Subject: INTERNATIONAL TRADE FINANCE

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ITF – OCT 2022 – L3 – Q8 – Remedies to Fraud in International Contracts

State five remedies to fraud in international contracts based on a copper blister fraud case.

Question

During the summer of 2020, Geneva-based Mercuria Energy Group said it had been the victim of cargo fraud following its purchase of 10,000 tons of copper blister. When the cargoes started arriving in China, it found containers full of painted stones instead. The bizarre case happened despite security and inspection controls. About 6,000 tons were loaded for shipment in more than 300 containers on eight vessels. But before its journey from a port near Istanbul, the copper was switched with paving stones, spray-painted to resemble the semi-refined metal. Once the vessels were at sea, Mercuria paid $36m over five installments. The fraud wasn’t discovered until the ships began arriving in the Chinese port of Lianyungang. Mercuria, one of the five-biggest energy traders in the world, is seeking redress in Turkish and UK courts against the copper supplier, Bietsan Bakir. Turkish police have taken a number of people into custody in relation to the fake copper scheme. “Suspects have been taken under custody who are thought to be involved in the various parts of this organised crime against Mercuria,” the company said in a statement while thanking the Istanbul Financial Crimes Department.

Note: All parties in all commercial transactions should be aware of the potential for fraud. In some cases, those parties you negotiate with may not even be aware of the liability they pose. The above fraud case gained global attention through social media on March 9, 2021.

REQUIRED

State five (5) remedies to fraud in international contracts.

[Total Marks 20]

Answer

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Tags: Cargo Fraud, Documentary Verification, Fraud Remedies, Inspection, International Contracts
Level: Level 3

ITF – OCT 2022 – L3 – Q7 – Role of Banks in International Trade

List the roles of banks in international trade in bullet points for SMEs under AfCFTA.

Question

The African Continental Free Trade Area (AfCFTA) is organizing training programs to grow the Small and Medium-sized Enterprises (SMEs) and most importantly to deepen their understanding on international trade and how they can take advantage of the banking system for efficient operation and expansion of their businesses. As Head of Trade Finance of your bank, you have been engaged as a resource person by (AfCFTA) to take Chief Operating Officers of these SMEs on the following topic: “The Role of Banks in International Trade”

REQUIRED:

List these roles (in bullet points only) under the various roles for one mark each.

Note: Long and detailed descriptions are not required.

[Total marks 20]

Answer

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Tags: AfCFTA, Banks Role, Financing, International trade, Payment Services, Risk Management, SMEs
Level: Level 3

Topic: Banking services available from banks and other sources abroad
Series: OCT 2022

ITF – OCT 2022 – L3 – Q6 – Issuing Bank’s Undertaking under UCP 600 Article 7

State the issuing bank's undertaking as per UCP 600 Article 7 a (i-v), b, and c.

Question

State the “Issuing Bank’s Undertaking” as enshrined in Article 7 a (i – v), b and c when it issues a credit on behalf of its customer under the current International Chamber of Commerce (ICC) Publication in respect of Uniform Customs and Practice for Documentary Credit – UCP 600.

[Total Marks 20]

Answer

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Tags: Article 7, documentary credit, Honour, Issuing Bank Undertaking, Reimbursement, UCP 600
Level: Level 3

ITF – OCT 2022 – L3 – Q5 – D/A Collections and Buyer Protection

Explain D/A terms, expected instructions on collection order, address suggestion on refusing non-spec goods, and ways for drawee protection in D/A collections.

Question

Mr. Bob Ferguson, senior director of your customer, Adelaide Ltd is negotiating for the first time with suppliers abroad to purchase some outwear garments, which are at present unobtainable in the UK. The terms of payment which the sellers have suggested are a 90 days’ sight draft D/A with presentation through a UK bank. You understand that the presentation will be subject to Uniform Rules for Collections (and the shipping terms are to be CFR UK port). Your customer believes that he will have the opportunity of examining the goods when they are received in the UK and that, if they are not in accordance with specification, he can refuse the goods and will not be liable to pay the sellers, since all charges will be against the goods.

Required

a) Write brief notes on the terms of payment mentioned above; [4 marks]

b) Indicate the instructions you would expect to see on the collection order; [8 marks]

c) What would say to the suggestion by Mr. Bob Ferguson that, if goods were not in accordance with specification, the company could refuse to take up and pay for them? [6 marks]

d) How can the drawee obtain a measure of protection with D/A collections? [2 marks] [Total Marks 20]

Answer

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Tags: Bill of Exchange, Buyer Protection, CFR Terms, Collection Order, Documents Against Acceptance, Specification Compliance
Level: Level 3

Topic: Uniform Rules for Collections
Series: OCT 2022

ITF – OCT 2022 – L3 – Q4 – Back-to-Back Credits for Import Financing and Cash Flow

Describe back-to-back credits to protect the customer and assist cash flow, assess appropriateness for German supplier in Euros, and suggest a compromise for compliance.

Question

Builders Merchants Ltd, customers of your bank, supply the building construction industry with a wide range of building materials and products. Their Financial Director, Mr. Kwame Annoh, calls to see you to discuss a CIF contract, which has been signed, to supply a range of fittings and building materials to an overseas buyer. During the conversation you discover that all the goods will be bought from overseas and that all the suppliers are insisting upon secured methods of payment. The Financial Director asks you to suggest a method by which his company can be fully protected, since cash flow considerations are causing some concerns at the present time. The overseas CIF contract is expressed in sterling but one supplier based in Germany, is insisting upon being paid in Euros.

Required

a) A brief description of basic instrument which would be appropriate in answering the needs of the Builders Merchants Ltd. Indicate why your suggestion will cater for your customer by assisting them to overcome their cash flow difficulties and why it will also give some comfort to their potential suppliers. [12 marks]

b) State briefly whether the method described by you in (a) is or is not, appropriate to the contract with the German supplier. Give reasons for your answer. [2 marks]

c) A compromise that you would consider arranging for Builders Merchants Ltd. which would assist them in complying with the request of the German supplier, bearing in mind that the German company requires security of payment.

[6 marks] [Total Marks 20]

Answer

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Tags: Back-to-Back Credits, Cash Flow Management, Multi-Currency Contracts, Secured Payment, Supplier Security
Level: Level 3

Topic: The main types of documentary letters of credit
Series: OCT 2022

ITF – OCT 2022 – L3 – Q3 – Hedging Export Proceeds with Forward Contracts and Extension

Calculate foreign currency amounts from export contracts, applicable forward rates, GHS credited from received currencies, and close out/extend the New Zealand transaction to show total GHS received.

Question

Agribusiness Plc. is a large corporate in the commodity industry specializing in mango production around Somanya and Afram Plains. After surviving the Covid-19 pandemic, which nearly collapsed the company, Agribusiness is on its feet firmly and now leading the export of fresh mangoes in the West African sub-region. Taking advantage of the African Continental Free Trade

Area (AfCFTA), the company is now looking beyond its European buyers to meet the demand needs of other African countries.

Last week, the Chief Executive Officer and the Chief Operating Officer invited you to their warehouse to discuss their export contracts with you. Both you and your customers were very happy because this transaction will enable them to start paying off the loan facilities your bank has extended to them. These four contracts are for the export of 20 tons of fresh mangoes to

Switzerland, New Zealand, Zambia and Botswana in the ratios of 0.35; 0.30; 0.15 and 0.20 respectively. One month after the meeting at the warehouse, Agribusiness engaged Sintim Freight Forwarders to handle the export orders to the buyers. Goods were eventually shipped and related documents submitted through your counters for payments which were expected in exactly one month’s time in Ghana Cedi for your customer’s account. On 1st September, the company entered into one-month forward exchange contract with your bank to hedge their eventual expected proceeds.

Price per ton at CIF values to their respective destinations are:

Switzerland New Zealand Zambia Botswana
CHF 3, 410 NZD 5, 783 ZMW 58, 765 BWP 44, 970

September 1st rates quoted by your bank are as follows:

Spot Rates One Month Forward

CHF/GHS 8.2350 – 8.2365 0.047 – 0.053 Cedis dis.

NZD/GHS 4.8610 – 4.8625 0.023 – 0.032 Cedis dis.

USD/GHS 7.8530 – 7.8545 0.032 – 0.040 Cedis dis.

GHS/ZMW 2.1000 – 2.1015 0.025 – 0.035 Kwa. dis.

GHS/BWP 1.5715 – 1.5725 0.040 – 0.053 Pula. dis.

October 1st Spot Rate One Month Forward

USD/GHS 7.8450 – 7.8465 0.35 – 0.45 Cedis dis.

NZD/GHS 4.8590 – 4.8610 0.018 – 0.022 Cedis dis

All the expected export proceeds were received by your bank on due date except the one from New Zealand where the buyer could not clear the goods due to problems at Port Nicholson, Wellington. Agribusiness has accordingly extended the forward contract by one month with your bank.

REQUIRED

a. Calculate the amount of foreign currency from each buyer. [4 marks]

b. Calculate the applicable forward rates. [8 marks]

c. Calculate the amount credited to your customer’s GHS account from the foreign currencies received on their behalf. [4 marks]

d. Close out and extend the New Zealand transaction and show the total GHS your customer received under the four export contracts. [4 marks]

[Total Marks 20]

Answer

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Tags: AfCFTA, Close Out and Extension, export proceeds, Forward Exchange Contracts, Hedging, Multi-Currency Calculations
Level: Level 3

Topic: Trade promotion services
Series: OCT 2022

ITF – OCT 2022 – L3 – Q2 – Forward Cover for Documentary Credit Receivables in JPY to EUR

Calculate the Euro amounts received by the beneficiary on presentation dates after arranging forward cover for JPY receivables under a documentary credit, including close outs for differences in actual shipments.

Question

Farm Technologies Ltd is an agrochemical company in Tokyo, Japan dealing in wholesale distribution. The company has entered into a contract to import agricultural chemical products from Bayer AG in Leverkusen, Germany. The suppliers have insisted on the use of documentary credit which has been agreed by Farm Technologies Ltd. Some of the major terms under this credit are as follows:

• In favour of : Bayer AG, Leverkusen.

• For the account of : Farm Technologies Ltd, Tokyo

• Expiring : November 25

• Amount :About JPY12,900,000

• Covering : About 600 metric tons of agrochemicals to be shipped in

two approximately equal installments, one during the first half of July and one during the first

half of August

• Price : JPY21, 500 per metric ton CIF Tokyo.

Drawings under the credit will be as follows:

• 95% of the value of a provisional invoice upon presentation of documents strictly in order.

The remaining 5% will be available against final invoice accompanied by an independent weight and analysis certificate showing the final weight and chemical analysis.

On 25 May the beneficiary asks you to cover their receivables forward in the foreign exchange market as follows:

i. Arrange forward cover immediately in respect of each of the value of 300 metric tons shipment.

ii. Upon presentation of documents, close out any differences between the forward contract amounts and the actual values claimed.

iii. Ignore forward cover for the balance to be claimed in October.

The documents were presented in order on the following dates:

15 July: Documents showing shipment of exactly 294 metric tons

10 August: Documents showing shipment of exactly 315.79 metric tons

31 October: Final invoice claiming an agreed figure of JPY48, 950. This figure represents the

net settlement of the remaining 5%.

You were asked in early May to confirm this irrevocable documentary credit on behalf of a Japanese correspondent bank.

REQUIRED

Using the following rates of exchange between Euro and JPY displayed by Commerzbank, Frankfurt, where you work at the Trade Finance Department, calculate the Euro sums Bayer AG will receive on the appropriate presentation dates.

25 May Spot 134.95 135.45

1 month forward 1.30 yen 1.15 yen premium

2 months forward 2.15 yen 1.95 yen premium

3 months forward 2.50 yen 2.30 yen premium

6 months forward 4.75 yen 4.65 yen premium

15 July Spot 130.00 132.00

10 August Spot 140.50 142.25

31 October Spot 133.80 135.25

Note:

For the purpose of this question, Commerzbank and the beneficiary assume that shipments and presentation of documents will be made on the same day.

Ignore letter of credit charges as these are for buyer’s account.
Ignore any close out of figures of less than 100 yen.

[Total Marks 20]

Answer

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Tags: Close Out, documentary credit, Forward Exchange Cover, JPY to EUR Conversion, Provisional Invoice, Shipment Installments
Level: Level 3

ITF – OCT 2022 – L3 – Q1 – Financing Export Transaction with Bill of Exchange and FX Risk Protection

Advise on methods to protect from FX risks for an export to South Africa using bill of exchange, outline contractual obligations, calculate proceeds and cedis from forward and currency borrowing, and formula to compare borrowing costs.

Question

Your customer, Adonteng Traders Limited has finished all the registration formalities to take advantage under the new continental trading booming in Africa. Specializing in export of food throughout the continent, Adonteng Traders have negotiated with South African buyers for supply of assorted foodstuff. The arrangement allows them to draw bill of exchange on buyers immediately after shipment for full payment after 90 days. Because of restricted profit margins over the past few months due to the Russian-Ukraine problem, and a shortage of working capital, the customers called to see you on 30 March to seek your advice on how best they can finance this transaction worth USD250, 000 falling due on 30 June. The credibility of the South African buyers is highly undoubted. Adonteng Traders are seeking funding from your bank for three months in either Ghana Cedi equivalent or USD250, 000 and would pay off when final proceeds are due from the buyers. Additional information available on 30 March is as follows:

(i) USD/GHS

Spot 7.7120 7.7160

1 month forward 0.035 0.043 Cedis disc

2 months forward 0.051 0.063 Cedis disc

3 months forward 0.060 0.065 Cedis disc

(ii) Base rate is 19.0%

(iii) US 3 month LIBOR rate is 5.25%

(iv) Adonteng Traders is borrowing dollars from your US correspondent bank at 1.5% over US LIBOR rate.

(v) For interest on USD borrowing, kindly use mid-rate to convert.

(vi) Your customers do not purchase goods for which they have to pay in foreign currency.

REQUIRED:

(a) By what methods can your customers be protected from foreign exchange risks whilst preserving their profit margins? [2 marks]

(b) Outline any contractual obligations in respect of foreign exchange that your customers would have to undertake. [2 marks]

(a) above, and the cedis proceeds which each method would produce, stating which of the two options is better for Adonteng Traders. [10 marks]

(d) Set out a formula which your customers would use to compare cedis and foreign

currency borrowing costs, taking into account, where appropriate, the advantages or disadvantages of forward cover. [6 marks]

Notes: (2) Base your calculations on a 30 day month and a 360 day year.

[Total Marks 20]

Answer

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Tags: AfCFTA, Bill of Exchange, Currency Borrowing, Export Financing, Foreign Exchange Risk, Forward Contracts, Interest Calculations, Profit Margins
Level: Level 3

Topic: The meaning of International Trade Finance/Payment and Risk Management Services
Series: OCT 2022

ITF – APR 2023 – L3 – Q8 – Non-Financial Non-Transport Documents in Trade

Briefly explain ten documents important in international trade that are neither financial nor transport in nature.

Question

Documents are very important in international trade as they control the movements of goods and in some cases give legal titles to true owners. Briefly explain ten documents which are neither financial nor transport in nature but which nonetheless, are equally important in international trade. [2 marks each]

[Total Marks 20]

Answer

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Tags: Certificates, Commercial Documents, Trade Compliance
Level: Level 3

Topic: International Trade
Series: APR 2023

ITF – APR 2023 – L3 – Q7 – Fraudulent Remittance Prevention

Explain in 10 bullet points how to prevent a fraudulent remittance scenario involving a SWIFT MT910 message.

Question

You are in charge of the Foreign Remittances Department of your bank. About a week ago, a certain man came to your office to enquire whether you have received any remittance on his behalf. When asked how much he was expecting he said the amount was USD 23, 745.00 from his brother in America, to which you replied in the negative. He had a few discussion with with you, gave you his name as well as cell phone number and left.

Three days after, you received a SWIFT message MT9 10 (confirmation of credit advice) with an amount of USD 23, 745.00 (from Citbank N.A. so you called him. He gave his account details of your bank’s branch at Somanya. Upon this you gave instruction for payment to be processed into his current account in local currency. Customer withdrew the funds as soon as it hit the account explaining to the branch manager that it was for a building project and had to quickly buy the building material before prices escalate. A week later, you returned from a meeting at Head Office to find a SWIFT message on your desk from Citbank N.A requesting for immediate return of the paid out USD 23.745 received under MT9 10 as it has been confirmed by the FBI as a fraudulent transaction. In fact, Citbank is urgently demanding authorization message from your bank to debit its Nostro account in settlement.

Required:

Explain what you could have done to prevent this from happening to your bank. Your answer should be a ten (10) bullet point format.

[Total Marks 20]

Answer

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Tags: Bank Procedures, Fraud Detection, Preventive Measures, SWIFT MT910
Level: Level 3

Topic: SWIFT Messages
Series: APR 2023

ITF – APR 2023 – L3 – Q6 – Export Factoring vs Invoice Discounting

Define export factoring and state 8 differences between factoring and invoice discounting.

Question

a. What is Export Factoring? [4 marks]

b. State 8 differences between factoring and invoice discounting. [16 marks]

[Total – 20 marks]

Answer

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Tags: Differences, Export Factoring Definition, Trade Finance Methods
Level: Level 3

Topic: Invoice Discounting
Series: APR 2023

ITF – APR 2023 – L3 – Q5 – Medicare & Associates Documentary Credit Issue

State issuing bank's responsibilities under UCP 600 and measures to prevent non-payment in a documentary credit scenario for hospital equipment importation.

Question

You are the head of your bank’s Trade Department. Through the bank’s Corporate Department you received an application for the establishment of documentary letter of credit (L/C) from a customer. Medicare & Associates for the importation of hospital equipment from Germany. You supervised the issue of the credit in favour of the beneficiary and advised it through your euro correspondent, Commerzbank, Frankfurt. The credit amount of Euro 350, 000 was the total cost of the hospital equipment at CIF. Tema port. Upon receiving the L/C. Commerzbank immediately advised the beneficiary suppliers who organized the goods and shipped them under the CIF terms to Tema port. Documents were accordingly sent to the counters of Commerzbank for payment as the credit was under sight payment.

After thoroughly examining the documents, Commerzbank paid the beneficiary under the compliant presentation and sent the documents to your bank for reimbursement.

Upon receiving the documents, your examination team went through for any discrepancy but found none. Unfortunately, Medicare & Associates had no funds in their account to meet the payment of the reimbursement claim from Commerzbank.

Your bank had to reimburse Commerzbank immediately in accordance with Article 7 of UCP 600 – which is categorical on the Issuing Bank’s undertaking when it issues a documentary credit. You released the documents received from Commerzbank to customers and goods were cleared to their warehouse which was eventually sold to ultimate buyers. Strangely enough, Medicare & Associates could not pay your bank – citing Covid-19 problems as their reason for the failure to pay.

Medicare & Associates are now asking for the Euro 350,000 to be converted into a loan facility and be given time to pay.

Required i. State the undertaking/responsibilities of your bank with respect to UCP 600 of your bank which agreed to issue this documentary credit on behalf of its customer. (9 marks) ii. Indicate what could have been done to prevent this from happening? (11 marks)

[Total Marks 20]

Answer

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Tags: Bank Undertakings, Customer Default, letters of credit, Preventive Measures, Reimbursement
Level: Level 3

Topic: Risk Prevention
Series: APR 2023

ITF – APR 2023 – L3 – Q4 – Johnson Company Ltd Contract Negotiations

Identify and explain two bank products to overcome problems in negotiations between Johnson Company Ltd and Al Watany Ltd for generator export.

Question

You are the manager of Merchant Bank Ltd, which maintains the account of Johnson Company Ltd (JCL.) a local generator dealerships JCL’s Managing Director. Kingsley Arthur, has advised you today that the company has decided to purchase new generators from manufacturers in Europe because the terms of local suppliers are no longer favourable to their business.

Mr. Arthur informs you that he is in negotiations with a new Egyptian buyer. Al Watany Ltd for the export of the generators to Cairo for a total cost of USD 500, 000,00.

Some of the contract details are that the Egyptian buyers would have to make an advance payment of 20% upon signing the contract. Again, the buyers. Al Watany Ltd, should pay the last 10% immediately after shipment of the generators. Mr. Arthur is facing two major problems in the negotiations:

a) Since it is a new trading relationship, Al Watany Ltd is reluctant to agree to the 20% deposit when the contract is signed. Al Watany Ltd is concerned that the money could be lost if the contract did not work out as expected. b) Al Watany Ltd also insists on paying the final 10% of the contract price two months after shipment, so that they can check the generators are in good and acceptable condition on arrival in Cairo. Mr. Arthur is worried that the delay in payment will adversely affect the company’s cash flow.

Required: i. Identify two bank products that would help to overcome the problems in the commercial contract negotiations between Johnson Company Ltd and Al Watany Ltd. [5 marks] ii. Explain how each of these products would operate and advise the companies of the possible effects on their businesses by using these products. [15 marks]

[Total Marks 20]

Answer

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Tags: Advance Payment, Bank Guarantees, Delayed Payment, Performance Bonds, Trade Negotiation
Level: Level 3

Topic: Contract Risks
Series: APR 2023

ITF – APR 2023 – L3 – Q3 – Foreign Exchange Rate Scenarios

For five FX scenarios, state the type of rate quotation, bank's position, applicable rate, and settlement amount.

Question

In each of the five scenarios below, you are required to state clearly the following: A. The type of rate quotation and its applicable rules on the market. (1 mark) B. The position of your bank in the transaction. (1 mark) C. The applicable rate for your calculation. (1 mark) D. The settlement amount for your customer’s account. (1 mark)

Cement Solutions Ltd (CSL) is a new manufacturing company taking advantage of the housing deficit of the country to produce quality and affordable cement for the real estate industry. They have imported clinker from a Norwegian company worth NOK 750, 000, 00. Payment is due tomorrow and the Accountant called the sales desk at your bank’s Treasury for the rate to know how much will be debited to their Ghana Cecil account at your branch at Ridge, Accra. Your bank’s rate is as follows: Spot NOK/GHS 1.2210 1.2235
Asesewa Quarries Ltd. (AQL) taking advantage of the AICFTA, shipped limestone to a mining company in Angola costing Angolan Kwanza 3, 000, 000.00. AQL did not cover forward and want to know how much the company will receive in Ghana Cedis as payment is due today. AQL keeps its business account with your bank’s branch at Somanya. See rates below: Spot GHS/AOA 39.6805 39.9815
Dampare & Sons are dealers in quality rice on the Ghanaian market and have been importing mainly from the Asian millers which are always quoted in US dollars. The uncertainty of the depreciating local currency is affecting their profit margins. Under the AICFTA they now get their supplies from neighbouring Nigerian millers which have improved their bottom-line. The Accountant called at your Tema Market branch to make payment for NGN 15.0 million and your quote for the day is as follows: Spot NGN/GHS 0.0285 0.0295
The Head of Finance of University of KwaZulu-Natal, which has been chosen among the ten universities doing Medicine in South Africa, called at your Durban branch this morning to make payment for GBP 40,750,00 to a hospital equipment supplier in London to the debit of their local currency account. The value date is today and your bank has quoted the following rate from its trading floor:

Spot GBP/ZAR 21,95010 21,9835 5. You are in charge of the trading desk for foreign exchange operations at Commerzbank Tower, Frankfurt Main. You picked up an in-coming phone call and the counterpartry, your well-known customer, requested to pay GHS 775, 000,00,00 to a beneficiary company in Adum, Kumasi for goods imported. Based on your bank’s electronic screen displaying the rates for today as shown below, calculate how much should be debited to your customer’s euro account:

Spot EUR/GHS 13,5605 13,5675

[Total marks 20]

Answer

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Tags: Bid Ask Rates, Direct Quotes, Importer Exporter Transactions, Indirect Quotes, Settlement Amounts
Level: Level 3

Topic: Settlement Calculations
Series: APR 2023

ITF – APR 2023 – L3 – Q2 – Eagle Eyes Limited Investment Strategy

Discuss and illustrate the validity of Eagle Eyes Limited's strategy to disinvest US dollar fixed deposit, convert to GHS for Treasury bills, and hedge with a forward contract.

Question

Eagle Eyes Limited (EEL), took advantage of the business prospects under the National Pensions Regulatory Authority (NPRA) and registered as a Fund Manager/Custodian under the law. They chose the High Street branch of your bank and have since proved to be very wealthy customers. Today, you are in the seat managing affairs of the branch. They called on you to discuss movements in their investment as a new strategy to manage their business under the current economic challenges the country is experiencing.

They intend to disinvest their US dollar fixed deposit of US$950,000 which is earning 13.98 percent per annum, sell to your bank for local currency and take advantage of rising Government Treasury bill rates which has seen a major increase on the back of the prime rate. Being much aware of the financial terrain, EEL is hedging its risk through a six month forward contract as it still holds some US dollar obligations in its books.

Your bank’s borrowing rates are as follow:

US dollar 6 months fixed	13.98% p.a.
GH cedis 6 months Treasury Bill	27.35% p.a.

On the foreign exchange market, your bank is quoting the follow rates for today:

Spot	9.8750
6 months forward	0.7125 cedis discount

Required: a. In bullet point form, indicate what you would discuss with your customer regarding their investment re-pricing plans. [10 marks] b. Use the spot and forward margins and interest rates shown above to illustrate your answer. Indicate the validity or otherwise of the strategy of EEL. [10 marks]

[Total Marks 20]

Answer

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Tags: Fixed Deposit, Forward Exchange, Hedging Risks, Strategy Validity, Treasury bills
Level: Level 3

Topic: Interest Rate Arbitrage
Series: APR 2023

ITF – APR 2023 – L3 – Q1 – Timber International Export Finance Calculation

Calculate net profit for Timber International's timber exports to Libya, Tunisia, and Saudi Arabia, including schedules for supplier payments and buyer receipts, and the overdraft account with interest.

Question

==========

Question Title: [ITF – APR 2023 – L3 – Q1 – Timber International Export Finance Calculation] Level: LEVEL III Professional Bodies: CIBG Programs: ASSOCIATESHIP EXAMINATION Subjects: INTERNATIONAL TRADE FINANCE Topics: International Trade Finance, Export Finance, Letters of Credit, Forward Exchange Contracts, Overdraft Facilities, Interest Calculations Series: APRIL 2023 Total Marks: 20 Question Tags: Export Shipments, Payment Schedules, Receipts Schedules, Overdraft Account, Forward Rates, Interest Calculation, Net Profit Question Short Summary: Calculate net profit for Timber International’s timber exports to Libya, Tunisia, and Saudi Arabia, including schedules for supplier payments and buyer receipts, and the overdraft account with interest. ——————————————————————— Question: Question One

Timber International are global exporters of first class sawn timber. Though they have their large buyers in Europe, they have taken advantage of the AICFTA for further expansion. As your customers, they have come to discuss the finance of contracts to supply “Odum” kiln dried sawn timber to their new buyers in North Africa and the Gulf – Libya, Tunisia and Saudi Arabia. Timber International had agreed with these buyers under confirmed irrevocable letters of credit under the following details:

Shipments: 10 May 40 cubic meters to Libya at Libyan Dinar – LYD 5, 386.50 per cubic meter 14 June 50 cubic meters to Tunisia at Tunisia Dinar – TND 3, 517.50 per cubic meter 8 July 45 cubic meters to Saudi Arabia at Saudi Riyal – SAR 4, 168.50 per cubic meter

Payments: Ten days after shipment date, Timber International will issue a one-month bill of exchange on their new buyers. Proceeds of these drafts will be wired by SWIFT payment platform to your bank on due dates. To minimize risks, the company has completed a one-month forward exchange contracts with your bank on the dates drafts were drawn by Timber International on these buyers.

Timber International decided to buy the processed Odum timber from local suppliers at an agreed price of Euro 832 per cubic meter FOB to any of the three ports of destination Benghazi, Tunis and Jeddah Islamic ports respectively.

It is further agreed that payment to the local suppliers will be made exactly seven days after shipment date and within which period your bank would have already received the necessary export documents from the ultimate suppliers. To meet timely and uninterrupted payment to suppliers, Timber International applied for an overdraft facility in local currency to finance this business. In each case, payment under the credit was made to the local suppliers in euros on the agreed dates as appropriate, and debited to the cedi overdraft account accordingly.

Please note the following additional information:

Ghana Reference Rate is 33.25% p.a.
Your bank takes a spread of 2% p.a. on facilities.
Day basis for overdraft interest calculation is 360 days for a year with each month also taken as 30 days. Kindly round-up all interest calculations amount and post as a single figure after all postings have been made.

Required On the basis of the following additional information, calculate the net profit in Ghana Cedis for your customer, showing: a. Schedule of Payments to Suppliers (3 marks) b. Schedule of Receipts from Buyers (6 marks) c. Overdraft account of your customers showing all postings (11 marks)

Rates for the transactions are detailed below:

	Spot			One month
17 May	EUR/GHS	13.5200	13.5250	0.0010-0.0015 cedis discount
21 June	EUR/GHS	13.5305	13.5350	0.0025-0.0030 cedis discount
15 July	EUR/GHS	13.5525	13.5575	0.0040-0.0045 cedis discount

	Spot			One month
20 May	LYD/GHS	2.6000	2.6100	0.0150-0.0200 cedis discount
24 June	TND/GHS	4.0500	4.1500	0.0050-0.0100 cedis discount
18 July	SAR/GHS	3.4000	3.4105	0.0030-0.0450 cedis discount
				[Total Marks 20]

Answer

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Tags: Export Shipments, Forward Rates, Interest calculation, Net Profit, Overdraft Account, Payment Schedules, Receipts Schedules
Level: Level 3

Topic: Interest Calculations
Series: APR 2023

ITF – APR 2024 – L3 – Q8 – Post-Shipment Finance Products

Explain briefly the post-shipment finance products: Export Bill Negotiation, Export Bill Discounted, Advance against Banker's Acceptance, and Advance against an Export Bill sent for Collection.

Question

Post-Shipment Finance refers to an Advance or Loan extended to the exporter on the strength of documentation after goods have been shipped to the importer. It is more popular in Cross Border Trade transactions. This facility is extended to the exporter either on with or without recourse basis and is also applicable to both Documentary Credit and Non-Documentary Credit transactions.

REQUIRED With the above in view, explain very briefly, the following Post-Shipment Finance Products: A. Export Bill Negotiation B. Export Bill Discounted C. Advance against Banker’s Acceptance D. Advance against an Export Bill sent for Collection

Answer

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Topic: Advance against banker's acceptance, Export bill negotiation, FINANCIAL SERVICES FROM BANKS AND OTHER SOURCES
Series: APR 2024

ITF – APR 2024 – L3 – Q3 – Cost Calculation for Specialized Steel Quotations

Calculate the effective cost of 100 tons of specialized steel from different country quotations considering payment terms and additional information and determine the most favorable quotation ignoring other charges.

Question

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:

Country	Price Per Ton	Payment Terms
a. Norway	NOK 2,125	FOB, Oslo Open Account: Settlement one month after shipment.
b. Denmark	DKK 1,560	CFR, London Draft drawn payable two months after shipment (Collection Charges for buyer).
c. Turkey	TRY 2112	CIF, London Irrevocable Documentary Credit payable three months after shipment.

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.

	Spot	One Month	Two Months	Three Months
Norway	12.20 – 12.50	10 – 12c disc	15 – 18c disc	20 – 23c disc
Denmark	8.90 – 9.10	8 – 5c pm	10 – 8c pm	14 – 11c pm
Turkey	11.80 – 12.05	12 – 9c pm	14 – 11c pm	16 – 12c pm

Answer

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Tags: Cost Calculation, Financing, Import Costs, international suppliers, Overdraft, Payment Terms, Security, steel quotations
Level: Level 3

Topic: CIF), Foreign exchange rates, Forward Contracts, Import financing, Risk Management
Series: APR 2024

ITF – APR 2024 – L3 – Q2 – Option Forward Contracts and Rate Calculations

Define an option forward contract and calculate the applicable rates for three scenarios involving option contracts for buying or selling foreign currencies (USD, NGN, CHF) based on given spot and forward rates.

Question

(a) What do you understand by Option Forward Contract?

(b) From the following scenarios, calculate the appropriate rate for your customer, by specifically choosing the correct Option Rate applicable in each circumstance: I. Your customer wishes to take out an Option Contract on 1 March for the period 1 March to 1 April, to buy US $30,000 to pay for goods imported from the USA. Your bank’s rates are as follows: 1 March Spot USD/GHS 11.3450 11.3540 One month forward 0.0520 0.0545 cedis dis.

ii. To manage the risk of its Foreign Exchange, your customer came to arrange for Forward Exchange Contract for export proceeds of NGN 7.8 million due within the next two months. Your customer wishes to take out an Option Contract on 1 March for the period 1 April to 1 May to sell the Foreign Currency to your bank. Your quoted rates are as follows: 1 March Spot GHC/NGN 68.0110 68.0125 One month forward 0.0120 0.0145 naira dis Two months’ forward 0.0165 0.0195-naira dis.

iii. The Import Bill of your customer falls due within the next three months. The customer wishes to take out an Option Contract on 1 March to pay the Swiss Franc 25,000 anytime between 1 May and 1 June. Rates are as follows: 1 March Spot CHF/GHS 12.8215 12.8265 Two months’ forward 0.0865 0.0890 cedis dis Three months’ forward 0.0910 0.0945 cedis dis

Answer

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Tags: CHF/GHS, export proceeds, Forward Exchange, GHS/NGN, Import Payments, option forward contract, rate calculation, USD/GHS
Level: Level 3

Topic: Forward Contracts, Mechanics of forward contracts, Protection against exchange risks, Rates of exchange
Series: APR 2024

ITF – APR 2024 – L3 – Q1 – Financing Options for Advance Payment

Calculate and compare two financing options for a customer awaiting an advance payment under a construction contract: borrowing the USD amount or the GHS equivalent, considering exchange rates, interest, fees, and a forward contract; select the most favorable option from the customer's perspective.

Question

Zakaria Construction Plc. (ZCP) are your customers specialized in the construction of highways. Sometime in February, your customer approached you to discuss their intention to apply for a Bid Bond to participate in an International Competitive Tender by the Ministry of Roads and Highways. The Tender is for the award of a contract to construct the Eastern Corridor Road. After discussions with your bank, the Bid Bond was issued in Favour of Ministry of Roads and Highways. On March 1, Mr. Adamu, the Chief Finance Officer of ZCP, called to inform you that the company has successfully won the Tender and had been awarded a contract to construct a portion of the main project. At the meeting, Mr. Adamu showed other documents confirming the award of the contract – which also showed the contract value as USD1.2million. The meeting discussed at length, how the bank could assist ZCP to obtain an Advance Payment Bond in Favour of Ministry of Roads and Highways to enable the company access $11.25 %$ initial Mobilization Funding of the contract value.

The following events took place: a. On April 1, the Advance Payment Guarantee was issued and submitted to the Ministry of Roads and Highways. b. The $11.25 %$ Advance Payment Funding is confirmed by Ministry of Roads and Highways and will be received by your bank exactly in three months’ time, on July 1, for customer’s account. c. Also on April 1, the company entered into three months’ Forward Contract to sell the US Dollar proceeds of the $11.25 %$ Advance Payment to your bank on arrival of funds.

ZCP has to acquire materials before main construction works begin in July and so, have requested your bank for immediate funding and have proposed two options as follows: I) To borrow the US Dollar amount of the $11.25 %$ Advance Payment for three months and repay when it is received on July 1. ii) To borrow Ghana Cedi equivalent of the US Dollar amount for three months and repay from proceeds of the three months Forward Contract.

Rates available for the day are as follows:

April 1,	Spot	10.2570
One month forward	0.0085	10.2640
Two months’ forward	0.0115	0.0095 cedis discount
Three months’ forward	0.0135	0.0125 cedis discount
		0.0145 cedis discount

You are also given the following additional information: a. Term SOFR (Secured Overnight Financing Rate) which has replaced the LIBOR, is quoted this morning for 3 months US Dollar at $5.1 %$ with your bank’s margin at $4.5 %$. b. Commitment and Arrangement Fees are charged separately on Dollar borrowing at $1.50 %$ and $0.50 %$ respectively. c. Interest and other charges on US Dollar borrowing should be translated at middle-rate. d. For ZCP, your bank will lend local currency at $2 %$ above its Base Rate of $21.75 %$ p.a. e. Processing Fees for Cedi Facility is $1.0 %$. f. Cedi Facility also attracts Group Insurance Commission of $1.50 %$.

REQUIRED Calculate each of the two options and choose the most favorable one from your customer’s point of view, stating your reason.

Answer

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Tags: Advance Payment Bond, bid bond, Fees, Forward Contract, GHS Loan, Interest calculation, SOFR, USD Loan
Level: Level 3

Topic: Foreign Currency Borrowing, Forward Contracts, Local Currency Borrowing
Series: APR 2024

Subject: INTERNATIONAL TRADE FINANCE

ITF – OCT 2022 – L3 – Q8 – Remedies to Fraud in International Contracts

State five remedies to fraud in international contracts based on a copper blister fraud case.

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ITF – OCT 2022 – L3 – Q7 – Role of Banks in International Trade

List the roles of banks in international trade in bullet points for SMEs under AfCFTA.

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ITF – OCT 2022 – L3 – Q6 – Issuing Bank’s Undertaking under UCP 600 Article 7

State the issuing bank's undertaking as per UCP 600 Article 7 a (i-v), b, and c.

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ITF – OCT 2022 – L3 – Q5 – D/A Collections and Buyer Protection

Explain D/A terms, expected instructions on collection order, address suggestion on refusing non-spec goods, and ways for drawee protection in D/A collections.

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ITF – OCT 2022 – L3 – Q4 – Back-to-Back Credits for Import Financing and Cash Flow

Describe back-to-back credits to protect the customer and assist cash flow, assess appropriateness for German supplier in Euros, and suggest a compromise for compliance.

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ITF – OCT 2022 – L3 – Q3 – Hedging Export Proceeds with Forward Contracts and Extension

Calculate foreign currency amounts from export contracts, applicable forward rates, GHS credited from received currencies, and close out/extend the New Zealand transaction to show total GHS received.

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ITF – OCT 2022 – L3 – Q2 – Forward Cover for Documentary Credit Receivables in JPY to EUR

Calculate the Euro amounts received by the beneficiary on presentation dates after arranging forward cover for JPY receivables under a documentary credit, including close outs for differences in actual shipments.

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ITF – OCT 2022 – L3 – Q1 – Financing Export Transaction with Bill of Exchange and FX Risk Protection

Advise on methods to protect from FX risks for an export to South Africa using bill of exchange, outline contractual obligations, calculate proceeds and cedis from forward and currency borrowing, and formula to compare borrowing costs.

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ITF – APR 2023 – L3 – Q8 – Non-Financial Non-Transport Documents in Trade

Briefly explain ten documents important in international trade that are neither financial nor transport in nature.

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ITF – APR 2023 – L3 – Q7 – Fraudulent Remittance Prevention

Explain in 10 bullet points how to prevent a fraudulent remittance scenario involving a SWIFT MT910 message.

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ITF – APR 2023 – L3 – Q6 – Export Factoring vs Invoice Discounting

Define export factoring and state 8 differences between factoring and invoice discounting.

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ITF – APR 2023 – L3 – Q5 – Medicare & Associates Documentary Credit Issue

State issuing bank's responsibilities under UCP 600 and measures to prevent non-payment in a documentary credit scenario for hospital equipment importation.

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ITF – APR 2023 – L3 – Q4 – Johnson Company Ltd Contract Negotiations

Identify and explain two bank products to overcome problems in negotiations between Johnson Company Ltd and Al Watany Ltd for generator export.

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ITF – APR 2023 – L3 – Q3 – Foreign Exchange Rate Scenarios

For five FX scenarios, state the type of rate quotation, bank's position, applicable rate, and settlement amount.

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ITF – APR 2023 – L3 – Q2 – Eagle Eyes Limited Investment Strategy

Discuss and illustrate the validity of Eagle Eyes Limited's strategy to disinvest US dollar fixed deposit, convert to GHS for Treasury bills, and hedge with a forward contract.

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ITF – APR 2023 – L3 – Q1 – Timber International Export Finance Calculation

Calculate net profit for Timber International's timber exports to Libya, Tunisia, and Saudi Arabia, including schedules for supplier payments and buyer receipts, and the overdraft account with interest.

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ITF – APR 2024 – L3 – Q8 – Post-Shipment Finance Products

Explain briefly the post-shipment finance products: Export Bill Negotiation, Export Bill Discounted, Advance against Banker's Acceptance, and Advance against an Export Bill sent for Collection.

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ITF – APR 2024 – L3 – Q3 – Cost Calculation for Specialized Steel Quotations

Calculate the effective cost of 100 tons of specialized steel from different country quotations considering payment terms and additional information and determine the most favorable quotation ignoring other charges.

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ITF – APR 2024 – L3 – Q2 – Option Forward Contracts and Rate Calculations

Define an option forward contract and calculate the applicable rates for three scenarios involving option contracts for buying or selling foreign currencies (USD, NGN, CHF) based on given spot and forward rates.

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ITF – APR 2024 – L3 – Q1 – Financing Options for Advance Payment

Calculate and compare two financing options for a customer awaiting an advance payment under a construction contract: borrowing the USD amount or the GHS equivalent, considering exchange rates, interest, fees, and a forward contract; select the most favorable option from the customer's perspective.

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