- 20 Marks
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]
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