Curtis Inc. is a U.S. manufacturer of heavy construction equipment used in the c

Question

Curtis Inc. is a U.S. manufacturer of heavy construction equipment used in the construction of deep water ports and heavy lift capacity airports. Curtis is headquartered in Michigan, and has just received an order from a Pakistani Construction Company not known to you or to Curtis. The order is for two of your largest earth movers with the total sale price of e30.0 million euros. The Pakistani company requires Curtis to ship upon completion of manufacture and will pay the e30.0 million to you six months from shipment.

Global Financing (a Commercial Bank of which you are President and Chief Lender) is the international financier hired to put this financial transaction together and make it happen, (so don't make this a career limiting opportunity)!

Cost of funds is 4.75% (LIBOR)
Confirmation fees are 65 basis points
Negotiation fees are 12 basis points
Discount Commission is 30 basis points
Spot euro is $1.4950
90 day euro is $1.4975
180 day euro is $1.5000
Banker's Acceptance rates are 4.96%

Issues to consider:
The Pakistani's cannot pay for 180 days from shipment
Curtis wants it's money as soon as shipment is made

Assume no ancillary or incidental fees
1. How would you eliminate the foreign exchange risk, is there any? when?how?, explain and calculate
All computations are in U.S. dollars ( you're in the U.S. remember!)

2. What international instrument can be used to ensure performance of both parties? Describe how it works and what parties are involved in this deal

Explanation / Answer

Part 1)

The foreign exchange risk can be eliminated by taking a forward cover for the date on which the transaction is expected to take place (180 days from the date of shipment). The currency risk will be eliminated as the amount will be received in U.S. Dollar under the contract. The calcuation is as follows:

Amount Received under Forward Cover = Value of Gross Receviables in Euro*180 Day Euro Rate

Using the information provided in the question, we get,

Amount Received under Forward Cover = 30,000,000*1.50 = $45,000,000

Thus, Curtis will recieve the value of $45,000,000 under the forward cover, thereby, eliminating risk associated with currency fluctuations.

________

Part 2)

To ensure performance of both the parties, a performing LC (Letter of Credit) can be issued by the buyer. Under this form of LC, the seller is assured by the LC issuing bank that the payment will be released as soon as the seller performs the obligations under the contract. In this case, Curtis will be obliged to deliver the goods to the buyer and can expect payment only after the delivery of goods has taken place. Similarly, the LC issuing bank will be obliged to make the payment (on behalf of the buyer) as soon as the goods have been delivered to the buyer. The four main parties inolved in this form of international instrument would be buyer (also known as applicant), seller (also known as beneficiary), LC issuing bank and advising bank (the bank in the country of the seller through which LC is advised to the seller). The other functional parties include confirming bank, neogitating bank, paying bank and reimbursing bank.

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