Judges Mauritius Co Ltd imports spare parts for cars from Dubai on a letter of credit basis, payable 60 days from ‘bill of lading' issue date. Each letter of credit is valid for 90 days, but full shipment normally takes place within 30 days of the issuance of the letter of credit. The business has no seasonality (equal monthly purchases), and the annual volume of import trade is US$ 12 million, and the net profit is 15%. Transit time for documents from Dubai is 10 days, whilst the transit time for goods is 20 days. When the goods arrive they are warehoused in an independent warehouse for a period of 30 days before being put on the market.
Sales are effected as follows:
30% sold on the domestic market on a 45 days open account basis;
25% exported to an Indian buyer against a 30 day usance letter of credit;
25% exported to a German buyer on a 45 days DA basis documentary collection using bills of exchange;
20% exported to a French buyer on a 45 days bill of lading date DA basis documentary collection using bills of exchange;
There is a credit insurance cover for all the buyers, and we are told that there have been no claims in the past 5 years.
Question:
(a) After taking into account the above information related to Judges Mauritius Ltd, you are required to
i. Identify the Trade cycle
ii. Locate the pressure points (the funding needs)
iii. Present the overall required facility structure
(b) Explain the following terms used in trade finance:
i. Negotiation of letter of credit
ii. Trust receipts
iii. Avalised bill of exchange
(c) ‘A transferable letter of credit is less risky for a middleman's bank than a back-to-back letter of credit'.
Referring to specific Articles under UCP 600, comment on the above quotation in relation to the risks taken by the middleman's bank dealing with two banks.