Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade – I - Question Paper

Forward market cover:

Rupee outflow after six month = 2,56,000 ´ 46.22

= Rs.118.32 lakh

Money market cover:

As the company has to pay dollar six months hence, so it will borrow in rupees, convert into dollar at spot and invest in dollar.

Dollar amount to be invested today = = $ 2,49,148.42

\ Rupee amount to be borrowed today = $2,49,148.42´ 46.11

= Rs.114.88 lakh

\ Rupee outflow after six months = 114.88

= Rs.121.20 lakh

Availing cash discount

Amount to be paid if cash discount is availed = $2,53,500

Rupee equivalent of $ 2,53,500 at the spot rate = 2,53,500´ 46.11 = Rs.116.89 lakh

\ Rupee outflow after six months = 116.89 = Rs.124.78 lakhs

So it is better to avail forward market, as the outflow is minimum in this case.



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6. a. Bank has to quote Rs/S$ bid rate. Transit period and usance period involve 115 days. In Rs/$ quote, dollar is at premium. Therefore the transit period and usance period will be rounded of to the lower month and three months forward bid rate is to be taken.

Rs/$ spot bid rate
= Rs.44.54

Add premium for three months
= Rs. 0.26


Rs.44.80

Less exchange margin at 0.3%
= 0.1344

Bid rate for dollar
44.67


In $/S$ quote. Singapore Dollar is at premium. The transit and usance period will be rounded off to lower month.

$/S$ spot bid rate
0.6061

Add premium for three month
0.0037


0.6098

Rs/S$ bid rate
= (Rs/$)bid ´ ($/S$)bid

= 44.67´ 0.6098

= Rs.27.24 /S$


b. Cash inflow to the exporter

Amount of the Export bill
= S$ 150000

Less 70% to be kept in EEFC a/c
= S$ 105000


S$ 45000


Amount paid to the exporter at the rate of Rs. 27.24 per Singapore dollar

= 27.24 ´ 45000

= 12,25,800

c. Interest amount recovered = = Rs.23172.66.

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part C: Applied Theory



7. i. Revolving Credit: A letter of credit whereby the credit available to the beneficiary gets reinstated to the original amount once a drawing is made, is called revolving credit. The amount under this credit may revolve in relation to time or value. Revolving credit may be of 2 kinds. In the 1st type, the amount gets reinstated immediately when the beneficiary makes a drawing. In the 2nd type, the amount will be revived only when the issuing bank provide a confirmation. This may take place after the issuing bank receives documents and payment is made, or the issuing bank confirms the fact of receipt of documents. Bankers should be cautious while opening revolving credits, as there is a tendency to lose track of the amount, which they are committing under this credit.

ii. Installment Credit: It stipulates that shipments may be made in installments at specified periods of time. Installment credit differs from simple credit, which permits partial shipments in the sense that under installment credit, the time as well as the volume is stipulated. On the other hand, under a simple credit, which permits partial shipments, there is no stipulation as to time and volume.

While availing credit under an installment letter of credit, the exporter should be aware of the implications of Article 41 of the UCPDC guidelines. As per this article, if for any reason, the beneficiary is not able to ship the goods within the stipulated period and does not draw the installment on time, then the LC ceases to be available not only for that installment but also for any following installments. This can be prevented only if the beneficiary sees to it that a provision specifically stipulating that credit will be available for following installments despite any failure of earlier shipment or drawings is incorporated in the text of the LC. This credit calls for shipment of full value of goods.

iii. Deferred Credit: This credit is mostly used in those trades where a portion of goods is paid for by the buyer after verification of goods or after assessing the value of the goods taking into account the quality, shortages, etc. Date for payment of the undrawn balance may or may not be specified. Hence such kind of credit is called as deferred credit.

iv. Transit Credit: Normally, when an LC is opened, it will be advised to the beneficiary by a bank that is based in the beneficiary's country. However, in a transit credit, the services of a bank situated in a 3rd country will be used. In such credit, the advising bank will be situated in a country other than the beneficiary's. Such a requirement may be called for, in cases where the opening bank has no correspondent relations with any bank in the beneficiary's country. Transit credit may also be opened by countries whose credit may not be readily accepted in the beneficiary's country. In such a case, a bank in a 3rd country may be requested to open the LC.

v. Reimbursement Credit: When a credit is denominated in the currency of a 3rd country, such credit is termed as reimbursement credit. This is in contrast to the normal letters of credit, which are denominated in the currency of either the applicant's country or the beneficiary's country. Sometimes, credits where a paying/accepting/negotiating bank is reimbursed in a manner other than by debit to the Vostro Account of the opening bank or by credit to the Nostro account of the paying/accepting/ negotiating bank held with the opening bank are also referred to as reimbursement credits.

vi. Anticipatory Credit: Payment under a letter of credit is usually made at the post shipment stage (i.e. on submission of relevant shipping documents). However, under anticipatory credit, payment is made to the exporter at the pre-shipment stage in anticipation of export of goods and submission of bills at a later stage. The advances so made will be recovered from the proceeds of bills to be submitted under the letter of credit. Where the bills are not presented, recovery will be made from the opening bank

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8. a. Methods of Repatriation of Export Proceeds

i. Export proceeds should be received through the medium of an authorized dealer. Where the exporter has received payment directly in the form of bank draft, pay order, banker’s cheque, personal cheque, etc. the authorized dealer will handle export documents only if the exporter’s track record is good. The authorized dealer should also be convinced that the instrument represents payment for exports.

ii. Proceeds of goods sold to overseas buyers on their visits to India may be received by the exporter either by reimbursement against charge slips signed by the International Credit Card (ICC) holders (overseas buyers) or as instantaneous credit to the exporter’s bank account in India. Authorized dealers will handle export documents even in such cases. Form GR (duplicate) will be released by the authorized dealers on receipt of funds in their Nostro account or on production of a certificate by the exporter from the Credit Card Servicing bank in India to the effect that it has received the equivalent amount in foreign exchange, if the authorized dealer concerned is not the credit card servicing bank.

iii. Funds held in the Foreign Currency (Non-resident) account and Non-resident (External) Rupee Account

may also be utilized for payment of export proceeds.

iv. Payment towards export proceeds from a rupee account, held in the name of an exchange house with an authorized dealer, is also permissible up to Rs.2,00,000 per annum.

v. Export proceeds may also be paid by foreign currency notes/foreign currency traveler cheques by the buyer on his visit to the country.

b. Pre-shipment Credit

The purpose of this credit is to give the necessary funds to the exporter to procure raw material and meet the costs involved in manufacturing the goods. This credit may be initially extended without any security in which case it is known as extended packing credit. At this stage it remains a clean advance. The funds so lent are used to procure the raw material, which then is charged to the bank. Then the advance becomes a secured advance. The advance is provided either in the form of a loan or in the form of an operating account. The advance so provided has to be adjusted with the proceeds of the export. Hence it is necessary to ensure that the loan provided for executing a particular export order is adjusted out of the sale proceeds of that export. However the banker is vested with the authority by RBI to waive this condition and to allow the advance to be adjusted from the proceeds of any export transaction.

Pre-shipment credit is extended for the period which matches with the operating cycle of the activity. However, the period of credit is normally restricted to a maximum of 180 days. It is envisaged that the export will be materialized within the due date and the loan will be adjusted from the export proceeds. However, the banks have the discretion to extend the period of credit up to 360 days under special circumstances. In order to ensure that export will materialize banks normally insist for a Letter of Credit opened in the name of the exporter or a confirmed order before releasing the pre-shipment credit.

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Earning:   Approval pending.