Assessment Brief/ Task
The detailed requirements for this task are as follows:
The following task is based on the case study Excelsior Lighting Ltd (ELL) issued separately.
For the purposes of this assessment you are to assume the role of an independent International Trade Advisor. In this capacity you are required to produce a report of a length of a maximum 3,000 words which addresses the following:
1.    A review of the risks that Excelsior Lighting Limited will be exposed to in the export market in Phase 1, and outline the considerations Mr Daniels should give in managing and mitigating against these risks.
2.    An explanation of the operation of a documentary credit, and comments specifically on the appropriateness of using transferable letters of credit for the scenario outlined in Phase 2.
3.    Compare and contrast the obligations of each party under CIF, C&F and FOB, and evaluates which of these Incoterms would be the most appropriate for the export order to Singapore outlined in Phase 2.
4.    Compare and contrast the four terms defined in Article 6b of UCP 600 which are used to describe how payment can be claimed under a letter of credit.
5.    An explanation of how, in relation to Phase 3, ELL’s bank can assist Excelsior Lighting Ltd in improving its gearing by providing off balance sheet financing for the export sales.
6.    Calculation of the forward option rates for the payments to US-Eng for the machine, and calculation in sterling of the total cost of the machine.
7.    A review of the full range of risks (i.e. not just those involving currency) which Excelsior Lighting Ltd now faces as a result of entering this contract with US-Eng Manufacturing Solutions, with an indication as to how these risks can be reduced or eliminated.

Note. The remaining marks are for the presentation, structure and referencing of work    Weighting (%)

20

10
10
20
10

12
8

10

The following information is important when:
•    Preparing for your assessment
•    Checking your work before you submit it
•    Interpreting feedback on your work after marking.

Assessment Criteria
The module Learning Outcomes tested by this assessment task are indicated on page 1. The precise criteria against which your work will be marked is as follows:
•    Level of understanding, analysis and application of international trade finance concepts and principles. (90%)
•    Use of source material and referencing (5%)
•    Quality and structure of written presentation work (5%)

Performance descriptors
Performance descriptors indicate how marks will be arrived at against each of the above criteria. The descriptors indicate the likely characteristics of work that is marked within the percentage bands indicated.

90-100%    Outstanding understanding of risks faced by participants in international trade, outstanding ability to evaluate the factors affecting exchange rates and outstanding ability to apply appropriate hedging strategies to mitigate against the effects of these, outstanding analysis of the case in the context of international documentation and methods of payment in international trade, and an outstanding ability to identify and evaluate the key issues of relevance to the company. Outstanding application of appropriate commercial shipping terms.
Outstanding range of reading – well beyond recommended reading list. Originality in sourcing materials and their use/application. Fluent and discriminating use of material, etc. Outstanding appraisal of sources. All references complete and accurate.
Work is of an outstanding quality; logical, well sequenced, clear and concise with outstanding originality. Outstanding clarity and precision of writing throughout. Outstanding style and level of detail for audience. Accurate, succinct and fluent, persuasive in approach and typified by a sophisticated use of English.
80-89%    Excellent understanding of risks faced by participants in international trade, excellent ability to evaluate the factors affecting exchange rates and excellent ability to apply appropriate hedging strategies to mitigate against the effects of these, excellent analysis of the case in the context of international documentation and methods of payment in international trade, and an excellent ability to identify and evaluate the key issues of relevance to the company. Excellent application of appropriate commercial shipping terms.
Excellent range of reading – well beyond recommended reading list. Originality in sourcing materials and their use/application. Fluent and discriminating use of material, etc. Excellent appraisal of sources. All references complete and accurate.
Work is of an excellent quality; logical, well sequenced, clear and concise with some flair/ originality. Clarity and precision of writing throughout. Excellent style and level of detail for audience. Accurate, succinct and fluent, persuasive in approach and typified by a sophisticated use of English.
70-79%    Very good understanding of risks faced by participants in international trade, sound ability to evaluate the factors affecting exchange rates and sound ability to apply appropriate hedging strategies to mitigate against the effects of these, very good analysis of the case in the context of international documentation and methods of payment in international trade, and a sound ability to identify and evaluate the key issues of relevance to the company. Very good application of appropriate commercial shipping terms.
Very good range of reading – beyond recommended reading list. Interesting and unusual sources used. Makes very good use of source material and establishes relevance to issues. References complete and accurate.
Can structure argument very well and substantiate assertions. Very good layout with effective structure and use of fonts, etc. Accurate word processing. Generally no grammar or spelling errors; only very minor errors in English. Clear, fluent and persuasive writing style.
60-69%    Good understanding of risks faced by participants in international trade, good ability to evaluate the factors affecting exchange rates and good ability to apply appropriate hedging strategies to mitigate against the effects of these, good analysis of the case in the context of international documentation and methods of payment in international trade, and an ability to identify and evaluate the key issues of relevance to the company. Good application of appropriate commercial shipping terms.
Good range of reading – beyond recommended reading list. Evidence of use of recommended reading list and other appropriate source material. Mainstream texts used. Referencing present and accurate.
Can structure argument well and substantiate assertions. Good layout with effective structure and use of fonts, etc. Accurate word processing. Occasional grammar or spelling errors; only very minor errors in English. Clear, fluent and good writing style.
50-59%    Competent understanding of risks faced by participants in international trade, some ability to evaluate the factors affecting exchange rates and some ability to apply appropriate hedging strategies to mitigate against the effects of these, competent analysis of the case in the context of international documentation and methods of payment in international trade, and an attempt to identify and evaluate the key issues of relevance to the company. Competent application of appropriate commercial shipping terms.
Good range of reading – beyond recommended reading list. Evidence of use of recommended reading list and other appropriate source material. Mainstream texts used. Referencing present and accurate.
Competent structure and sequencing of material. A solid, coherent effort with ideas and argument well supported. Evidence of proof reading before submission.  A competent attempt. Occasional errors in grammar spelling, punctuation, etc. but largely fluent, clear and correct. Appropriate style for purpose and audience.
40-49%    Basic understanding of risks faced by participants in international trade, some ability to evaluate the factors affecting exchange rates and some ability to apply appropriate hedging strategies to mitigate against the effects of these, basic analysis of the case in the context of international documentation and methods of payment in international trade, and an attempt to identify and evaluate the key issues of relevance to the company. Basic application of appropriate commercial shipping terms.
Reasonable range of reading. Reasonable evidence of use of recommended reading list and other appropriate source material. Mainstream texts used. Referencing present and reasonably accurate.
Presentation adequate with some attempt at structure that allows the reader to follow the line of thinking. Reasonably coherent. Ideas not always wholly supported or substantiated. Style and format limits general effectiveness. Mostly clear in meaning if lacking in fluency. Some errors in grammar, spelling or punctuation.
30-39%    Weak/superficial understanding of risks faced by participants in international trade, weak ability to evaluate the factors affecting exchange rates and a failure to apply appropriate hedging strategies to mitigate against the effects of these, weak attempt at analysing the case but little in the context of international documentation and methods of payment in international trade, weak identification and evaluation of the key issues of relevance to the company. Weak application of and failure to recognise appropriate commercial shipping terms.
Superficial range of reading. Little evidence of use of recommended reading list and other appropriate source material. Mainstream texts used. Referencing superficially presented.
Lacks coherence and/or theoretical underpinning. Not well organised, lacks structure. Not proof read. Frequent lapses in grammar, punctuation and /or spelling. Meaning not always clear, often obscure. Clumsy expressions used. Inappropriate style.
20-29%    Poor understanding of risks faced by participants in international trade, weak ability to evaluate the factors affecting exchange rates and a failure to apply appropriate hedging strategies to mitigate against the effects of these, poor attempt at analysing the case but little in the context of international documentation and methods of payment in international trade, poor identification and evaluation of the key issues of relevance to the company. Poor application of and failure to recognise appropriate commercial shipping terms.
Poor range of reading. Poor use of recommended reading list and other appropriate source material. Incomplete and/or inaccurate referencing.
Poor coherence and/or theoretical underpinning. Poorly organised, with no structure. Not proof read. Poor grammar, punctuation and /or spelling. Meaning not clear and obscure. Poor expressions used. Poor style.
10-19%    LiNOCe to no attempt to engage with the assignment brief
0-9%    No real attempt to address the assignment brief

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