Held and Sons are Stockholders in London whose account is operated on Overdraft basis. Hitherto, they have obtained their Stocks in the UK, but they are now forced to look elsewhere for supplies of specialized steel. They have received the following quotations:

Using additional information set out below, show by calculating the cost of 100 tons of the steel, which of quotations (a), (b) and (c) would be the cheapest for your customer.

Freight charges from any European Port £5 per ton
Insurance (to be affected on 110% of CIF value) 1% payable in £
Collection Charges (total for both banks) ¼ %
Documentary Credit Charges (including Acceptance Commission) ¾ %
Overdraft Interest for one month (considered as 1/12 of a year) 15% pa.
Ignore all other possible charges.

It is to be assumed that your customers would have covered any Exchange Risk on the day of shipment, in accordance with rates quoted below, and that all payments and charges relative to any particular quotation are debited on the same day.

[Total Marks 20]
Answer: To determine the cheapest quotation for 100 tons of specialized steel, we need to calculate the total cost in GBP for each option, including the cost of goods converted using the appropriate forward exchange rate, additional charges (freight, insurance, collection, or documentary credit charges), and overdraft interest for the respective payment period at 15% per annum.

The forward exchange rates are calculated as follows:

• The spot rates are quoted as lower – higher, where the lower rate (left side) is used for buying foreign currency (importer’s perspective).
• Forward margins are applied using the right-hand figure, as it represents the less favorable margin for the buyer of foreign currency: larger discount for discount currencies (worse for buyer) and smaller premium for premium currencies (worse for buyer).
• For discount (disc): Forward rate = Spot rate – discount margin.
• For premium (pm): Forward rate = Spot rate + premium margin.
• The margins are in cents (1/100 of the currency unit).

The total cost for each option is:
Principal = Cost of goods in GBP + applicable charges (freight, insurance, collection/DC).
Interest = Principal × 15% × (months / 12).
Total cost = Principal + Interest.

Insurance is calculated on 110% of the CIF value at 1%, but since insurance is part of CIF, we use the formula: Insurance = (Cost + Freight) × (0.01 / 0.99) for FOB/CFR terms (approximating 110% coverage but simplified to 1% on CIF).

Option (a): Norway (FOB Oslo, Open Account, 1 month)

• Invoice amount: 100 tons × NOK 2,125 = NOK 212,500.
• Spot rate for buying NOK: 12.20.
• One-month margin: 10 – 12c disc → Use 12c (0.12) disc.
• Forward rate: 12.20 – 0.12 = 12.08 NOK/GBP.
• Cost of goods in GBP: 212,500 / 12.08 ≈ £17,591.06.
• Freight: 100 × £5 = £500.
• Insurance: (£17,591.06 + £500) × (0.01 / 0.99) ≈ £18,091.06 × 0.010101 ≈ £182.74.
• Principal: £17,591.06 + £500 + £182.74 = £18,273.80.
• Interest (1 month): £18,273.80 × 0.15 × (1/12) ≈ £18,273.80 × 0.0125 ≈ £228.42.
• Total cost: £18,273.80 + £228.42 = £18,502.22.

Option (b): Denmark (CFR London, Draft 2 months)

• Invoice amount: 100 tons × DKK 1,560 = DKK 156,000.
• Spot rate for buying DKK: 8.90.
• Two-month margin: 10 – 8c pm → Use 8c (0.08) pm.
• Forward rate: 8.90 + 0.08 = 8.98 DKK/GBP.
• Cost of goods in GBP: 156,000 / 8.98 ≈ £17,371.94.
• Freight: £0 (included in CFR).
• Insurance: £17,371.94 × (0.01 / 0.99) ≈ £17,371.94 × 0.010101 ≈ £175.48.
• Collection charges: 0.25% × £17,371.94 ≈ £43.43.
• Principal: £17,371.94 + £175.48 + £43.43 = £17,590.85.
• Interest (2 months): £17,590.85 × 0.15 × (2/12) ≈ £17,590.85 × 0.025 ≈ £439.77.
• Total cost: £17,590.85 + £439.77 = £18,030.62.

Option (c): Turkey (CIF London, DC 3 months)

• Invoice amount: 100 tons × TRY 2,112 = TRY 211,200.
• Spot rate for buying TRY: 11.80.
• Three-month margin: 16 – 12c pm → Use 12c (0.12) pm.
• Forward rate: 11.80 + 0.12 = 11.92 TRY/GBP.
• Cost of goods in GBP: 211,200 / 11.92 ≈ £17,718.12.
• Freight: £0 (included in CIF).
• Insurance: £0 (included in CIF).
• DC charges: 0.75% × £17,718.12 ≈ £132.89.
• Principal: £17,718.12 + £132.89 = £17,851.01.
• Interest (3 months): £17,851.01 × 0.15 × (3/12) ≈ £17,851.01 × 0.0375 ≈ £669.41.
• Total cost: £17,851.01 + £669.41 = £18,520.42.

Comparison:

• Option (a): £18,502.22
• Option (b): £18,030.62
• Option (c): £18,520.42

The cheapest option is (b) Denmark at £18,030.62, as it has the lowest total cost after accounting for all elements. This is due to the favorable forward premium, no freight cost, and relatively lower interest despite the two-month deferral compared to the higher charges and interest in the other options.