Course
- Question: Banker’s Acceptances
- Describe how foreign trade would be affected if banks did not providetrade- related services.
- How can a banker’s acceptance be beneficial to an exporter, an importer, anda bank?
2. Question: Letters of Credit Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its obligation, however, stating that it was not authorized to guarantee commercial transactions.
- Explain how an irrevocable L/C would normally facilitate the business transaction …
- Explain how the cancellation of the L/C could create a trade crisis between the U.S.and Russian firms.
- Why do you think situations like this (the cancellation of the L/C) are rare in industrialized countries?
- Can you think of any alternative strategy that the U.S. exporter could have used to protect itself better when dealing with a Russian importer?
3. Question: IRP Application to Short-Term Financing Connecticut Co. plans to finance its U.S. operations. It can borrow euros on a short-term basis at a lower interest rate than if it borrowed dollars.
- If interest rate parity does not hold, what strategy should Connecticut Co.consider when it needs short-term financing?
- Assume that Connecticut Co. needs dollars. It borrows euros at a lower interest rate than that for dollars. If interest rate parity exists and if the forward rate of the euro is a reliable predictor of the future spot rate, what does this suggest about the feasibility of such a strategy?
- If Connecticut Co. expects the current spot rate to be a more reliable predictor of the future spot rate, what does this suggest about the feasibility of such a strategy?
4. Question: IRP Application to Short-term Financing Seabreeze Co. needs to finance some dollar- denominated expenses for one year. It can borrow euros cheaper than dollars. Interest rate parity exists. The one-year forward rate of the euro contains a premium of 4 percent. If it believes the euro will appreciate by 6 percent over the next year, would its expected financing expense be lower if it borrowed dollars or euros?
5. Question: Investing in a Portfolio Pittsburgh Co. plans to invest its excess cash in Mexican pesos forone The one-year Mexican interest rate is 19 percent. The probability of the peso’s percentage change in value during the next year is shown next: … What is the expected value of the effective yield based on this information? Given that the U.S. interest rate for one year is 7 percent, what is the probability that a one-year investment in pesos will generate a lower effective yield than could be generated if Pittsburgh Co. simply invested domestically?
ANSWER
- Banker’s Acceptances
- Describe how foreign trade would be affected if banks did not provide trade-related
- How can a banker’s acceptance be beneficial to an exporter, an importer, and a bank?
Foreign trade would be reduced without the trade-related services by banks, because
some trade can only occur if banks back the transaction with bankers’ acceptances. A banker’s acceptance guarantees payment to the exporter so that credit risk of the importer is not worrisome. It allows the importers to import goods without being turned down due to uncertainty about their credit standing. It is a revenue generator for the bank since a fee is received by the bank for this service.…..please click the icon below to purchase the answer at $10