Question

(2)(a) What is a Letter of Credit? What role does it play as a method of payment in international transaction? Identify, at least, four of the documents that issuing banks would normally request from beneficiaries before they honor any drafts drawn on them. (b)Identify the methods that MNCs adopt to access short term financing in the euro-curreney market. Suppose a US based MNC faces a domestic interest rate of 12% and decides to borrow the Yen with a one year interest rate of 8%. If the MNC forecasts that the Yen will appreciate from S0.45 to $0.459 over the year, what would be the effective financing rate for the Yen? (c) A Factor agrees to buy an exporter's receivables at a 3.5% per month discount. In addition, the Factor charges a 1.25 % fee for non-recourse financing. If the exporter decides to factor $1.5million in 180-day receivables, how much will the exporter receive? If the financing is with recourse, will the amount received by the exporter be different? Explain with quantitative evidence.