(a) Suppose that a factor will buy an exporter’s receivables at a 3.5% per month discount. In addition the factor will charge an extra 2.75% fee for non-recourse financing. If the exporter decides to factor $2.5 million 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.
(b) Find the annual percentage rate of return for the factor in both the recourse and non- recourse financing.
(c) Diamond company based in the U.S will receive two million pounds tomorrow for its exports to an importer in London. It wants to determine its maximum one day loss (due to potential decline in the value of the pound) based on a 99% confidence interval. The firm estimated the standard deviation of the daily percentage change in the pound during the previous 90 days and the result was 2.5 %. If the firm expects the percentage change in the pound to fall by 1.2 %, find the value of the pound based on the maximum one day loss given that the spot rate for the pound is $1.62. Also determine the potential dollar loss for the Diamond company.