Finance of International Trade: Payments and Services November 2008 Past Question Examination Paper – KNEC
This Past Paper examination was examined by the Kenya National Examination Council (KNEC) and it applies to the following Certificate courses
Diploma in Banking and Finance
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THE KENYA NATIONAL EXAMINATIONS COUNCIL
FINANCE OF INTERNATIONAL TRADE: PAYMENTS AND SERVICES
Time: 3 hours
1. Tritex Mills Ltd is your customer trading in cereals on the local markec Due to bad weather which resulted in poor harvest of wheat, Tritex intends to import l00lennes of wheat to satisfy local demand. It has found a supplier in South Africa who is negotiating payment by usance documentary letters of credit with 90 day drafts drawn on your bank The company’s directors have approached you for advice.
(a) Explain to the directors the risks they will be exposed to if they agree to the payment terms requested. (8 marks)
(b) Since the supplier abroad has agreed to give Tritex Mills Ltd three months credit, explain to the directors how the South African supplier can use the letter of credit to raise funds without recourse finance. (12 marks)
2. Your customer is an importer of combustion engines and has been advised by a friend at a local export club that CIF Mombasa international commercial terms (incoterms) and settlement by SWIFT would be most appropriate to his business.
Explain to your customer:
(a) The obligations of the importer under the incoterms above; (10 marks)
(b) The procedure for remitting payments for imports. (10 marks)
3. (a) Explain the advantages to an importer who opts for documentary letters of
credit as a method of payment in inteniational trade. (10 marks)
(b) Your customer, KUEFA Ltd, has secured a contract for the sale of fertilizer to India for a contract price of USD 1 million
KUEFA Ltd requires to import some phosphates from Australia. This phosphate is to be processed in KUEFA’s factory as part of the fertilizer. The Australian supplier requires a documentary credit of USD 500,010.
Evaluate the appropriateness of the back-to-back in this case. (10 marks)
4. (a) Highlight the advantages and disadvantages of franchising to a franchisee.
(b) Your customer, who is a Kenyan importer, requested you to remit
KES 1tO,UXD to an overseas beneficiary with all charges to be passed to the beneficiary.
Set out the book-keeping for a telegraphic transfer, where your bank charges KES 3.000. (10 marks)
5. (a) Explain the risks covered under the NCM compact policy. (12 marks)
b) Your customer, French Beans Ltd, has identified a distributor in Paris through which it can export rather than exporting directly to a number of buyers throughout France. It has been suggested that French Beans Ltd should operate a collection account with a French bank in Paris to which export proceeds could be paid.
Explain the disadvantages to French Beans Ltd if it opens a collection account as suggested. (8 marks)
6. (a) J & B are new importers of processed foodstuffs. They would like to have some degree of credit from the exporter as their limit with the bank has been consume‹£ The supplier has agreed to collection payment terms but suggests that they use direct collections as this will save both on time and bank charges.
(i) Explain the meaning of direct collections. (2 marks)
(ii) Outline the drawbacks of direct collections to an exporter. (6 marks)
(b) Your customer, Galileo Ltd, is negotiating with a buyer in Eutope for a large export order. The buyer has stipulated that payment should be made in US Dollars and the goods delivered CIF New Orleans. Payment terms are net cash one month after arrival of goods.
(i) Explain the credit risks in the method of payment suggested. (4 marks)
(ii) Explain how the customer can minimize the exchange risk. (8 marks)
7. Molo Butterflies Ltd, a customer of your bank, is a KES based aircraft charter company operating in Kenya and the Middle East. It has been awarded a contract to provide freight and passenger services for a number of destinations in the Middle East. The contract which is guaranteed by the governments of various territories is to be signed on 1 August 2008. The value of the contract to the customer is USD 1.5 million and it will & necessary for Molo Butterflies Ltd to charter three aircrafts at a total cost of USD 9tXi,000.
Payments by Molo Butterflies Ltd are as follows:
• 1/3 upon signing of the contract;
• 1/3 six months after signing of the contract;
• 1/3 twelve months after signing the contract.
Receipts by Molo Butterflies Ltd are as follows:
• 1/3 (USD500,000) three months after-signing the contract (guaranteed);
• 1/3 six months after signing the contract (guaranteed);
• 1/3 (USD 500,000) twelve months after signing the contrast.
Your customer asks you to make the best possible financial arrangements to mitigate any risks to them.
USD/KES exchange rates on 1 August 2tXi8 are as follows:
Spot 73.3195 73.3810
3 months forward 0.16 0.21
6 months forward o.44 072
12 months forward 0.85 1.05
• The full expected net receipts are sold forward on 1 August 2008 for delivery on 1 August 2009.
• Ignore any other forward contracts.
• Ignore all commercial risks which may be included in the contract
• Ignore interest charges.
(a) The advice you would give to the company on each of the following:
(i) The risk that the company has to face in accepting the contract which has been awarded to them; (4 marks)
ii) The method that the company should adopt in order to minimize the risk mentioned in (i) above. (6 marks)
(b) A statement of the currency account you would operate on behalf of a customer, including a calculation at the end of the period, showing the total KES proceeds which would be credited to the customer’s account.