Case Study -1
Calculation of bills buying rate, when exchange margin and interest is also to be taken into account:
On July 5, an exporter in India, submits aUSD50000, 2months usance bill drawn under a letter of credit, on animporter inUS. The normal
transit period is 25 days. The inter-bank currency rates are as under:
Spot rate : 1 USD = Rs.65.0000 5000
July forwardmargin = 0.3500 / 0.4000
August forwardmargin = 0.6000 / 0.7000
September forwardmargin = 0.8500 / 0.9000
October forwardmargin = 0.9500 / 0.9900
The exchangemargin is 0.15%. Customer wants to retain 20% of the amount in a current account opened in USA. Rate of interest is
10% p.a. Calculate tl-e following:
1. Rate to be quoted to the customer ,
2. Gross amount to be credited to customer account.
3. Amount of interest to be'deducted.
Solution : The bill dated Jul 05, has 25 transit period + 2months'Usance (Aug and Sep).Hence the payment shall fall due on Sept 30. The
exporterwill be allowed the benefit of Sept forwardmargin sincethe payment is due on last day of Sept.
Further, interest will be recovered from the customer from the date of discount to date of realization on the amount to be credited to his
account (i.e. 80%of the bill amount, as the balance is to be retained in USA).
Spot rate = 65.0000
AddSeppremium=65.0000 +0.8500= 65.85
Deductmargin@0.15% = 65.8500—0.09878 = 65.75122
Final rate = 65.7500 (rounded)
Gross amount due to customer = 65.7500 x 40000* = 2630000
*(20%to be retained inUSA out of 50000)
Less interest@10%for 86 days = Rs.62308.53
(2630000x10x86) / (365x 100)
Net amount payable to exporter =Rs.2567691.46
Case Study -2
Calculationof TT selling ratewhenexchangemarginis given:On July 5, a savingbank customer in India, requests for issue aUSD10000. The
inter-bank currency rates areas under:
Spot rate : 1 USD = Rs.65.0000 / 5000
July forwardmargin = 0.3500 / 0.4000
Bank requires an exchangemarginof 0.15%.
What ratewillbe quoted and howmuch amountwillbedebited to customer's account.
Solution : In this case, no handling of documents is required.Hence TT selling rate shall be used. Exchangemarginwill be added, since for the
bank, it is a sale transaction.
Spot rate selling rate = 65.5000
Addmargin@0.15% = 65.5000 + 0.098775 = 65.598775
Final rate = 65.6000 (rounded)
Gross amountduefromcustomer= 65.6000 x10000=656000
Case Study 3
Calculation for dishonour of export bill purchased by the bank, when exchange margin is given
An export bill of USD 10000 was purchased from an exporter at the then bills buying rate of Rs.65.80. But on due date it was not
paid. Now the bank has to recover the amount from the exporter.
The inter-bank currency rates are as under:
Spot rate : 1 USD = Rs.65.0000 / 5000
July forward margin = 0.3500 / 0.4000
August forward margin = 0.6000 / 0.7000
Bank requires an exchange margin of 0.20% for TT selling rate and 0.15% for bills selling rate.
What rate will be quoted and how much amount will be debited to customer's account.
What gain has been made by the customer in the transaction.
Solution : In this case, handling of import documents is not required. For recovering the amount from export customer, the
TT selling rate shall be used. Exchange margin for TT selling will be added, since for the bank, it is a sale transaction.
Inter-bank spot selling rate = 65.5000
Add TT sellingmargin@0.20%= 65.5000 + 0.1310 = 65.6310
TT selling rate = 65.6310, Amount to be debited = 65.6310 x 10000 = Rs.656310
Profit to the exporter = 658000—656310 = Rs.1690 (amount creditedwhen purchased less amount recovered)
Case Study 4
Calculation of rate and amount for credit of proceeds of bill sent for collection.
An export bill ofUSD 10000was sent for collectionwhichwas submitted by an exporter.On July 10, the correspondent bank creditedUSD9860,
the proceeds of the bills, toNOSTROaccount of thecollecting bank, after recovering its own charges.
The inter-bank currency rates on July 10, are as under:
Spot rate : 1 USD = Rs.65.0000 / 5000
July forwardmargin = 0.3500 / 0.4000
August forwardmargin = 0.6000 / 0.7000
Bank requires an exchange margin of 0.10% for TT buying rate and 0.15% for bills buying rate.
What ratewillbe quoted and howmuch amountwillbecreditedtocustomer's account.
Solution : In this case, the billwas sent for collection.On theamount realized, the TT buying rateshallbe used since the amount has already
beencredited toNOSTROaccountof the bank. There isno need to take any forwardmarginin to account.
Exchange margin for U buying will be deducted, since for the bank, it is a purchase transaction.
Inter-bank spot selling rate
Less TT buyingmargin@0.10%TT
buying rate
Amount to be credited
====
65.0000
65.0000+0.0650
65.0650
65.0650x9860=
=65.0650
Rs.641541
CaseStudy5
Calculationofrateandamountforcreditofproceedsofbillpurchasedfromexporter
AnexportbillhasbeensubmittedbyanexporterforUSD40000forpurchaseonSept15.Theotherinformationisprovidedasunder:
1. Inter-bankexchangerateis66.5400/6000
2. Octoberforwardpoints=0.5000/0.4500
3. Transitperiodis15days
4. Rateof interestis10%
5. Exchangemarginis0.10%
6. FinenessofratesshouldbeasperFEDAIRulesi.e.0.0025
Whatratewillbequotedandhowmuchamountwillbecreditedtocustomer'saccount.
Solution:ExchangemarginforTTbuyingwillbededucted,sinceforthebank,itisapurchasetransaction.Furtherinterestat10%for15dayswillbe
recovered.Octoberforwarddiscountshallbereduced.
Inter-bankspotbuyingrate = Rs.66.5400
Lessmargin@0.15% = 66.5400-0.06654=66.47346
Ratetobequoted = 66.4725(0.0025fineness)
Dueamount = 66.4725x40000=Rs.2658900
LessInterest@10%for15days = Rs.10926.99
Amounttobecredited = Rs.2647973
Case Study 6
Purchaseof export bill byusing cross rate
An exporter tenders an export bill of Singapore Dollars 20000. At that time:
1. Inter-bankUSDratewasRs.65.5045/6070
2. Forwardrate:Onemonth,0.2000/1500,2months 0.4500/3500, 3month: 0.7000/6000
3. USD/SGDratewasUSD1=1.3205/3225.
4. Forwardrate:Onemonth,0.0200/0300,2months 0.0400/0500, 3month: 0.0600/0700
5. Exchangemarginis0.10%.
6. Transitperiodis25days.
7. Interestrateis10%
What rate will be quoted by the bank and how much amount in Indian currency, shall be credited to exporter's current account?
Solution : This involves calculation of cross rate since at the time of cancellation, the Singapore dollar / rupee rate is not available. Since it is a
purchase transaction andUSDforward is at a discount, onemonth forward discountwill be taken into account.
As regards,USD/SGD, theUSDis at a premium, onemonthforwardwillbe taken into account, as it isa sale transactionfor thebank.
Inter-bank USD rate =
Less onemonthforwarddiscount =
Rate after forward discount =
Less exchangemargin@0.1% =
Rate after exchange margin =
Rounded (to 0.0025) =
USD/SGD selling rate =
Add one month premium =
USD/SGD one month =
SGD/Rupee rate =
Rs.65.5045
Rs.00.2000
Rs.65.3045
Rs.00.0653
Rs.65.2392
Rs.65.2400
1.3225
0.0300
1.3525
65.2400/1.3525= 48.20
Amount to be creditedto customer account = 48.20 x 20000=Rs.964000 Less interest for 25days@10%= 6602.74
Net amount = Rs.957397.26
Case Study 1 : Profit or losson a swapdeal.
Abank inDelhimakes a swapdealofUSD50000 by selling spot and buying onemonthforward. The other informationis as under:
1. Inter-bankUSDratewasRs.65.5045/6070
2. Onemonthforward rate isquoted Rs.0.25above the spot rate.
3. Interest ratein Delhi is 10%and inNewYork 5%p.a.
4. Commission on the deal is 0.5 paise per Rs.100 on sale and 0.5 paise on purchase.
Calculate the gain or lossmade by thebank inthis deal. Solution: The bank has sold spot at themarket buying rate of Rs.65.5045.
Accordingly, the onemonthforward buyingwill be atRs.65.7545 (65.5045 + 0.2500).
1. Amount receivedonsale ofUSD50000:
USD50000x 65.5045 =Rs.3275225.00
Less commission@0.5 paise =Rs.163.76
Amount received =Rs.3275061.24
Interest earned at 10%for onemonth =Rs.27292.18
Net amount received =Rs.3302353.42
2. Principal amount + interest payable inUSD
Principal amount =USD50000
Interest@5%onUSD50000 for onemonth =USD208.33
Total amount =USD50208.33
Amount payable in Indian currency =Rs.3301423.63
(50208.33x65.7545)
Add commission@0.5 paise =Rs.165.07
Total amount payable =Rs.3301588.70
3.Gain(1-2) =Rs.764.72
Case Study 2 : Booking and cancellation of a Forward Contract
A bank in Delhi entered into a forward purchase contract for USD 10000
on Aug 16, with its customer, which is due on Nov 15, at Rs.65.8050.
Bank covered itself intheinter-bankmarket at Rs.65.9050.
On October 10, the customer requested the bank that the date be
extended toDecember 15.
The rates are as under:
Spot Rate Inter-bankUSDratewasRs.65.5050/6050
Spot Sep=Rs.65.6050/7050
SpotOct = Rs.65.7050/8050 •
SpotNov = Rs.65.8050/9050
SpotDec =Rs.65.9050/9950
2. Exchangemarginshallbe 0.20%onbuying and selling transactions.
Calculate the charges that would be recovered from the customer for
extension of the date.
Solution : The bankwill cancel the contract and then re-book the same.
1. Cancellation of the original contract
The cancellationwill be at forward sale rate for deliveryNovember at
inter-bank forward selling rate. = Rs.65.9050
Add exchangemargin@0.20% = Rs.00.1318
Total = Rs.66.0368
Roundedto 0.0025 = Rs.66.0375
Purchase of USDat original contracted rate = Rs.65.8050
It sells by cancellation of contract = Rs.66.0375
Loss perUSDin sale = Rs.0.2325
Loss on totalUSD10000 =Rs.2325
2. Re-booking of the contract
The re-bookingof forwardcontractwillbewithdelivery forDecember 15. The forward rateforNovember shallbe taken asDecember isnot a
completemonth.
Forward rate to be taken for contract = Rs.65.8050
Less exchange margin @0.20@ = Rs.00.1316
Total = Rs.65.9366
Rounded to 0.0025 = Rs.65.9375
Hence,bankshallbookanewcontractatRs.659375andwillrecoverRs.2325forcancellationofthepreviouscontract.
CASE STUDIES
Case 1: Credits v/s contracts
Article 4, states that a credit by its nature is separate from the sale or other contract on which it is based and banks are in no way
concerned with or bound by such contracts.
It also states that the issuing bank must discourage any attempt by the applicant to include the details of the contact, proforma
invoice, etc, as an integral part of the LC.
Further, Article 5 of UCPDC 600, states that banks deal in documents and not in goods and services.
Even then, the applicants at times attempt to get the documents refused due to reasons, such as (i) goods not as per proforma
invoice (ii) obtain stay /injunction against the opening bank to honour payment of the documents received under LC, due to the
reason that the beneficiary has not sent the goods as shown, as mentioned in the contract or as given to understand.
Thus there could be a breach in the contract between the buyer and the seller, but the documents under LC could be perfectly
in compliance of the terms of LC, thus making the issuing bank liable to pay / honour.
Courts, in many cases, have been putting stays /granting injunctions and stopping issuing banks to pay to the negotiating bank and
debiting applicants accounts.
While issuing banks' on their own, should not, in connivance or other wise, try to excuse itself from making payments/
honoring the documents, with such reasons, which link the discrepancies to the sale contracts or the quality of goods, the
National courts/ law, being above the UCPDC, they are bound to wait for the stay /injunction to be lifted before making
payment to the negotiating banks.
The recovery of the amounts of documents from the applicant is altogether a separate issue, as it is a matter of taking credit risk by
the opening bank on the applicant. Thus, recovery of amount from the applicant must also not be linked to the honoring of payment
to the negotiating bank.
Case 2. Case of Date of documents
Bank A issues LC dated 1.10.2009, in favour of a beneficiary in UK. The last date of shipment as per LC is 15.10.2009 and last date of
negotiation 31.10.2009.
The beneficiary presents documents to Bank B, for negotiation on 05.10.2009, with documents evidencing shipment of goods on
30.09.2009, which sends the documents to the opening bank, asking to reimburse as per LC terms.
The opening bank, on receipt of documents notices that, the shipment was made on 30.09.2009 and the invoice was dated
2.09.2009, while the inspection certificate, analysis certificate and packing list were dated 25.09.2009
The issuing bank on receipt of documents rejected the documents, notifying discrepancy that documents were dated prior to date of
credit.
Article 14 i, specifically provides that documents could be dated prior to the date of LC, but should not be dated after the date of
presentation.
While, the LC is silent about the date of documents, documents presented need to be dated as per LC terms, if so provided in the LC.
As such, assuming that the LC did not provide for dates of the documents, the rejection by the opening bank is not as per UCPDC.
Case 3. Partial Shipments
An LC, covering shipment of 1000 cartons consisting of 15000 pieces of shirts, (readymade garments), from Chennai port to Dubai
port, provides that partial shipment is not allowed.
The beneficiary hands over 500 cartons of Shirts, to the shipping company on 15.7.2009 and another 500 cartoons on 18.7.2009.
The Shipping Company issues BL for the first 500 cartons on 17.7.2009 and another BL covering 500 cartoons on 19.7.2009. Both the
consignments are to be shipped by a vessel that is due to leave Chennai port on 21.7.2009. Thus the total goods under the LC , i.e.
1000 cartons, are shipped on a single vessel, but with two BLs.
The LC issuing bank, on receipt of documents drawn under the LC rejects the documents, stating the shipment is not made under
one BL and as such constitutes partial shipment, which is not permitted under the LC. The issuing bank, informs the negotiating bank
that goods are held at their disposal and further instructions are awaited.
As per article 31 of UCP, a presentation of documents consisting of more than one set of transport documents, covering shipment of
goods on the same means of transport and has same journey, will not be considered as partial shipment, even if they indicate
different dates of shipment.
As such, in the given scenario, the rejection of documents by the LC opening bank is not correct as per the Article 31 of UCP, and the
bank must pay /honour the documents.
Case 4. Notice of Dishonor
The LC issuing bank on receipt of documents on 15.9.2009 (Tuesday) took two days to examine the same and referred the
documents to the applicants for their acceptance on 17.9.2009 (Thursday). The applicants came up with a discrepancy in
documents, on 22.9.2009 (Tuesday) evening, stating that the documents need to be rejected as the BL was not stamped with "On
board" stamp and initialed by the shipping company.
The issuing bank sent a Swift message of rejection to the negotiating bank on 23.9.2009.
On receipt of Swift message from the issuing bank, informing rejection of documents and discrepancy, as informed by the applicant,
the negotiating bank referred the matter back to the opening bank stating that the message of refusal and notification of
discrepancy was not received within the time period of 5 working days, and as such claimed to be reimbursed as per LC teims.
Article 16 d of UCP states that the notice of refusal and discrepancy must be given latest by the closing hours of the 5 th working day
from the date of presentation. In the instant case, the opening bank was correct in sending the swift message on 23.9.2009, which
was 5th working day, subsequent to the date of receipt of documents.
Since, 19th and 20th were Saturday and Sunday and 21.9.2009, being a holiday in India, on account of Ramadan ID, the opening bank
was right in sending the notice of refusal / discrepancy on 23.9.2009, which was in compliance with the meaning of the said article.
CASE 5. Insurance
An LC calls for insurance from ware house to warehouse, and insurance to cover 110% of the invoice value.
Bank A negotiates and forwards documents, covering invoice for USD 17920.00 under a Multi model transport document (Combined
Bill of Lading) dated 15.9.2009. to the opening bank, under the said LC. The insurance enclosed to the documents is for USD
20,000.00 and is dated 17.9.2009.
As per the Article 28 of UCP, the insurance must indicate the amount of insurance. It should be at least 110% , of the invoice value if
the LC is silent on this requirement and must not be dated prior to the date of transport document.
In the given scenario, the insurance is dated after the date of multimodal transport document, which should be covering the voyage
of goods from the godown of the seller, and is more than the given percentage for insurance coverage, i.e. more tan 110%.
Banks would normally accept some difference in insurance coverage which could be due to rounding off of the values/cover amount,
but still can be used as a discrepancy to refuse the documents. However, a document dated after the date of shipping document, is
clearly a discrepancy, and requires specific approval from the applicant.
CASE STUDY ON PRE- AND POST-SHIPMENT FINANCE
Case: A textile exporter, with estimated export sales of Rs. 300 lacs during the last year and projected sales of Rs.500 lacs for the
current year, approaches the bank for granting credit facilities. The bank sanctions following facilities in the
account:PCL/FBP/FUBD/FBN ....... . ..... Rs. 100.00 lacs Sub limits:
PCL (25 % margin on fob value) Rs. 50.00 lacs FBP (10 % margin on bill amount) Rs. 50.00 lacs FUBD (15 % margin on bill amount) Rs.
50.00 lacs FBN (nil margin) Rs. 100.00 lacs
He gets an order for USD 50,000.00 CF, for exports of textiles- dyed/hand printed, to UK, with shipment to be made by 15.9.2009.
On 2.6.2009 he approaches the bank for releasing PCL against this order of USD 50,000.00. The bank releases the PCL as per terms of
sanction.
On 31.8.2009, the exporter submits export documents for USD 48,000.00, against the order for USD 50,000.00. The documents are
drawn on 30 days usance (D/A) as per terms of the order. The bank discounts the documents at the days applicable rate, adjusts
the PCL outstanding and credits the balance to the exporter's account, after recovering interest up to notional due date. Interest
on PCL recovered separately. st the
The documents are realized on 29.10.2009, value date 27.10.2099, after deduction of foreign bank charges of USD 250.00. The bank
adjusts the outstanding post shipment advance allowed again bill on 31.8.2009.
Bank charges interest at – PCL- 8.50 % upto 180 days, and post shipment at 8.50 % upto 90 days and. 10.50 % thereafter. Overdue
interest is charged at 14.50%.
the USD/INR rates were as under:
—2.6.2009: Bill Buying 48.20, bill Selling 48.40.
— 31.08.2009: TT buying 47.92, Bill buying 47.85, TT selling 48.08, Bill selling 48.15., premium for 3() days was quoted as
04/06 paise.
Now give answers to the following:
1. What is the amount that the bank allows as PCL to the exporter against the given export order, considering insurance and
freight costs of 12%.
(i) Rs. 15,90,600 @ (ii) Rs. 2410000.00 (iii) Rs. 2120,800.00 (iv) Rs. 1815000
2. What exchange rate will the bank apply for purchase of the export bill for USD 48,000.00 tendered ' by the exporter:
(i) 47.89 (ii) 47.85 (iii) 47.91 (iv) 47.96
3. What is the amount of post shipment advance allowed by the bank under FUBD, for the bill submitted by the exporter:
(i) Rs.19,54,728 (ii) Rs 19,52,280 (iii) Rs.19,53,912 (iv) Rs.22,98,720
4. What will be the notional due date of the bill submitted by the exporter:
(i) 30.10.2009
(ii) 30.9.2009
(iii) 25.10.2009
(iv) 27.10.2009
5. Total interest on the export bill discounted, will be charged up to;
(i) notional due date 25.10.2009
(ii) value date of credit 27.10.2009
(iii) date of realisation 30.10.2009
(iv) date of credit to nostro account 29.10.2009
Ans. 1: USD 50,000.00@ 48.20 = Rs.. 2410000.00 – less 12% for insurance and freight cost i.e Rs. 289,200 = Rs.21,20,800.00 (fob
value of the order. Less margin 25% i.e. Rs.530,200.00 balance Rs 15,90,600.00
Ans. 2: 47.89– Bill buying rate on 31.8.2008 – 47.85 plus 4 paise premium for 30 days, this being a DA bill.
.4 USD 48,000.00 @ 47.96 =Rs. 23,02,080.00, less 15% margin on DA bill, i.e. Rs. 345312.00
Ans.
0850:19:i161,7su6b8m.0i0tted on 31.8.2009- drawn on 30 days DA plus normal transit period of 25 days -
31.8.2009 plus 30 days plus 25 days, i.e. total 55 days from 31.3.2009 i.e. 25.10.2009
ADS 5: Interest is charged up to the date the funds have been credited to the banks nostro account, the effective date of credit is the
value date of credit, i.e. 27.10.2009.
SOME MORE CASE STUDIES ON EXCHANGE RATES
Basic Concepts
Negotiationof,ExportBillsisapurchasetransactionandRetirementofImportBillsisasaletransactionforthe
AuthorisedDealer.
InpurchaselowerratewillbeappliedandinSalehigherratewillbeapplied.Samewillbethecaseforforward
premium
In sale transaction exchangemarginwill be added but in purchase transaction exchangemarginwill be
deducted.
Case 1
OnJan10,2012,theMumbaibranchofpopularbankenteredintofollowingforeigncurrencysaleandpurchase
transactions:
(1) WithMr.AforsaleofUSD2000tobedeliveredontheJan10.
(2) WithMr.BforpurchaseofUSD2000tobedeliveredonJan11.
(3) WithMr.CforpurchaseofUSD2000tobedeliveredonJan14(Jan12and13beingbankholidays)
(4) WithMr.DforsaleofUSD2000tobedeliveredonFeb11.
Theinter-bankforeigncurrencyratesonJan10,2012areasunder:CashrateorreadyrateUSD=Rs.45.50/60,TomrateRs.45.55/65,SpotrateRs.45.60/70
andonemonthforwardrateRs.45.80185.
Onthebasisofabove,answerthefollowingquestions.
01 WhatratewillbeusedforthetransactionwithAandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50,Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d) Rs.45.65,Rs.91300
02 WhatratewillbeusedforthetransactionwithBandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50, Rs:91000 --
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d) Rs.45.65,Rs.91300
03What ratewillbeusedfor thetransactionwithCandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50, Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d) Rs.45.65,Rs.91300
02What ratewillbeusedfor thetransactionwithAandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50, Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, R-6:91200
d) Rs.45.65,Rs.91300
Ans.1-c 2-b 3-c 4-d
Explanations:
1. Itisasaletransaction.Hence,samedayratei.e.cashrateofRs.45.60willbeused.Theamount=-45.60x2000=Rs.91200
2. It is a purchase transaction. Hence, next day rate (TOM Rate) of Rs.45.55 will be used. The amount = 45.55 x 2000 = Rs.91100
3. Itisapurchasetransaction.Hence,3ffidayrate(SpotRate)ofRs.45.60willbeused.Theholidaysperiodwillbeexcludedfromcounting.Theamount=
45.60x2000=Rs.91200
4. Itisaforwardsaletransaction.HenceforwardsalerateorRs.45.85willbeused.Theamount=45.85x2000=Rs.91700
Case 2
AnexportersubmittedanexportbillofUSD100000drawnon120daysusancebasisfromdateofshipment,whichtookplaceonAug03,2012.The
followingfurtherinformationisprovided:
(1) TheduedateisDec01,2012.
(2) Theexchangemarginis0.20%.
(3) Spotinter-bankUSDrateisRs.45.00/05.
(4) PremiumspotNov0.40/45
(5) Rateisquotedtonearest0.25paiseandrupeeamounttoberoundedoff
(6) Interestrateis8%forperiodupto180days.
(7) Commissiononbillpurchaseis0.50%
Answerthefollowingquestions.
01Whatistherateatwhichthebillwill-bepurchasedifitisademandbillafteradjustmentofbankmargin,withouttakingintoaccount,thepremium?
a) Rs.44.91 b) Rs.45.09 c) Rs.45.31 d) Rs.45.51
02 What is the rate at which the bill will-be purchased if it is a demand bill after adjustment of bank margin and the premium? -
a) Rs.44.91 b) Rs.45.09 c) Rs.45.31 d) Rs.45.51
03What is thegross amountbeforeapplicationof interest andcommission:
a) R5.4531000 b) Rs.4410174 c) Rs.4407908.50 d) Rs.4507909
04What istheamountofthebillwithoutbankcommission
a) Rs.4531000 b) Rs.4410174 c) Rs.4407908.50 d) Rs.4407909
05Whatamountwillbecreditedtoexporter'saccount:
a) Rs.4531000 b) Rs.4410174 c) Rs.4407922.50 d) Rs.4407909
Ans. 1-a 2-c 3-a 4-b 5-d Explanation :
1. Calculationofbuyingratewillbeasunder:
Spot rate Rs.45.00(buying ratewillbeappliedas it ispurchase)
Less 0.20% margin Rs.00.09 Rate Rs.44.91
2. Calculationofratewillbeasunder:
Spot rate Rs.45.00(buying ratewillbeappliedas it ispurchase)
Less 0.20% margin Rs.00.09 Rate Rs.44.91
Addpremium Rs.00.40(premiumwillbeaddedas thatbenefitwillbeof thecustomer) Rate Rs.45.31-
3. Calculationofratewillbeasunder:
Spot rate Rs.45.00(buying ratewillbeappliedas it ispurchase) Less 0.20% margin Rs.00.09
Rate Rs.44.91 AddpremiumRs.00.40(premiumwillbeaddedas thatbenefitwillbeof thecustomer)
Rate Rs.45.31 Amount inRs.45.31 x100000 =4531000
4. Calculationofratewillbeasunder:
Spot rate Rs.45.00 Less 0.20% margin Rs.00.09 Rate Rs.44.91
Add premium Rs.00.40 RateRs.45.31-- GrossAmountinRs.45.31x100000=4531000
Interest120days@8%Rs.120826 Amount 4531000—120826=4410174
5. Calculationofratewillbeasunder:
Spot rate Rs.45.00 Less 0.20% margin Rs.00.09
Rate Rs.44.91 Add premium Rs.00.40
Rate Rs.45.31 Amount inRs. 45.31x100000 = 4531000
Interest120days@8%Rs.120826 Commissionat0.05%Rs.2265.50—
Amounttobecredited4531000-120826-2265.50=4407908.50(roundedtoRs.4407909).
Case 3
Yourexport customerhasreceivedanadvanceofUS10000againstexporttoUK,whichtheimporterinUKhasgotcreditedtoNOSTROaccountofthe
bankinLondon.Thecurrent inter-bankmarketrateUSD=45.10/15.Bankretainsamarginof0.15%onpurchaseand0.16%onsale.Whatamountwill
becreditedtocustomersaccount:
a. Rs.451676.50 b. Rs.450323.50 c. Rs.451721.60 d.Rs.450278.40 Ans.1-b
Explanations:
1: It is a purchase transaction for the bank.Hence inter-bank purchase rate of Rs.45.10will be used. Bankwill
deduct the purchasemargin of 0.15%. Grossamount=45.10x10000=451000:
Net amountwhichwillbe creditedto customer's account = 451000- 676.50(0.15%margin) = 450323.50
Case 4
Acustomerwants to book the following forward contracts:
(1) Forward purchase ofUSD50000fordelivery 31.dmonth(2) Forwardsale ofUSD50000 for delivery 2ndmonth.
Givenspot rate=45.1000/45.1200. Premium=1m- 0800/0900,2m- 1700/1900and3m- 2800/2900.Exchangemargin=forpurchase- 0.20%and
for sale- 0.25%.
01What is the rate for forward purchase transaction:
a) 45.4233 b) 45.2705 c) 45.1795 d) 45.1700
02What is the rate for forward sale transaction:
a) 45.4233 b) 45.3243 c) 45.4882 d) 45.3456
Ans. 1-c 2-a Explanations:
1. For purchase the spot rate = 45.1000
Add2mpremium =00.1700(premiumfor2monthsonlytobeaddedinpurchaseasbillmaybe
givenonanydayof3'dmonthincludingon13tday) Total =45.2700
Lessmargin of 0.20% = 00.0905 Rate =45.1795
2. For sale the spot rate = 45.1200 Add 2mpremium = 00.1900 (premiumfor full period of 2months only to be added in
sale) Total=45.3100 Addmargin of 0.25%= 00.1133 Rate =45.4233
Case 5
Following are the Inter bank quotes on a certain date: Spot USD 1NR 44.60/65
1month8/10 2month18/20 3month28/30
SpotGBPUSD1.7500/7510 1month30/20 2-month50/40 3month70/60
Alltheabovedifferencesareforthemonthandfixeddatesandthebankmarginis3paise.
01Anexporterhaspresentedanexportdemandbill(sightdocument)forUSD300000underirrevocableletterofcredit.Whatwillbetherateatwhichthe
documentswillbenegotiated?
a) 44.5700 b) 44.6000 c) 44.6500 d) 44.6800
02- An Exporter has submitted 60 days usance bill for USD 25000 for purchase. At what rate the document will be purchased?
a) 44.7500 b) 44.7800 c) 44.8400 ' d) 44.8700
03 Your bank has opened a letter of credit for import at the end of 2 months for GBP 30000. At what rate, the forward exchange
will be booked?
a) 78,4700 b) 78,4725 c) 78,6300 d) 78,6325
04 If the exchange margin is 3 Paise for buying as well as selling, what is the bank's spread in % on customer transaction?
a) 0.2465 b) 0.3000 c) 0.6000 d) 0.6275
05Acustomer tenders exportbillforGBP10,00,000payable45days fromsight. Thetransitperiodis 15dayshewants toretain10%ofbill valueinthe
foreigncurrency.Bank'smarginis 10paise.Whatwillbecreditedto customer'saccount?
a) 71310030 b) 70317630 c) 70110270 d) 70018510
Ans.1-a 2-a 3-b 4-a 5-b
Explanations:
1. It is a demand bill which means the payment is immediate upon negotiation. So, spot rate will be applied, which is USD/INR
SPOT 44.60/44.65.
Being an export bill, frombank's pointof view, it is a buying transaction.HenceBuying (Bid)Rateof 44.60(andan inter-bank rate)willbe
applied. To arrive at the customer rate, themarginwillbededucted.
inter Bank Rate 44.6000 Less : Margin 00.0300 Customer Rate 44.5700
2. The payment terms in this case are 60 days usance. Hence, 2 months forward rate will be applied, which will be calculated as
under:
Spot USDIINR 44.6000/44.6500 Forward 2Months 00.1800100.2000 (small/Big> Premium>Add)
Total 2Months 44.7800/44.8500 Being an export bill, from bank's point of view, it is buying of FC. Hence Buying (Bid) Rate
will be applied, which is 44.78. To arrive.at the customer rate, exchange margin will be deducted. Inter Bank Rate 44.7800
Less:Margin 00.0300
Customer Rate 44.7500
3. The fetter of credit is for 2months.Hence, 2months forwardratewill bea appliedwhichwillbe calculated onthebasisof 2MonthsGBP/INR
rate througha cross rate (GBP/USDandUSD/INR rates).
USD/INR SPOT 44.6000/44.6500 Forward 2Months 00.1800/00.2000 (Small/Big-> Premium->Add)
Total 2Months 44.7800/44.8500 GBP/USDSPOT1.7500/1.7510
Forward-2Months 0.0030/0.0020(Big/Small->Discount ->Less) Total 2Months 1.7470/1.7490
It is an import transaction and frombank's point of view, it is selling. Hence selling (offer) Ratewill be applied.
GBP/INR = GBPIUSD x USD /INR =44.8500X1.7490 =78.44265
This is an inter-bank rate. To arrive at the customer rate, exchangemarginwill be added.
Inter Bank Rate 78.4427 Add:Margin 00.0300 Customer Rate 78.4727 rounded to 78.4725
4. USDANIR Spot 44.6000/44.6500 inter Bank Buying Rate 44.6000
Less: ExchangeMargin 00.0300 Merchant Buying Rate 44.5700
Inter bank Selling Rate 44.6500 Add: ExchangeMargin 00.0300
Merchant Selling Rate 44.6800
%Spread=((SellingRate-BuyingRate) X100)1/{(SellingRate+BuyingRate)/2}
=((44.68-44.57)X100))/{44.68+44.57)/21 =00.11X100/44.625 =0.2465%
5. TheBill period is 45Days. The transit period is 15Days.
Total period is 2 months. Hence, 2 months forward rate will be applied. 2Months GBP/INIR rate is required for which cross-rate
will be calculated.
USD/INR SPOT 44.6000/44.6500 Forward Points 2Months 00.1800/00.2000 (Small/Big->Premium->Add)
Spot 2Months 44.7800/44.8500 GBP/USD SPOT 1.7500/1.7510
Swap Points 2months 0.0030/0.0020 (Big/Small-> Discount->Less) Outright 2Months 1.7470/1.7490
Being an export frombank's point of view, it is Buying. Hence Buying (Bid) Ratewill be applied).
GBP/INRBID = GBP/USDBID X USD/INRSID =44.7800X1.7470 =78.2307
This is an inter-bank rate. To arrive at the Customer Rate, Exchangemarginwill be deducted.
Inter Bank Rate 78.2307 Less: Margin 00.1000 Customer Rate 78.1307
The bill is for 10,00,000 GBP. Of this, the customer wants to retain 10% in EEFC account. Hence he would be converting 9,00,000
GBP.For 9,00,000GBP, his accountwould be creditwith = 78.1307 X 900000 = Rs.70317630
Case 6
An importer customer,wants to retire an import bill of Pound Sterling 100000 drawn under letter of credit opened by you, and payable on
demand onOct, 12.2012. The TTmargin is 0.10%. The inter-bank rates areGBP/USD= 1.5975/1.6000 andUSD/1NR = Rs.44.90/45.00.On the
basis of given information, answer the following questions.
01 What rate will be quoted by the bank for this transaction in terms of GBP/INR without taking into account the TT margin:
a) Rs.71.7276 b) Rs.71.9085 c) Rs.72.0000 d) Rs.72.0720
02 What rate will be-quoted by the bank for this transaction in terms of GBP/1NR after taking into account the TT margin:
a) Rs.71.7276 b) Rs.71.9085 c) Rs.72.0000 d) Rs.72.0720
03 What amount will be debited to cash credit or overdraft or current account of the customer for retirement of this bill:
a) Rs.7000000 b) Rs.7207200 c) Rs.7218300 d) Rs.7222070
04 If this bill is not retired by the importer customer, the crystallization of this import bill will be on which of the following dates:
a) Oct 12, 2012 b) Oct 21, 2012 c) Oct 22, 2012 d) Nov 12, 2012
Ans. 1-c 2-d 3-b 4-c
Explanations:
1. This is a sale transactionfor thebank.Bankwillpurchase pounds (GBP) atmarket selling rate andwill sell theUSDtothecustomer to purchase
pounds. The rate takenwill be 1.6000 and 45.00.Hence theGBP/INR = 1.6000 x45.00 = 72.00. Further bankwill addmarginof 0.10%which
will be0.0720. Thetotal rate = 72.00 + 0.720. The customerwouldpay = 72.072 x 100000 =Rs.7207200
2. Thisisasaletransactionforthebank.Bankwillpurchasepounds(GBP)atmarketsellingrateandwillselltheUSDtothecustomertopurchasepounds.
Theratetakenwillbe1.6000and45.00.HencetheGBP/INR=1.6000x45.00=72.00.Furtherbankwilladdmarginof0.10%whichwillbe0.0720.The
totalrate=72.00+0.720=72.072.
3. Thisisasaletransactionforthebank.Bankwillpurchasepounds(GBP)atmarketsellingrateandwillselltheUSDtothecustomertopurchasepounds.
Theratetakenwillbe1.6000and45.00.HencetheGBP/1NR=1.6000x45.00=72.00.Furtherbankwilladdmarginof0.10%whichwillbe0.0720.The
totalrate=72.00+0.720.Thecustomerwouldpay=72.072x100000=Rs.7207200
4. Thebill is to be paidon demand Le.Oct 12, 2012.As per FEDAI rule,wherethedemandimport billsdrawnunder LCarenot retiredon
demand, these arerequired to be crystallizedwithin10 days fromthedateof demand.Hence the latest date bywhichit shouldbe crystallized
isOct 22, 2012. (Forusanceimport bills the crystallisationwillbe doneon duedate.
Case 7
OnApr15,2012,XYZLtdexpectstoreceiveUSD20000withinJuly2012.ThecompanywantstobookaforwardcontractforJuly2012. TheUSD/1NR
inter-bankspot rateisRs.45.10/20.Theforwardpremiumis18/20paiseforMay,31/33forJuneand45/47for July.Themargintoberetainedbythe
bankis0.10paiseperUSD.
01What istheFCrateatwhichtheforwardcontractwillbebookedifthemarginisnottakenintoaccount:
a) Rs.45.31 b) Rs45.41 c) Rs.45.55 d) Rs.45.57
02What is theFCrateatwhichtheforwardcontractwillbebookedifthemarginis takenintoaccount
a) Rs.45.31 b) Rs45.41 c) Rs.45.55 d) Rs.45.57
Ans.1-b 2-a
Explanations:
1. Forcalculatingtheforward,thebankwilltakeintoaccount theforwardpremiumforJuneasamountcanbe receivedonanydayinJulyincludingft
July.Thusthepremiumamount is31paise.Theratewouldbe:
Spot rate = 45.10 Forwardpremiumfor June =00.31(premiumfor Julywillnot be paid as delivery isduring July) Total =45.41
2. Forcalculatingtheforward, thebankwilltakeintoaccounttheforwardpremiumforJuneasamountcanbe
received on any day in July including 1st July. Thus the premiumamount is 31 paise. The rate would be:
Spot rate = 45,10
Forward premiu=mfo0r0.J3u1n
Total = 45.41
LessMargin = 00.10
Rate to be
quoted
= 45.31
Case 8
Theimporter requests on Sep 01, 2012 to book a forward contract forpayment of an import billofUSD50000 duefor Dec 15, 2012. Spot rate
USD/INR = 45.10/20. Forward premiumfor Sep10/14 paise,Oct 22/24 paise,Nov 33/35 paise,Nov toDec 15-12/14 paise.Bank is to chargemargin
of 0.20%.
01 Without taking into account themargin, the ratethatwill bequoted by thebank is :
a) Rs.45.2000 b) Rs.45.5500
c) Rs.45.6900 d) Rs.45.7814
01 By taking into account themargin, the ratethatwillbe quoted by the bank is :
a) Rs.45.2000 b) Rs.45.5500
c) Rs.45.6900 d) Rs.45.7814-
Ans. 1-c 2-d
Explanations:
1. Thisis FCsaletransaction.HencebankwillusetheSpot rate=45.20.andpremiumupto
Dec15,willbeadded.Theratewouldbe:45.20marginof 0.20%i.e.0.09138isadded, the
ratewouldbe=45.7814.
2. Thisis FCsafetransaction.HencebankwillusetheSpot rate=45.20.andpremiumupto
Dec15,willbeadded.Theratewouldbe:45.20marginof 0.20%i.e.0.09138isadded, the
ratewouldbe=45.7814.
To calculate the rate Nov premium+ 0.35
+ 0.14 = 45.69.When the
To calculate the rate Nov premium+ 0.35
+ 0.14 = 45.69.When the
Case 9
Your correspondent bank inUKwants to credit Rs.50million in itsNOSTROaccountmaintained by you in NewDelhi. The bank is ready to credit
the equivalentUSDin you NOSTROaccount in London. The inter-bank rate is USDrate is Rs.45.10/15. If exchangemargin is ignored, howmuch
amount, the correspondent bankwill credit to the NOSTROaccount in London and atwhat rate.
a 1108647.45 b. 1107419.71 c 1107022.13 d. inadequate information tomakethecalculation.
Ans. 1-a
Explanations:
For the bank, it is a purchase transaction as bank is purchasing dollar and giving rupee.Hence the rate thatwill
be applicable is Rs.45.10. The FC value of Rs.50million = 50000000/45.10 = 1108647.45.
Case 10
M/s XYZ imported goods worth Japanese Yen (JPY) 50 million. They request to remit the amount. The USDANR rate is
Rs.45.1500/1700 and USD/JPU is 91.30/50. The bank will load a margin of 0.20%.
01What ratewill be quoted (per 100 yen)?
a) Rs.49.0456 b) Rs.49.4743 c) Rs.49.5730 d) Rs.49.8712
02What amount theimporter has to pay in Indian currency?
a) Rs.2472100 b) Rs.2478500 c) Rs.2428400 d) Rs.2408300
Ans. 1-c 2-b Explanations:
1. JPY is to be sold against rupees forwhich no direct rate is available. Itwill be calculated as a cross rate. Bank need to buy JPY againstUSD
andUSDagainst rupees. Hence the following ratewill be used forUSD/INR 45.1700 (themarket selling rate) and forUSD/JPY 91.30 (the
market selling rate being lower in this case).
Rate = 45.1700/91.30 = 0.494743 and for JPY 100 the same will be Rs 49.4743 (As per FEDAI Rules, JPY is quoted as per 100
yen)
2. JPY is to be sold against rupees for which no direct rate is available. It will be calculated as a cross rate. Bank need to buy JPY
against USD and USD against rupees. Hence the following rate will be used for USD/INR 45.1700 (the market selling rate) and
for USD/JPY 91.30 (the market selling rate being lower in this case).
Rate = 45.1700/91.30 = 0.494743 and for JPY 100 the same will be Rs 49.4743 (As per FEDAI Rulet, JPY is quoted as per 100
yen).
Tothismarginof 0.20%will beaddedwhichworksout to0.0989.
Hencetheratewillbe49.4743+.0989=49.5732roundedof to49.5730
TotalRupeepayment=5,00,00,000x49.573/100= 24786500
Case 11
Bank had booked a forward purchase contract 3months back at Rs.45.60, for delivery 3 days later forUSD 10000. Due to delay in realization of
export bill, the customer has requested-for cancellation of the contract and re-book it for onemonth fixed date or option contract beginning
onemonth fromspot date. The inter-bank spot rate is 45.2000/2200.Onemonth forward premiumis 0800/1000 paise. The TT selling and
buyingmargin 0.20%
01Whatwill be the rate atwhich the contractwill be cancelled:
a) 45.2200 b) 45.2000 c) 45.3104 d) 45.3908
02What amountwill be debited or credited to customer account being difference:
a) Rs.3202 debited b) Rs.3202 credited c) Rs.2996 credited d) Rs.2996 debited
03Atwhat rate, the contractwould be re-booked:
a) 45.2200 b) 45.2000 c) 45.3104 d) 45.3908
Ans. 1-c 2-c 3-c Explanations:
1. The contractwillbe cancelledat TT selling ratei.e. 45.2200+0.20%margini.e0.0904 = 45.3104
Theamount at contracted rate of 45.60 = 45.60x 10000= 456000 The amount at cancelled
rate of 45.3104=453104
Difference =Rs.2996,whichwould be credited to customer account.
2. The contractwillbe cancelledat TT selling ratei.e. 45.2200+0.20%margin = 0.0904 = 45.3104
Theamount at contracted rate of 45.60 = 45.60x10000 = 456000 Theamount at cancelledrate
of 45.3104=453104
Difference =Rs.2996,whichwould be credited to customer account.
3. Forbookingof contract, thespot rate=45.2000
Add one month premium = 00.0800
Total =45.2800
Less inter-bankmarginat0.20%=00.0905
Rate = 45.1895
Case- 12
international Bank successfully contracted an FCNR (B) deposit of 10million USD for a period of 5 years. Out of these funds, the bank retains
USD 4million as depositwith a high rated US bank in its NOSTROaccount and converts the remaining amount to Indian currency at prevailing
USD rate = Rs.46. On the basis of the given information, answer the following questions:
01 f the foreign currency ratemoves to Rs.46.50:
a) the bank.will gainRs. 3mio(million)b) the bankwill lose Rs. 3mio(million)
c) thebankwill gainRs.6mio(million)d) the bankwill lose Rs.6mio(million)
02What typeofpositionthebank ishavingpresently after this transaction?
a) anoversoldpositionofUSD4million b) anoversoldpositionofUSD6million c)anoverboughtpositionofUSD6million d) anoverboughtposition
ofUSD6million
03IftheforeigncurrencyratemovestoRs.45.00:
a) thebankwillgainRs.3mio(million) b)thebankwilllossRs.3mio(million) c)thebankwillgainRs.6mio(million) d)thebankwilllooseRs.6mio(million)
04Thesquareitsposition,thebankwillhavetoundertakewhichofthefollowingtransaction?
a) AcquireUSDassetsofatleastUSD6million b)AcquireUSDassetsofat leastUSD4million
c)AcquireUSDliabilitiesofat leastUSD4million d)AcquireUSDliabilitiesof at leastUSD6million
05 If the bank decides to invest the amount received as FCNR deposit in a 3-year US govt. security at 6 months LIBOR related rate
of interest, the bank faces the following type of risk?
a) foreign exchange risk b) liquidity risk c) basis risk d) no risk
A n s . 1 - b 2 - b 3 - c 4 - a 5 - c
CASE STUDIES ON LETTER OF CREDIT
Case 1
M/sExportsPrivateLimitedhavereceivedaletterofcreditforexport-oftextileitemsforanamountof$50000approximately.Thecompany
manufacturedthegoods,madetheshipmentandpresentedthedocumentsfornegotiationtothenegotiatingbankforatotalinvoicevalueof$52356.
Thenegotiatingbankrefusedtonegotiatethedocumentastheamountexceededtheamountofletter forcredit.Whatisthepositionofexporterinthe
givensituation:
a) Negotiatingbankhasalldiscretiontopointoutanydiscrepancy.Hence,itneednotpay.
b) Thediscrepancypointedoutbythenegotiatingbankisnotcorrect.Henceitshouldpay.
c) Thenegotiatingbankshouldseekadviceoftheopeningbankinsuchmatters
d) Theinformationgivenisincompletetotakeadecision.
Answer:
Solution:Thedecisionofthenegotiatingbankinrefusingtonegotiate.thedocumentsonthebasisofvariationintheamountisnotcorrect.AsperArticle30of
UniformCustomsandPracticesforDocumentaryCredits600,thewords"about"or"approximately"usedinconnectionwiththeamountofthecreditorthe
quantityortheunitpricestatedinthecredit,aretobeconstruedasallowingatolerancenottoexceed10%moreor10%less,thantheamount,thequantityor
theunitpricetowhichtheyrefer.
Hence the amount stated in the invoice is well within the tolerance of 10% and objection raised by the bank is not correct.
Case 2
M/sExportsPrivateLimitedreceivedaletterofcreditforexportofcertainproductsbuttheletterofcreditdoesnotstatethequantityintermsofa
stipulatednumberofpackingunitsorindividualitems.Theexportermanufacturedthegoodsandpresentedthedocumentsfornegotiationwhichhave
beennegotiatedbythenegotiatingbank.However,theopeningbankrefusedtohonourthedocumentsonthepremisethatthereisvariationofaround3
percentinthequantityofgoodssupplied.Thenegotiatingbankdemandsthereturnofmoneyfromtheexporter.Whatistheexporter'spositioninthis
case:
a) Once the documents have been found correct, the negotiating bank cannot ask for refunds of the money from the beneficiary
b) If theapplicant refuses topay, thebeneficiarywillhavetoreturnthemoney
c) The objection raised by the opening bank is justified and this should have been seen by the negotiating bank before hand
d) Theopeningbank'sobjectionisnotjustifiedandithastopaythedocuments
Answer:
Solution:Thedemandofthenegotiatingbankforrefundofthemoneyfromtheexporterisnotjustified.AsperprovisionsofArtide30ofUniform
CustomsandPracticesfordocumentaryCredits(UCPDC-600),atolerancenottoexceed5%moreor5%lessthanthequantityofthegoodsisallowed,
providedthecreditdoesnotstatethequantityintermsofastipulatednumberofpackingunitsorindividualitemsandthetotalamountofthedrawings
doesnotexceedtheamountof the,credit.Inthegivencase, thequantityvariationfallswithinthetolerancelevel.Thenegotiatingbank,insteadofseeking
refundfro-mtheexportershouldtakeupthematterwiththeissuingbankforpayment.
Case3
InternationalBank,NewDelhi receivedaletterofcreditissuedbyabankinUKinfavourofM/sExportsPrivate
Limited, a customerof InternationalBank.Thenegotiationis restrictedtoInternationalBank.Onthedateof
receiptofLC,riotstookplaceinthelocalityWherethebranchofthebankislocated.AsaresulttheLCcouldnotbeadvisedbythebanktotheexporter
immediately.LateronwhenthesituationbecamenormalthebankadvisedtheLCtotheexporterbutbythattimetheexpirydatefornegotiationof
documentshadexpired.TheexporterinsistsonnegotiationofdocumentsbytheInternationalBank,asdelayisnotonthepartoftheexporterbutonthe
partofInternationalBank.WhatisthepositionoftheInternationalBankvis-à-vistheexporterinthegivensituation:
a) InternationalBankisliableduetowhichit shouldnegotiatethedocuments
b) ExportersPvtLimitedhastherighttogetthepaymentofthedocuments
c) International Bank is not liable
d) Giveninformationisnotenoughtotakeanydecision
Answer: c
Solution:TheinsistenceoftheexportertonegotiatethedocumentsisnotcorrectwhenthedateofnegotiationoftheLChasexpired.AsperArticle36of
UniformCustomsandPracticesforDocumentaryCredits(UCPDC600),abankassumesnoliabilityorresponsibilityfor theconsequencesarisingoutofthe
interruption
ofitsbusinessbyactsofGod,riots,civilcommotions, insurrections,wars,actsofterrorism,orbyanystrikes.orlockoutsoranyothercausesbeyondits
control.Abankwillnot,uponresumptionofitsbusiness,honourornegotiateunderacreditthatexpiredduringsuchinterruptionofitsbusiness.Under
thegivencircumstances,thebankhasnoobligationtonegotiatethedocumentsandmake.thepaymentsincethecredithas-expired.Thebeneficiaryhas
toget thenegotiationdateextendedbyamendmentoftheLC.
Case 4
M/sExportsPrivateLimitedhavereceivedaletterofcreditintheirfavourforexportofcertaingoodstoUK.Thedateofexpiryofthecreditisaround31st
December2011.Sincetheprocessinvolvedinmanufacturingofgoodswaslittlelonger,theexportercouldpresentthedocumentsfornegotiationon3rd
January2012.Thedocumentswerenegotiatedbythenegotiatingbankunderreservetowhichtheexporterobjected.Intheopinionof theexporter,
thereisnodeficiencyinthedocumentsandintheopinionof thebank,thedocumentshavenotbeenpresentedfornegotiationintime.Whatisthe
positionof thebankandtheexporter:
a) Bank has to negotiate the documents as it gets 5 banking days to check the documents and the documents have been
presented during that period.
b) The beneficiary has the right to present the documents within 5 calendar days since date is written as around Dec 31. Hence,
the negotiating bank cannot refuse payment
c) Thebankisnotunderobligationtonegotiatethedocumentas thelastdatefornegotiationisover
d) Thebankshouldseekinstructionoftheopeningbankandapplicantandmoveaccordingly.
Answer:
Solution:Thestandtakenbythebankthatthedocumentshavebeenpresentedafterexpirydate,isnotcorrect.AsperArticle3(Interpretations)of
UniformCustomsandPracticesforDocumentaryCredits(UCPDC600),theexpression'tonorabout"orsimilar,willbeinterpretedasastipulationthatan
eventistooccurduringaperiodoffivecalendardaysbeforeuntilfivecalendardaysafterthespecifieddate,bothstartandenddatesincluded.The
documentshavebeenpresentedbytheexporterwithin3calendardaysafterthespecifieddatei.e.Dec31,2011.Hence,thebankshouldnegotiatethe
documentsifotherwiseinorder.
Case 5
PopularBankissuedanLCofUSD50000onJan05,2012,infavorsofJohnandJohnofLondon.Thelast-dateforshipmentisJan15andlastdatefor
negotiationisJan31,2012.ThegoodswereshippedonJan02,2012anddocumentswerepresentedforshipmentbythebeneficiaryfornegotiationto
SouthHallBankonJan14,2012,whichwerenegotiatedonJan16,2012.WhenthedocumentsweresenttoPopularBankforreimbursementbythe
SouthHallBank,theopeningbankfoundthefollowingdiscrepancies:
1. ThedateofshipmentasJan02,2012whilethedateofLCwasJan05,2012.
2. The date of invoice was Jan 03, 2012 and date of packing list and inspection certificate was Dec 31, 2011. The opening
bank returned the documents to the negotiating bank.
a) The return is not justified due to which the negotiating bank should send the documents back to opening bank for payment
b) Thereturnisjustified,asthedateofLCissubsequenttodateofdocuments
c) Thereturnisjustified,asthedateofdifferentdocumentsisdifferent
d) Theopeningbankshouldseekopinionoftheapplicantandthentakedecision
Answer: a
Solution:Thediscrepanciespointedoutbytheopeningbankarenotjustified.AsperArticle14ofUCPDC600, thedocumentsunderanLCcanbedated
priortothedateofLCbuttheseshouldnotbedatedlaterthanthedateofpresentation.Further,Datain adocument,whenreadincontextwiththe
credit, thedocumentitselfandinternationalstandardbankingpractice,neednotbeidenticalto,butmustnotconflictwith,datainthatdocument,any
otherstipulateddocumentorthecredit.Therefore,ifthedocumentsdonotcarryanyotherdiscrepancy, theopeningbankortheapplicantcannotrefuse
payment,onthisbasis.
Case 6
AnLCprovidesforshipmentof500piecesof trousersin200cartons.Italsoprovidesthatpartialshipment isnotallowed.Thebeneficiaryhandsover
100cartonstotheshippingcompanyonJul10andanother100cartonsonJul16.TwobillsoffadingwithdatesJul10andJul16,areissued.The
cartonsaretobecarriedinasinglevesseltosailonJul20.
Thedocumentsarenegotiatedbythenegotiatingbankbutthesearereturnedbackbytheopeningbank,statingthattheLCdidnotpermitpartial
shipment:
a) Openingbankcannotbeforcedtopaybecausethepart shipment isnotpermitted
.b) Openingbankshouldpay, as it isnotpartial shipment, sincevessel isone
c) Bynegotiatingdefectivedocuments, thenegotiatingbankhasmademistake,henceit cannot forcethe
openingbank toreimburse
d) Negotiatingbankhasmademistake.It shouldrecover thepaymentfromthebeneficiary
Answer:
Solution:AsperArticle31ofUCPDC600,documentswith2ormoresetsof transportdocuments coveringshipmentof goodsonthesamemeans
of transport andsamejourney, arenot consideredpartial shipment.Hence, thestandtakenby theopeningbank isnot correct.
Case7
UniversalBank(theissuingbank) receivedthedocumentsunder LCfromPopularBank(thenegotiatingbank)onDec22(Tuesday). It tookonedayto
checkthedocumentsandforwardedthedocumentsforacceptancebytheapplicant.OnDec29, theapplicantpointedoutthattheinsurancepolicy
wasinacurrencydifferent fromtheoneasmentionedinLC.(Dec25wasaholidayduetoXmasandDec27wasSunday).Theopeningbank
immediatelyinformedthenegotiatingbankaboutthisdiscrepancybywayofanEmailandsoughtdirectionsfordisposalofthedocuments.The
negotiatingbankpointedoutthattheopeningbank couldconveytheobjectionifany,within5daysandnotlater,duetowhichitshouldmakethe
payment:
--a) Observationmadebythenegotiatingbankisnotcorrect. Ithasreceivedtheobjectionintime.
b) Observationmadebythenegotiatingbankiscorrect.Openingbankhasconveyedtheobjection2days
late.
c) Observationmadebythenegotiatingbankisnotcorrect.Itshouldconveythistothebeneficiaryand
recovertheamount
d) Losswouldbetotheaccountofapplicant,ashetookmorethan5days.
Answer: a
Solution:AsperArticle16ofUCPDC,theissuingbankgets5bankingdaystodeterminewhetherthedocumentscarrydiscrepancyornot.Dec25being
XmasholidayandDec27beingSunday(whicharetobeexcludedfromcounting),theissuingbankconveyedthediscrepancywithin5bankingdays.
Hencenegotiatingbankcannotrefutetheclaimoftheopeningbank.
EXPORTFINANCE
Case-8
Anexporterapproachesthepopularbankforpre-shipmentloanwithestimatedsalesofRs.100lakh.ThebanksanctionsalimitofRs.50lakh,with
followingmargins:Pre-shipmentloanonFOBvalue—25%;ForeignDemandBill-10%;Foreignusancebilis—20%.
ThefirmgetsanorderforUSD50,000(CIF)toAustralia.On1.1.2011whentheUSD/INRratewasRs.43.50perUSD,thefirmapproachedtheBankfor
releasingpre-shipmentloan(PCL),whichisreleased.
On31.3.2011,thefirmsubmittedexportdocuments,drawnonsightbasisforUSD45,000asfullandfinalshipment.Thebankpurchasedthedocuments
atRs.43.85,adjustedthePCLoutstandingandcreditedthebalanceamounttothefirm'saccount,afterrecoveringinterestforNormalTransitPeriod
(NTP). The documents were realized on 30.4.2011 after deduction of foreign bank charges of USD 450. The bank adjusted the
outstanding post shipment advance. against the bill. Bankchargedinterestforpre-shipmentloan@7%upto90daysand,@8%over90days
upto180days.ForPostshipmentcredit,theBankchargedinterest@7%fordemandbillsand@7.5%forusance(D/A)documentsupto90daysand
@8.50%thereafterandonalloverdues,interest@10%.
01 What is the amount that the Bank can allow as PCL to the exporter against the given export order, considering the profit
margin of 10% and insurance and freight cost of 12%?
a) Rs.2200000 b) Rs.1650000 c) R6.1485000 d) Rs.1291950
02What is the amount of post shipment advance that can be allowed by the Bank under foreign bills
purchased, for the bill submitted by the exporter?
a) Rs.19,80,000 b) Rs.17,75,925 c) Rs.19,73,250 d) Rs.21,92,500
03 What will be the period for which the Bank charges concessional interest on DP bills, from date of purchase of the bill?
a) 90 days b) 25 days c) 31 days d) Up to date of realization
04 in the above case, when should the bill be crystallized (latest date), if the bill remains unrealized for over two months, from the
date of purchase-(ignore holidays)?
a) On 30.4.2011 b) On 24.4.2011 c) On 24.5.2011 d) On 31.5.2011
05 What rate of interest will be applicable for charging interest on the export bill at the time of realization, for the days beyond
Normal Due Date (NDD)?
a) 8% b) 7% c) 7.5% d) 10%
Ans. 1-d 2-c 3-b 4-c 5-d Explanations:
1. FOBvalue=
CIF Value i.e. 50000x43.5 = 2175000
Deduct Insurance & freight 12% of 2175000 = 261000
Balance = 1914000
Deduct profit margin 10% of 1914000 = 191400
Balance = 1722600
Less Margin 25% = 430650
PCL = 1291950
2. 45000x43.85=1973250
3. Concessional• rate will be charged for normal transit period of 25 days and there after overdue interest will be charged.
4. Crystallisationwillbe donewhen the billbecomesoverdueafter 25 daysof normal transitperiod.Date of overduewillbe25.4.2011. if bill
remains overdue, itwillbecrystalisedwithin30 days i.e. upto 24.5.2011.
5. Rate of interestwillbe 10%as theoverdueinterest is statedas 10%in thequestion.
Calculation of bills buying rate, when exchange margin and interest is also to be taken into account:
On July 5, an exporter in India, submits aUSD50000, 2months usance bill drawn under a letter of credit, on animporter inUS. The normal
transit period is 25 days. The inter-bank currency rates are as under:
Spot rate : 1 USD = Rs.65.0000 5000
July forwardmargin = 0.3500 / 0.4000
August forwardmargin = 0.6000 / 0.7000
September forwardmargin = 0.8500 / 0.9000
October forwardmargin = 0.9500 / 0.9900
The exchangemargin is 0.15%. Customer wants to retain 20% of the amount in a current account opened in USA. Rate of interest is
10% p.a. Calculate tl-e following:
1. Rate to be quoted to the customer ,
2. Gross amount to be credited to customer account.
3. Amount of interest to be'deducted.
Solution : The bill dated Jul 05, has 25 transit period + 2months'Usance (Aug and Sep).Hence the payment shall fall due on Sept 30. The
exporterwill be allowed the benefit of Sept forwardmargin sincethe payment is due on last day of Sept.
Further, interest will be recovered from the customer from the date of discount to date of realization on the amount to be credited to his
account (i.e. 80%of the bill amount, as the balance is to be retained in USA).
Spot rate = 65.0000
AddSeppremium=65.0000 +0.8500= 65.85
Deductmargin@0.15% = 65.8500—0.09878 = 65.75122
Final rate = 65.7500 (rounded)
Gross amount due to customer = 65.7500 x 40000* = 2630000
*(20%to be retained inUSA out of 50000)
Less interest@10%for 86 days = Rs.62308.53
(2630000x10x86) / (365x 100)
Net amount payable to exporter =Rs.2567691.46
Case Study -2
Calculationof TT selling ratewhenexchangemarginis given:On July 5, a savingbank customer in India, requests for issue aUSD10000. The
inter-bank currency rates areas under:
Spot rate : 1 USD = Rs.65.0000 / 5000
July forwardmargin = 0.3500 / 0.4000
Bank requires an exchangemarginof 0.15%.
What ratewillbe quoted and howmuch amountwillbedebited to customer's account.
Solution : In this case, no handling of documents is required.Hence TT selling rate shall be used. Exchangemarginwill be added, since for the
bank, it is a sale transaction.
Spot rate selling rate = 65.5000
Addmargin@0.15% = 65.5000 + 0.098775 = 65.598775
Final rate = 65.6000 (rounded)
Gross amountduefromcustomer= 65.6000 x10000=656000
Case Study 3
Calculation for dishonour of export bill purchased by the bank, when exchange margin is given
An export bill of USD 10000 was purchased from an exporter at the then bills buying rate of Rs.65.80. But on due date it was not
paid. Now the bank has to recover the amount from the exporter.
The inter-bank currency rates are as under:
Spot rate : 1 USD = Rs.65.0000 / 5000
July forward margin = 0.3500 / 0.4000
August forward margin = 0.6000 / 0.7000
Bank requires an exchange margin of 0.20% for TT selling rate and 0.15% for bills selling rate.
What rate will be quoted and how much amount will be debited to customer's account.
What gain has been made by the customer in the transaction.
Solution : In this case, handling of import documents is not required. For recovering the amount from export customer, the
TT selling rate shall be used. Exchange margin for TT selling will be added, since for the bank, it is a sale transaction.
Inter-bank spot selling rate = 65.5000
Add TT sellingmargin@0.20%= 65.5000 + 0.1310 = 65.6310
TT selling rate = 65.6310, Amount to be debited = 65.6310 x 10000 = Rs.656310
Profit to the exporter = 658000—656310 = Rs.1690 (amount creditedwhen purchased less amount recovered)
Case Study 4
Calculation of rate and amount for credit of proceeds of bill sent for collection.
An export bill ofUSD 10000was sent for collectionwhichwas submitted by an exporter.On July 10, the correspondent bank creditedUSD9860,
the proceeds of the bills, toNOSTROaccount of thecollecting bank, after recovering its own charges.
The inter-bank currency rates on July 10, are as under:
Spot rate : 1 USD = Rs.65.0000 / 5000
July forwardmargin = 0.3500 / 0.4000
August forwardmargin = 0.6000 / 0.7000
Bank requires an exchange margin of 0.10% for TT buying rate and 0.15% for bills buying rate.
What ratewillbe quoted and howmuch amountwillbecreditedtocustomer's account.
Solution : In this case, the billwas sent for collection.On theamount realized, the TT buying rateshallbe used since the amount has already
beencredited toNOSTROaccountof the bank. There isno need to take any forwardmarginin to account.
Exchange margin for U buying will be deducted, since for the bank, it is a purchase transaction.
Inter-bank spot selling rate
Less TT buyingmargin@0.10%TT
buying rate
Amount to be credited
====
65.0000
65.0000+0.0650
65.0650
65.0650x9860=
=65.0650
Rs.641541
CaseStudy5
Calculationofrateandamountforcreditofproceedsofbillpurchasedfromexporter
AnexportbillhasbeensubmittedbyanexporterforUSD40000forpurchaseonSept15.Theotherinformationisprovidedasunder:
1. Inter-bankexchangerateis66.5400/6000
2. Octoberforwardpoints=0.5000/0.4500
3. Transitperiodis15days
4. Rateof interestis10%
5. Exchangemarginis0.10%
6. FinenessofratesshouldbeasperFEDAIRulesi.e.0.0025
Whatratewillbequotedandhowmuchamountwillbecreditedtocustomer'saccount.
Solution:ExchangemarginforTTbuyingwillbededucted,sinceforthebank,itisapurchasetransaction.Furtherinterestat10%for15dayswillbe
recovered.Octoberforwarddiscountshallbereduced.
Inter-bankspotbuyingrate = Rs.66.5400
Lessmargin@0.15% = 66.5400-0.06654=66.47346
Ratetobequoted = 66.4725(0.0025fineness)
Dueamount = 66.4725x40000=Rs.2658900
LessInterest@10%for15days = Rs.10926.99
Amounttobecredited = Rs.2647973
Case Study 6
Purchaseof export bill byusing cross rate
An exporter tenders an export bill of Singapore Dollars 20000. At that time:
1. Inter-bankUSDratewasRs.65.5045/6070
2. Forwardrate:Onemonth,0.2000/1500,2months 0.4500/3500, 3month: 0.7000/6000
3. USD/SGDratewasUSD1=1.3205/3225.
4. Forwardrate:Onemonth,0.0200/0300,2months 0.0400/0500, 3month: 0.0600/0700
5. Exchangemarginis0.10%.
6. Transitperiodis25days.
7. Interestrateis10%
What rate will be quoted by the bank and how much amount in Indian currency, shall be credited to exporter's current account?
Solution : This involves calculation of cross rate since at the time of cancellation, the Singapore dollar / rupee rate is not available. Since it is a
purchase transaction andUSDforward is at a discount, onemonth forward discountwill be taken into account.
As regards,USD/SGD, theUSDis at a premium, onemonthforwardwillbe taken into account, as it isa sale transactionfor thebank.
Inter-bank USD rate =
Less onemonthforwarddiscount =
Rate after forward discount =
Less exchangemargin@0.1% =
Rate after exchange margin =
Rounded (to 0.0025) =
USD/SGD selling rate =
Add one month premium =
USD/SGD one month =
SGD/Rupee rate =
Rs.65.5045
Rs.00.2000
Rs.65.3045
Rs.00.0653
Rs.65.2392
Rs.65.2400
1.3225
0.0300
1.3525
65.2400/1.3525= 48.20
Amount to be creditedto customer account = 48.20 x 20000=Rs.964000 Less interest for 25days@10%= 6602.74
Net amount = Rs.957397.26
Case Study 1 : Profit or losson a swapdeal.
Abank inDelhimakes a swapdealofUSD50000 by selling spot and buying onemonthforward. The other informationis as under:
1. Inter-bankUSDratewasRs.65.5045/6070
2. Onemonthforward rate isquoted Rs.0.25above the spot rate.
3. Interest ratein Delhi is 10%and inNewYork 5%p.a.
4. Commission on the deal is 0.5 paise per Rs.100 on sale and 0.5 paise on purchase.
Calculate the gain or lossmade by thebank inthis deal. Solution: The bank has sold spot at themarket buying rate of Rs.65.5045.
Accordingly, the onemonthforward buyingwill be atRs.65.7545 (65.5045 + 0.2500).
1. Amount receivedonsale ofUSD50000:
USD50000x 65.5045 =Rs.3275225.00
Less commission@0.5 paise =Rs.163.76
Amount received =Rs.3275061.24
Interest earned at 10%for onemonth =Rs.27292.18
Net amount received =Rs.3302353.42
2. Principal amount + interest payable inUSD
Principal amount =USD50000
Interest@5%onUSD50000 for onemonth =USD208.33
Total amount =USD50208.33
Amount payable in Indian currency =Rs.3301423.63
(50208.33x65.7545)
Add commission@0.5 paise =Rs.165.07
Total amount payable =Rs.3301588.70
3.Gain(1-2) =Rs.764.72
Case Study 2 : Booking and cancellation of a Forward Contract
A bank in Delhi entered into a forward purchase contract for USD 10000
on Aug 16, with its customer, which is due on Nov 15, at Rs.65.8050.
Bank covered itself intheinter-bankmarket at Rs.65.9050.
On October 10, the customer requested the bank that the date be
extended toDecember 15.
The rates are as under:
Spot Rate Inter-bankUSDratewasRs.65.5050/6050
Spot Sep=Rs.65.6050/7050
SpotOct = Rs.65.7050/8050 •
SpotNov = Rs.65.8050/9050
SpotDec =Rs.65.9050/9950
2. Exchangemarginshallbe 0.20%onbuying and selling transactions.
Calculate the charges that would be recovered from the customer for
extension of the date.
Solution : The bankwill cancel the contract and then re-book the same.
1. Cancellation of the original contract
The cancellationwill be at forward sale rate for deliveryNovember at
inter-bank forward selling rate. = Rs.65.9050
Add exchangemargin@0.20% = Rs.00.1318
Total = Rs.66.0368
Roundedto 0.0025 = Rs.66.0375
Purchase of USDat original contracted rate = Rs.65.8050
It sells by cancellation of contract = Rs.66.0375
Loss perUSDin sale = Rs.0.2325
Loss on totalUSD10000 =Rs.2325
2. Re-booking of the contract
The re-bookingof forwardcontractwillbewithdelivery forDecember 15. The forward rateforNovember shallbe taken asDecember isnot a
completemonth.
Forward rate to be taken for contract = Rs.65.8050
Less exchange margin @0.20@ = Rs.00.1316
Total = Rs.65.9366
Rounded to 0.0025 = Rs.65.9375
Hence,bankshallbookanewcontractatRs.659375andwillrecoverRs.2325forcancellationofthepreviouscontract.
CASE STUDIES
Case 1: Credits v/s contracts
Article 4, states that a credit by its nature is separate from the sale or other contract on which it is based and banks are in no way
concerned with or bound by such contracts.
It also states that the issuing bank must discourage any attempt by the applicant to include the details of the contact, proforma
invoice, etc, as an integral part of the LC.
Further, Article 5 of UCPDC 600, states that banks deal in documents and not in goods and services.
Even then, the applicants at times attempt to get the documents refused due to reasons, such as (i) goods not as per proforma
invoice (ii) obtain stay /injunction against the opening bank to honour payment of the documents received under LC, due to the
reason that the beneficiary has not sent the goods as shown, as mentioned in the contract or as given to understand.
Thus there could be a breach in the contract between the buyer and the seller, but the documents under LC could be perfectly
in compliance of the terms of LC, thus making the issuing bank liable to pay / honour.
Courts, in many cases, have been putting stays /granting injunctions and stopping issuing banks to pay to the negotiating bank and
debiting applicants accounts.
While issuing banks' on their own, should not, in connivance or other wise, try to excuse itself from making payments/
honoring the documents, with such reasons, which link the discrepancies to the sale contracts or the quality of goods, the
National courts/ law, being above the UCPDC, they are bound to wait for the stay /injunction to be lifted before making
payment to the negotiating banks.
The recovery of the amounts of documents from the applicant is altogether a separate issue, as it is a matter of taking credit risk by
the opening bank on the applicant. Thus, recovery of amount from the applicant must also not be linked to the honoring of payment
to the negotiating bank.
Case 2. Case of Date of documents
Bank A issues LC dated 1.10.2009, in favour of a beneficiary in UK. The last date of shipment as per LC is 15.10.2009 and last date of
negotiation 31.10.2009.
The beneficiary presents documents to Bank B, for negotiation on 05.10.2009, with documents evidencing shipment of goods on
30.09.2009, which sends the documents to the opening bank, asking to reimburse as per LC terms.
The opening bank, on receipt of documents notices that, the shipment was made on 30.09.2009 and the invoice was dated
2.09.2009, while the inspection certificate, analysis certificate and packing list were dated 25.09.2009
The issuing bank on receipt of documents rejected the documents, notifying discrepancy that documents were dated prior to date of
credit.
Article 14 i, specifically provides that documents could be dated prior to the date of LC, but should not be dated after the date of
presentation.
While, the LC is silent about the date of documents, documents presented need to be dated as per LC terms, if so provided in the LC.
As such, assuming that the LC did not provide for dates of the documents, the rejection by the opening bank is not as per UCPDC.
Case 3. Partial Shipments
An LC, covering shipment of 1000 cartons consisting of 15000 pieces of shirts, (readymade garments), from Chennai port to Dubai
port, provides that partial shipment is not allowed.
The beneficiary hands over 500 cartons of Shirts, to the shipping company on 15.7.2009 and another 500 cartoons on 18.7.2009.
The Shipping Company issues BL for the first 500 cartons on 17.7.2009 and another BL covering 500 cartoons on 19.7.2009. Both the
consignments are to be shipped by a vessel that is due to leave Chennai port on 21.7.2009. Thus the total goods under the LC , i.e.
1000 cartons, are shipped on a single vessel, but with two BLs.
The LC issuing bank, on receipt of documents drawn under the LC rejects the documents, stating the shipment is not made under
one BL and as such constitutes partial shipment, which is not permitted under the LC. The issuing bank, informs the negotiating bank
that goods are held at their disposal and further instructions are awaited.
As per article 31 of UCP, a presentation of documents consisting of more than one set of transport documents, covering shipment of
goods on the same means of transport and has same journey, will not be considered as partial shipment, even if they indicate
different dates of shipment.
As such, in the given scenario, the rejection of documents by the LC opening bank is not correct as per the Article 31 of UCP, and the
bank must pay /honour the documents.
Case 4. Notice of Dishonor
The LC issuing bank on receipt of documents on 15.9.2009 (Tuesday) took two days to examine the same and referred the
documents to the applicants for their acceptance on 17.9.2009 (Thursday). The applicants came up with a discrepancy in
documents, on 22.9.2009 (Tuesday) evening, stating that the documents need to be rejected as the BL was not stamped with "On
board" stamp and initialed by the shipping company.
The issuing bank sent a Swift message of rejection to the negotiating bank on 23.9.2009.
On receipt of Swift message from the issuing bank, informing rejection of documents and discrepancy, as informed by the applicant,
the negotiating bank referred the matter back to the opening bank stating that the message of refusal and notification of
discrepancy was not received within the time period of 5 working days, and as such claimed to be reimbursed as per LC teims.
Article 16 d of UCP states that the notice of refusal and discrepancy must be given latest by the closing hours of the 5 th working day
from the date of presentation. In the instant case, the opening bank was correct in sending the swift message on 23.9.2009, which
was 5th working day, subsequent to the date of receipt of documents.
Since, 19th and 20th were Saturday and Sunday and 21.9.2009, being a holiday in India, on account of Ramadan ID, the opening bank
was right in sending the notice of refusal / discrepancy on 23.9.2009, which was in compliance with the meaning of the said article.
CASE 5. Insurance
An LC calls for insurance from ware house to warehouse, and insurance to cover 110% of the invoice value.
Bank A negotiates and forwards documents, covering invoice for USD 17920.00 under a Multi model transport document (Combined
Bill of Lading) dated 15.9.2009. to the opening bank, under the said LC. The insurance enclosed to the documents is for USD
20,000.00 and is dated 17.9.2009.
As per the Article 28 of UCP, the insurance must indicate the amount of insurance. It should be at least 110% , of the invoice value if
the LC is silent on this requirement and must not be dated prior to the date of transport document.
In the given scenario, the insurance is dated after the date of multimodal transport document, which should be covering the voyage
of goods from the godown of the seller, and is more than the given percentage for insurance coverage, i.e. more tan 110%.
Banks would normally accept some difference in insurance coverage which could be due to rounding off of the values/cover amount,
but still can be used as a discrepancy to refuse the documents. However, a document dated after the date of shipping document, is
clearly a discrepancy, and requires specific approval from the applicant.
CASE STUDY ON PRE- AND POST-SHIPMENT FINANCE
Case: A textile exporter, with estimated export sales of Rs. 300 lacs during the last year and projected sales of Rs.500 lacs for the
current year, approaches the bank for granting credit facilities. The bank sanctions following facilities in the
account:PCL/FBP/FUBD/FBN ....... . ..... Rs. 100.00 lacs Sub limits:
PCL (25 % margin on fob value) Rs. 50.00 lacs FBP (10 % margin on bill amount) Rs. 50.00 lacs FUBD (15 % margin on bill amount) Rs.
50.00 lacs FBN (nil margin) Rs. 100.00 lacs
He gets an order for USD 50,000.00 CF, for exports of textiles- dyed/hand printed, to UK, with shipment to be made by 15.9.2009.
On 2.6.2009 he approaches the bank for releasing PCL against this order of USD 50,000.00. The bank releases the PCL as per terms of
sanction.
On 31.8.2009, the exporter submits export documents for USD 48,000.00, against the order for USD 50,000.00. The documents are
drawn on 30 days usance (D/A) as per terms of the order. The bank discounts the documents at the days applicable rate, adjusts
the PCL outstanding and credits the balance to the exporter's account, after recovering interest up to notional due date. Interest
on PCL recovered separately. st the
The documents are realized on 29.10.2009, value date 27.10.2099, after deduction of foreign bank charges of USD 250.00. The bank
adjusts the outstanding post shipment advance allowed again bill on 31.8.2009.
Bank charges interest at – PCL- 8.50 % upto 180 days, and post shipment at 8.50 % upto 90 days and. 10.50 % thereafter. Overdue
interest is charged at 14.50%.
the USD/INR rates were as under:
—2.6.2009: Bill Buying 48.20, bill Selling 48.40.
— 31.08.2009: TT buying 47.92, Bill buying 47.85, TT selling 48.08, Bill selling 48.15., premium for 3() days was quoted as
04/06 paise.
Now give answers to the following:
1. What is the amount that the bank allows as PCL to the exporter against the given export order, considering insurance and
freight costs of 12%.
(i) Rs. 15,90,600 @ (ii) Rs. 2410000.00 (iii) Rs. 2120,800.00 (iv) Rs. 1815000
2. What exchange rate will the bank apply for purchase of the export bill for USD 48,000.00 tendered ' by the exporter:
(i) 47.89 (ii) 47.85 (iii) 47.91 (iv) 47.96
3. What is the amount of post shipment advance allowed by the bank under FUBD, for the bill submitted by the exporter:
(i) Rs.19,54,728 (ii) Rs 19,52,280 (iii) Rs.19,53,912 (iv) Rs.22,98,720
4. What will be the notional due date of the bill submitted by the exporter:
(i) 30.10.2009
(ii) 30.9.2009
(iii) 25.10.2009
(iv) 27.10.2009
5. Total interest on the export bill discounted, will be charged up to;
(i) notional due date 25.10.2009
(ii) value date of credit 27.10.2009
(iii) date of realisation 30.10.2009
(iv) date of credit to nostro account 29.10.2009
Ans. 1: USD 50,000.00@ 48.20 = Rs.. 2410000.00 – less 12% for insurance and freight cost i.e Rs. 289,200 = Rs.21,20,800.00 (fob
value of the order. Less margin 25% i.e. Rs.530,200.00 balance Rs 15,90,600.00
Ans. 2: 47.89– Bill buying rate on 31.8.2008 – 47.85 plus 4 paise premium for 30 days, this being a DA bill.
.4 USD 48,000.00 @ 47.96 =Rs. 23,02,080.00, less 15% margin on DA bill, i.e. Rs. 345312.00
Ans.
0850:19:i161,7su6b8m.0i0tted on 31.8.2009- drawn on 30 days DA plus normal transit period of 25 days -
31.8.2009 plus 30 days plus 25 days, i.e. total 55 days from 31.3.2009 i.e. 25.10.2009
ADS 5: Interest is charged up to the date the funds have been credited to the banks nostro account, the effective date of credit is the
value date of credit, i.e. 27.10.2009.
SOME MORE CASE STUDIES ON EXCHANGE RATES
Basic Concepts
Negotiationof,ExportBillsisapurchasetransactionandRetirementofImportBillsisasaletransactionforthe
AuthorisedDealer.
InpurchaselowerratewillbeappliedandinSalehigherratewillbeapplied.Samewillbethecaseforforward
premium
In sale transaction exchangemarginwill be added but in purchase transaction exchangemarginwill be
deducted.
Case 1
OnJan10,2012,theMumbaibranchofpopularbankenteredintofollowingforeigncurrencysaleandpurchase
transactions:
(1) WithMr.AforsaleofUSD2000tobedeliveredontheJan10.
(2) WithMr.BforpurchaseofUSD2000tobedeliveredonJan11.
(3) WithMr.CforpurchaseofUSD2000tobedeliveredonJan14(Jan12and13beingbankholidays)
(4) WithMr.DforsaleofUSD2000tobedeliveredonFeb11.
Theinter-bankforeigncurrencyratesonJan10,2012areasunder:CashrateorreadyrateUSD=Rs.45.50/60,TomrateRs.45.55/65,SpotrateRs.45.60/70
andonemonthforwardrateRs.45.80185.
Onthebasisofabove,answerthefollowingquestions.
01 WhatratewillbeusedforthetransactionwithAandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50,Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d) Rs.45.65,Rs.91300
02 WhatratewillbeusedforthetransactionwithBandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50, Rs:91000 --
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d) Rs.45.65,Rs.91300
03What ratewillbeusedfor thetransactionwithCandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50, Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d) Rs.45.65,Rs.91300
02What ratewillbeusedfor thetransactionwithAandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50, Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, R-6:91200
d) Rs.45.65,Rs.91300
Ans.1-c 2-b 3-c 4-d
Explanations:
1. Itisasaletransaction.Hence,samedayratei.e.cashrateofRs.45.60willbeused.Theamount=-45.60x2000=Rs.91200
2. It is a purchase transaction. Hence, next day rate (TOM Rate) of Rs.45.55 will be used. The amount = 45.55 x 2000 = Rs.91100
3. Itisapurchasetransaction.Hence,3ffidayrate(SpotRate)ofRs.45.60willbeused.Theholidaysperiodwillbeexcludedfromcounting.Theamount=
45.60x2000=Rs.91200
4. Itisaforwardsaletransaction.HenceforwardsalerateorRs.45.85willbeused.Theamount=45.85x2000=Rs.91700
Case 2
AnexportersubmittedanexportbillofUSD100000drawnon120daysusancebasisfromdateofshipment,whichtookplaceonAug03,2012.The
followingfurtherinformationisprovided:
(1) TheduedateisDec01,2012.
(2) Theexchangemarginis0.20%.
(3) Spotinter-bankUSDrateisRs.45.00/05.
(4) PremiumspotNov0.40/45
(5) Rateisquotedtonearest0.25paiseandrupeeamounttoberoundedoff
(6) Interestrateis8%forperiodupto180days.
(7) Commissiononbillpurchaseis0.50%
Answerthefollowingquestions.
01Whatistherateatwhichthebillwill-bepurchasedifitisademandbillafteradjustmentofbankmargin,withouttakingintoaccount,thepremium?
a) Rs.44.91 b) Rs.45.09 c) Rs.45.31 d) Rs.45.51
02 What is the rate at which the bill will-be purchased if it is a demand bill after adjustment of bank margin and the premium? -
a) Rs.44.91 b) Rs.45.09 c) Rs.45.31 d) Rs.45.51
03What is thegross amountbeforeapplicationof interest andcommission:
a) R5.4531000 b) Rs.4410174 c) Rs.4407908.50 d) Rs.4507909
04What istheamountofthebillwithoutbankcommission
a) Rs.4531000 b) Rs.4410174 c) Rs.4407908.50 d) Rs.4407909
05Whatamountwillbecreditedtoexporter'saccount:
a) Rs.4531000 b) Rs.4410174 c) Rs.4407922.50 d) Rs.4407909
Ans. 1-a 2-c 3-a 4-b 5-d Explanation :
1. Calculationofbuyingratewillbeasunder:
Spot rate Rs.45.00(buying ratewillbeappliedas it ispurchase)
Less 0.20% margin Rs.00.09 Rate Rs.44.91
2. Calculationofratewillbeasunder:
Spot rate Rs.45.00(buying ratewillbeappliedas it ispurchase)
Less 0.20% margin Rs.00.09 Rate Rs.44.91
Addpremium Rs.00.40(premiumwillbeaddedas thatbenefitwillbeof thecustomer) Rate Rs.45.31-
3. Calculationofratewillbeasunder:
Spot rate Rs.45.00(buying ratewillbeappliedas it ispurchase) Less 0.20% margin Rs.00.09
Rate Rs.44.91 AddpremiumRs.00.40(premiumwillbeaddedas thatbenefitwillbeof thecustomer)
Rate Rs.45.31 Amount inRs.45.31 x100000 =4531000
4. Calculationofratewillbeasunder:
Spot rate Rs.45.00 Less 0.20% margin Rs.00.09 Rate Rs.44.91
Add premium Rs.00.40 RateRs.45.31-- GrossAmountinRs.45.31x100000=4531000
Interest120days@8%Rs.120826 Amount 4531000—120826=4410174
5. Calculationofratewillbeasunder:
Spot rate Rs.45.00 Less 0.20% margin Rs.00.09
Rate Rs.44.91 Add premium Rs.00.40
Rate Rs.45.31 Amount inRs. 45.31x100000 = 4531000
Interest120days@8%Rs.120826 Commissionat0.05%Rs.2265.50—
Amounttobecredited4531000-120826-2265.50=4407908.50(roundedtoRs.4407909).
Case 3
Yourexport customerhasreceivedanadvanceofUS10000againstexporttoUK,whichtheimporterinUKhasgotcreditedtoNOSTROaccountofthe
bankinLondon.Thecurrent inter-bankmarketrateUSD=45.10/15.Bankretainsamarginof0.15%onpurchaseand0.16%onsale.Whatamountwill
becreditedtocustomersaccount:
a. Rs.451676.50 b. Rs.450323.50 c. Rs.451721.60 d.Rs.450278.40 Ans.1-b
Explanations:
1: It is a purchase transaction for the bank.Hence inter-bank purchase rate of Rs.45.10will be used. Bankwill
deduct the purchasemargin of 0.15%. Grossamount=45.10x10000=451000:
Net amountwhichwillbe creditedto customer's account = 451000- 676.50(0.15%margin) = 450323.50
Case 4
Acustomerwants to book the following forward contracts:
(1) Forward purchase ofUSD50000fordelivery 31.dmonth(2) Forwardsale ofUSD50000 for delivery 2ndmonth.
Givenspot rate=45.1000/45.1200. Premium=1m- 0800/0900,2m- 1700/1900and3m- 2800/2900.Exchangemargin=forpurchase- 0.20%and
for sale- 0.25%.
01What is the rate for forward purchase transaction:
a) 45.4233 b) 45.2705 c) 45.1795 d) 45.1700
02What is the rate for forward sale transaction:
a) 45.4233 b) 45.3243 c) 45.4882 d) 45.3456
Ans. 1-c 2-a Explanations:
1. For purchase the spot rate = 45.1000
Add2mpremium =00.1700(premiumfor2monthsonlytobeaddedinpurchaseasbillmaybe
givenonanydayof3'dmonthincludingon13tday) Total =45.2700
Lessmargin of 0.20% = 00.0905 Rate =45.1795
2. For sale the spot rate = 45.1200 Add 2mpremium = 00.1900 (premiumfor full period of 2months only to be added in
sale) Total=45.3100 Addmargin of 0.25%= 00.1133 Rate =45.4233
Case 5
Following are the Inter bank quotes on a certain date: Spot USD 1NR 44.60/65
1month8/10 2month18/20 3month28/30
SpotGBPUSD1.7500/7510 1month30/20 2-month50/40 3month70/60
Alltheabovedifferencesareforthemonthandfixeddatesandthebankmarginis3paise.
01Anexporterhaspresentedanexportdemandbill(sightdocument)forUSD300000underirrevocableletterofcredit.Whatwillbetherateatwhichthe
documentswillbenegotiated?
a) 44.5700 b) 44.6000 c) 44.6500 d) 44.6800
02- An Exporter has submitted 60 days usance bill for USD 25000 for purchase. At what rate the document will be purchased?
a) 44.7500 b) 44.7800 c) 44.8400 ' d) 44.8700
03 Your bank has opened a letter of credit for import at the end of 2 months for GBP 30000. At what rate, the forward exchange
will be booked?
a) 78,4700 b) 78,4725 c) 78,6300 d) 78,6325
04 If the exchange margin is 3 Paise for buying as well as selling, what is the bank's spread in % on customer transaction?
a) 0.2465 b) 0.3000 c) 0.6000 d) 0.6275
05Acustomer tenders exportbillforGBP10,00,000payable45days fromsight. Thetransitperiodis 15dayshewants toretain10%ofbill valueinthe
foreigncurrency.Bank'smarginis 10paise.Whatwillbecreditedto customer'saccount?
a) 71310030 b) 70317630 c) 70110270 d) 70018510
Ans.1-a 2-a 3-b 4-a 5-b
Explanations:
1. It is a demand bill which means the payment is immediate upon negotiation. So, spot rate will be applied, which is USD/INR
SPOT 44.60/44.65.
Being an export bill, frombank's pointof view, it is a buying transaction.HenceBuying (Bid)Rateof 44.60(andan inter-bank rate)willbe
applied. To arrive at the customer rate, themarginwillbededucted.
inter Bank Rate 44.6000 Less : Margin 00.0300 Customer Rate 44.5700
2. The payment terms in this case are 60 days usance. Hence, 2 months forward rate will be applied, which will be calculated as
under:
Spot USDIINR 44.6000/44.6500 Forward 2Months 00.1800100.2000 (small/Big> Premium>Add)
Total 2Months 44.7800/44.8500 Being an export bill, from bank's point of view, it is buying of FC. Hence Buying (Bid) Rate
will be applied, which is 44.78. To arrive.at the customer rate, exchange margin will be deducted. Inter Bank Rate 44.7800
Less:Margin 00.0300
Customer Rate 44.7500
3. The fetter of credit is for 2months.Hence, 2months forwardratewill bea appliedwhichwillbe calculated onthebasisof 2MonthsGBP/INR
rate througha cross rate (GBP/USDandUSD/INR rates).
USD/INR SPOT 44.6000/44.6500 Forward 2Months 00.1800/00.2000 (Small/Big-> Premium->Add)
Total 2Months 44.7800/44.8500 GBP/USDSPOT1.7500/1.7510
Forward-2Months 0.0030/0.0020(Big/Small->Discount ->Less) Total 2Months 1.7470/1.7490
It is an import transaction and frombank's point of view, it is selling. Hence selling (offer) Ratewill be applied.
GBP/INR = GBPIUSD x USD /INR =44.8500X1.7490 =78.44265
This is an inter-bank rate. To arrive at the customer rate, exchangemarginwill be added.
Inter Bank Rate 78.4427 Add:Margin 00.0300 Customer Rate 78.4727 rounded to 78.4725
4. USDANIR Spot 44.6000/44.6500 inter Bank Buying Rate 44.6000
Less: ExchangeMargin 00.0300 Merchant Buying Rate 44.5700
Inter bank Selling Rate 44.6500 Add: ExchangeMargin 00.0300
Merchant Selling Rate 44.6800
%Spread=((SellingRate-BuyingRate) X100)1/{(SellingRate+BuyingRate)/2}
=((44.68-44.57)X100))/{44.68+44.57)/21 =00.11X100/44.625 =0.2465%
5. TheBill period is 45Days. The transit period is 15Days.
Total period is 2 months. Hence, 2 months forward rate will be applied. 2Months GBP/INIR rate is required for which cross-rate
will be calculated.
USD/INR SPOT 44.6000/44.6500 Forward Points 2Months 00.1800/00.2000 (Small/Big->Premium->Add)
Spot 2Months 44.7800/44.8500 GBP/USD SPOT 1.7500/1.7510
Swap Points 2months 0.0030/0.0020 (Big/Small-> Discount->Less) Outright 2Months 1.7470/1.7490
Being an export frombank's point of view, it is Buying. Hence Buying (Bid) Ratewill be applied).
GBP/INRBID = GBP/USDBID X USD/INRSID =44.7800X1.7470 =78.2307
This is an inter-bank rate. To arrive at the Customer Rate, Exchangemarginwill be deducted.
Inter Bank Rate 78.2307 Less: Margin 00.1000 Customer Rate 78.1307
The bill is for 10,00,000 GBP. Of this, the customer wants to retain 10% in EEFC account. Hence he would be converting 9,00,000
GBP.For 9,00,000GBP, his accountwould be creditwith = 78.1307 X 900000 = Rs.70317630
Case 6
An importer customer,wants to retire an import bill of Pound Sterling 100000 drawn under letter of credit opened by you, and payable on
demand onOct, 12.2012. The TTmargin is 0.10%. The inter-bank rates areGBP/USD= 1.5975/1.6000 andUSD/1NR = Rs.44.90/45.00.On the
basis of given information, answer the following questions.
01 What rate will be quoted by the bank for this transaction in terms of GBP/INR without taking into account the TT margin:
a) Rs.71.7276 b) Rs.71.9085 c) Rs.72.0000 d) Rs.72.0720
02 What rate will be-quoted by the bank for this transaction in terms of GBP/1NR after taking into account the TT margin:
a) Rs.71.7276 b) Rs.71.9085 c) Rs.72.0000 d) Rs.72.0720
03 What amount will be debited to cash credit or overdraft or current account of the customer for retirement of this bill:
a) Rs.7000000 b) Rs.7207200 c) Rs.7218300 d) Rs.7222070
04 If this bill is not retired by the importer customer, the crystallization of this import bill will be on which of the following dates:
a) Oct 12, 2012 b) Oct 21, 2012 c) Oct 22, 2012 d) Nov 12, 2012
Ans. 1-c 2-d 3-b 4-c
Explanations:
1. This is a sale transactionfor thebank.Bankwillpurchase pounds (GBP) atmarket selling rate andwill sell theUSDtothecustomer to purchase
pounds. The rate takenwill be 1.6000 and 45.00.Hence theGBP/INR = 1.6000 x45.00 = 72.00. Further bankwill addmarginof 0.10%which
will be0.0720. Thetotal rate = 72.00 + 0.720. The customerwouldpay = 72.072 x 100000 =Rs.7207200
2. Thisisasaletransactionforthebank.Bankwillpurchasepounds(GBP)atmarketsellingrateandwillselltheUSDtothecustomertopurchasepounds.
Theratetakenwillbe1.6000and45.00.HencetheGBP/INR=1.6000x45.00=72.00.Furtherbankwilladdmarginof0.10%whichwillbe0.0720.The
totalrate=72.00+0.720=72.072.
3. Thisisasaletransactionforthebank.Bankwillpurchasepounds(GBP)atmarketsellingrateandwillselltheUSDtothecustomertopurchasepounds.
Theratetakenwillbe1.6000and45.00.HencetheGBP/1NR=1.6000x45.00=72.00.Furtherbankwilladdmarginof0.10%whichwillbe0.0720.The
totalrate=72.00+0.720.Thecustomerwouldpay=72.072x100000=Rs.7207200
4. Thebill is to be paidon demand Le.Oct 12, 2012.As per FEDAI rule,wherethedemandimport billsdrawnunder LCarenot retiredon
demand, these arerequired to be crystallizedwithin10 days fromthedateof demand.Hence the latest date bywhichit shouldbe crystallized
isOct 22, 2012. (Forusanceimport bills the crystallisationwillbe doneon duedate.
Case 7
OnApr15,2012,XYZLtdexpectstoreceiveUSD20000withinJuly2012.ThecompanywantstobookaforwardcontractforJuly2012. TheUSD/1NR
inter-bankspot rateisRs.45.10/20.Theforwardpremiumis18/20paiseforMay,31/33forJuneand45/47for July.Themargintoberetainedbythe
bankis0.10paiseperUSD.
01What istheFCrateatwhichtheforwardcontractwillbebookedifthemarginisnottakenintoaccount:
a) Rs.45.31 b) Rs45.41 c) Rs.45.55 d) Rs.45.57
02What is theFCrateatwhichtheforwardcontractwillbebookedifthemarginis takenintoaccount
a) Rs.45.31 b) Rs45.41 c) Rs.45.55 d) Rs.45.57
Ans.1-b 2-a
Explanations:
1. Forcalculatingtheforward,thebankwilltakeintoaccount theforwardpremiumforJuneasamountcanbe receivedonanydayinJulyincludingft
July.Thusthepremiumamount is31paise.Theratewouldbe:
Spot rate = 45.10 Forwardpremiumfor June =00.31(premiumfor Julywillnot be paid as delivery isduring July) Total =45.41
2. Forcalculatingtheforward, thebankwilltakeintoaccounttheforwardpremiumforJuneasamountcanbe
received on any day in July including 1st July. Thus the premiumamount is 31 paise. The rate would be:
Spot rate = 45,10
Forward premiu=mfo0r0.J3u1n
Total = 45.41
LessMargin = 00.10
Rate to be
quoted
= 45.31
Case 8
Theimporter requests on Sep 01, 2012 to book a forward contract forpayment of an import billofUSD50000 duefor Dec 15, 2012. Spot rate
USD/INR = 45.10/20. Forward premiumfor Sep10/14 paise,Oct 22/24 paise,Nov 33/35 paise,Nov toDec 15-12/14 paise.Bank is to chargemargin
of 0.20%.
01 Without taking into account themargin, the ratethatwill bequoted by thebank is :
a) Rs.45.2000 b) Rs.45.5500
c) Rs.45.6900 d) Rs.45.7814
01 By taking into account themargin, the ratethatwillbe quoted by the bank is :
a) Rs.45.2000 b) Rs.45.5500
c) Rs.45.6900 d) Rs.45.7814-
Ans. 1-c 2-d
Explanations:
1. Thisis FCsaletransaction.HencebankwillusetheSpot rate=45.20.andpremiumupto
Dec15,willbeadded.Theratewouldbe:45.20marginof 0.20%i.e.0.09138isadded, the
ratewouldbe=45.7814.
2. Thisis FCsafetransaction.HencebankwillusetheSpot rate=45.20.andpremiumupto
Dec15,willbeadded.Theratewouldbe:45.20marginof 0.20%i.e.0.09138isadded, the
ratewouldbe=45.7814.
To calculate the rate Nov premium+ 0.35
+ 0.14 = 45.69.When the
To calculate the rate Nov premium+ 0.35
+ 0.14 = 45.69.When the
Case 9
Your correspondent bank inUKwants to credit Rs.50million in itsNOSTROaccountmaintained by you in NewDelhi. The bank is ready to credit
the equivalentUSDin you NOSTROaccount in London. The inter-bank rate is USDrate is Rs.45.10/15. If exchangemargin is ignored, howmuch
amount, the correspondent bankwill credit to the NOSTROaccount in London and atwhat rate.
a 1108647.45 b. 1107419.71 c 1107022.13 d. inadequate information tomakethecalculation.
Ans. 1-a
Explanations:
For the bank, it is a purchase transaction as bank is purchasing dollar and giving rupee.Hence the rate thatwill
be applicable is Rs.45.10. The FC value of Rs.50million = 50000000/45.10 = 1108647.45.
Case 10
M/s XYZ imported goods worth Japanese Yen (JPY) 50 million. They request to remit the amount. The USDANR rate is
Rs.45.1500/1700 and USD/JPU is 91.30/50. The bank will load a margin of 0.20%.
01What ratewill be quoted (per 100 yen)?
a) Rs.49.0456 b) Rs.49.4743 c) Rs.49.5730 d) Rs.49.8712
02What amount theimporter has to pay in Indian currency?
a) Rs.2472100 b) Rs.2478500 c) Rs.2428400 d) Rs.2408300
Ans. 1-c 2-b Explanations:
1. JPY is to be sold against rupees forwhich no direct rate is available. Itwill be calculated as a cross rate. Bank need to buy JPY againstUSD
andUSDagainst rupees. Hence the following ratewill be used forUSD/INR 45.1700 (themarket selling rate) and forUSD/JPY 91.30 (the
market selling rate being lower in this case).
Rate = 45.1700/91.30 = 0.494743 and for JPY 100 the same will be Rs 49.4743 (As per FEDAI Rules, JPY is quoted as per 100
yen)
2. JPY is to be sold against rupees for which no direct rate is available. It will be calculated as a cross rate. Bank need to buy JPY
against USD and USD against rupees. Hence the following rate will be used for USD/INR 45.1700 (the market selling rate) and
for USD/JPY 91.30 (the market selling rate being lower in this case).
Rate = 45.1700/91.30 = 0.494743 and for JPY 100 the same will be Rs 49.4743 (As per FEDAI Rulet, JPY is quoted as per 100
yen).
Tothismarginof 0.20%will beaddedwhichworksout to0.0989.
Hencetheratewillbe49.4743+.0989=49.5732roundedof to49.5730
TotalRupeepayment=5,00,00,000x49.573/100= 24786500
Case 11
Bank had booked a forward purchase contract 3months back at Rs.45.60, for delivery 3 days later forUSD 10000. Due to delay in realization of
export bill, the customer has requested-for cancellation of the contract and re-book it for onemonth fixed date or option contract beginning
onemonth fromspot date. The inter-bank spot rate is 45.2000/2200.Onemonth forward premiumis 0800/1000 paise. The TT selling and
buyingmargin 0.20%
01Whatwill be the rate atwhich the contractwill be cancelled:
a) 45.2200 b) 45.2000 c) 45.3104 d) 45.3908
02What amountwill be debited or credited to customer account being difference:
a) Rs.3202 debited b) Rs.3202 credited c) Rs.2996 credited d) Rs.2996 debited
03Atwhat rate, the contractwould be re-booked:
a) 45.2200 b) 45.2000 c) 45.3104 d) 45.3908
Ans. 1-c 2-c 3-c Explanations:
1. The contractwillbe cancelledat TT selling ratei.e. 45.2200+0.20%margini.e0.0904 = 45.3104
Theamount at contracted rate of 45.60 = 45.60x 10000= 456000 The amount at cancelled
rate of 45.3104=453104
Difference =Rs.2996,whichwould be credited to customer account.
2. The contractwillbe cancelledat TT selling ratei.e. 45.2200+0.20%margin = 0.0904 = 45.3104
Theamount at contracted rate of 45.60 = 45.60x10000 = 456000 Theamount at cancelledrate
of 45.3104=453104
Difference =Rs.2996,whichwould be credited to customer account.
3. Forbookingof contract, thespot rate=45.2000
Add one month premium = 00.0800
Total =45.2800
Less inter-bankmarginat0.20%=00.0905
Rate = 45.1895
Case- 12
international Bank successfully contracted an FCNR (B) deposit of 10million USD for a period of 5 years. Out of these funds, the bank retains
USD 4million as depositwith a high rated US bank in its NOSTROaccount and converts the remaining amount to Indian currency at prevailing
USD rate = Rs.46. On the basis of the given information, answer the following questions:
01 f the foreign currency ratemoves to Rs.46.50:
a) the bank.will gainRs. 3mio(million)b) the bankwill lose Rs. 3mio(million)
c) thebankwill gainRs.6mio(million)d) the bankwill lose Rs.6mio(million)
02What typeofpositionthebank ishavingpresently after this transaction?
a) anoversoldpositionofUSD4million b) anoversoldpositionofUSD6million c)anoverboughtpositionofUSD6million d) anoverboughtposition
ofUSD6million
03IftheforeigncurrencyratemovestoRs.45.00:
a) thebankwillgainRs.3mio(million) b)thebankwilllossRs.3mio(million) c)thebankwillgainRs.6mio(million) d)thebankwilllooseRs.6mio(million)
04Thesquareitsposition,thebankwillhavetoundertakewhichofthefollowingtransaction?
a) AcquireUSDassetsofatleastUSD6million b)AcquireUSDassetsofat leastUSD4million
c)AcquireUSDliabilitiesofat leastUSD4million d)AcquireUSDliabilitiesof at leastUSD6million
05 If the bank decides to invest the amount received as FCNR deposit in a 3-year US govt. security at 6 months LIBOR related rate
of interest, the bank faces the following type of risk?
a) foreign exchange risk b) liquidity risk c) basis risk d) no risk
A n s . 1 - b 2 - b 3 - c 4 - a 5 - c
CASE STUDIES ON LETTER OF CREDIT
Case 1
M/sExportsPrivateLimitedhavereceivedaletterofcreditforexport-oftextileitemsforanamountof$50000approximately.Thecompany
manufacturedthegoods,madetheshipmentandpresentedthedocumentsfornegotiationtothenegotiatingbankforatotalinvoicevalueof$52356.
Thenegotiatingbankrefusedtonegotiatethedocumentastheamountexceededtheamountofletter forcredit.Whatisthepositionofexporterinthe
givensituation:
a) Negotiatingbankhasalldiscretiontopointoutanydiscrepancy.Hence,itneednotpay.
b) Thediscrepancypointedoutbythenegotiatingbankisnotcorrect.Henceitshouldpay.
c) Thenegotiatingbankshouldseekadviceoftheopeningbankinsuchmatters
d) Theinformationgivenisincompletetotakeadecision.
Answer:
Solution:Thedecisionofthenegotiatingbankinrefusingtonegotiate.thedocumentsonthebasisofvariationintheamountisnotcorrect.AsperArticle30of
UniformCustomsandPracticesforDocumentaryCredits600,thewords"about"or"approximately"usedinconnectionwiththeamountofthecreditorthe
quantityortheunitpricestatedinthecredit,aretobeconstruedasallowingatolerancenottoexceed10%moreor10%less,thantheamount,thequantityor
theunitpricetowhichtheyrefer.
Hence the amount stated in the invoice is well within the tolerance of 10% and objection raised by the bank is not correct.
Case 2
M/sExportsPrivateLimitedreceivedaletterofcreditforexportofcertainproductsbuttheletterofcreditdoesnotstatethequantityintermsofa
stipulatednumberofpackingunitsorindividualitems.Theexportermanufacturedthegoodsandpresentedthedocumentsfornegotiationwhichhave
beennegotiatedbythenegotiatingbank.However,theopeningbankrefusedtohonourthedocumentsonthepremisethatthereisvariationofaround3
percentinthequantityofgoodssupplied.Thenegotiatingbankdemandsthereturnofmoneyfromtheexporter.Whatistheexporter'spositioninthis
case:
a) Once the documents have been found correct, the negotiating bank cannot ask for refunds of the money from the beneficiary
b) If theapplicant refuses topay, thebeneficiarywillhavetoreturnthemoney
c) The objection raised by the opening bank is justified and this should have been seen by the negotiating bank before hand
d) Theopeningbank'sobjectionisnotjustifiedandithastopaythedocuments
Answer:
Solution:Thedemandofthenegotiatingbankforrefundofthemoneyfromtheexporterisnotjustified.AsperprovisionsofArtide30ofUniform
CustomsandPracticesfordocumentaryCredits(UCPDC-600),atolerancenottoexceed5%moreor5%lessthanthequantityofthegoodsisallowed,
providedthecreditdoesnotstatethequantityintermsofastipulatednumberofpackingunitsorindividualitemsandthetotalamountofthedrawings
doesnotexceedtheamountof the,credit.Inthegivencase, thequantityvariationfallswithinthetolerancelevel.Thenegotiatingbank,insteadofseeking
refundfro-mtheexportershouldtakeupthematterwiththeissuingbankforpayment.
Case3
InternationalBank,NewDelhi receivedaletterofcreditissuedbyabankinUKinfavourofM/sExportsPrivate
Limited, a customerof InternationalBank.Thenegotiationis restrictedtoInternationalBank.Onthedateof
receiptofLC,riotstookplaceinthelocalityWherethebranchofthebankislocated.AsaresulttheLCcouldnotbeadvisedbythebanktotheexporter
immediately.LateronwhenthesituationbecamenormalthebankadvisedtheLCtotheexporterbutbythattimetheexpirydatefornegotiationof
documentshadexpired.TheexporterinsistsonnegotiationofdocumentsbytheInternationalBank,asdelayisnotonthepartoftheexporterbutonthe
partofInternationalBank.WhatisthepositionoftheInternationalBankvis-à-vistheexporterinthegivensituation:
a) InternationalBankisliableduetowhichit shouldnegotiatethedocuments
b) ExportersPvtLimitedhastherighttogetthepaymentofthedocuments
c) International Bank is not liable
d) Giveninformationisnotenoughtotakeanydecision
Answer: c
Solution:TheinsistenceoftheexportertonegotiatethedocumentsisnotcorrectwhenthedateofnegotiationoftheLChasexpired.AsperArticle36of
UniformCustomsandPracticesforDocumentaryCredits(UCPDC600),abankassumesnoliabilityorresponsibilityfor theconsequencesarisingoutofthe
interruption
ofitsbusinessbyactsofGod,riots,civilcommotions, insurrections,wars,actsofterrorism,orbyanystrikes.orlockoutsoranyothercausesbeyondits
control.Abankwillnot,uponresumptionofitsbusiness,honourornegotiateunderacreditthatexpiredduringsuchinterruptionofitsbusiness.Under
thegivencircumstances,thebankhasnoobligationtonegotiatethedocumentsandmake.thepaymentsincethecredithas-expired.Thebeneficiaryhas
toget thenegotiationdateextendedbyamendmentoftheLC.
Case 4
M/sExportsPrivateLimitedhavereceivedaletterofcreditintheirfavourforexportofcertaingoodstoUK.Thedateofexpiryofthecreditisaround31st
December2011.Sincetheprocessinvolvedinmanufacturingofgoodswaslittlelonger,theexportercouldpresentthedocumentsfornegotiationon3rd
January2012.Thedocumentswerenegotiatedbythenegotiatingbankunderreservetowhichtheexporterobjected.Intheopinionof theexporter,
thereisnodeficiencyinthedocumentsandintheopinionof thebank,thedocumentshavenotbeenpresentedfornegotiationintime.Whatisthe
positionof thebankandtheexporter:
a) Bank has to negotiate the documents as it gets 5 banking days to check the documents and the documents have been
presented during that period.
b) The beneficiary has the right to present the documents within 5 calendar days since date is written as around Dec 31. Hence,
the negotiating bank cannot refuse payment
c) Thebankisnotunderobligationtonegotiatethedocumentas thelastdatefornegotiationisover
d) Thebankshouldseekinstructionoftheopeningbankandapplicantandmoveaccordingly.
Answer:
Solution:Thestandtakenbythebankthatthedocumentshavebeenpresentedafterexpirydate,isnotcorrect.AsperArticle3(Interpretations)of
UniformCustomsandPracticesforDocumentaryCredits(UCPDC600),theexpression'tonorabout"orsimilar,willbeinterpretedasastipulationthatan
eventistooccurduringaperiodoffivecalendardaysbeforeuntilfivecalendardaysafterthespecifieddate,bothstartandenddatesincluded.The
documentshavebeenpresentedbytheexporterwithin3calendardaysafterthespecifieddatei.e.Dec31,2011.Hence,thebankshouldnegotiatethe
documentsifotherwiseinorder.
Case 5
PopularBankissuedanLCofUSD50000onJan05,2012,infavorsofJohnandJohnofLondon.Thelast-dateforshipmentisJan15andlastdatefor
negotiationisJan31,2012.ThegoodswereshippedonJan02,2012anddocumentswerepresentedforshipmentbythebeneficiaryfornegotiationto
SouthHallBankonJan14,2012,whichwerenegotiatedonJan16,2012.WhenthedocumentsweresenttoPopularBankforreimbursementbythe
SouthHallBank,theopeningbankfoundthefollowingdiscrepancies:
1. ThedateofshipmentasJan02,2012whilethedateofLCwasJan05,2012.
2. The date of invoice was Jan 03, 2012 and date of packing list and inspection certificate was Dec 31, 2011. The opening
bank returned the documents to the negotiating bank.
a) The return is not justified due to which the negotiating bank should send the documents back to opening bank for payment
b) Thereturnisjustified,asthedateofLCissubsequenttodateofdocuments
c) Thereturnisjustified,asthedateofdifferentdocumentsisdifferent
d) Theopeningbankshouldseekopinionoftheapplicantandthentakedecision
Answer: a
Solution:Thediscrepanciespointedoutbytheopeningbankarenotjustified.AsperArticle14ofUCPDC600, thedocumentsunderanLCcanbedated
priortothedateofLCbuttheseshouldnotbedatedlaterthanthedateofpresentation.Further,Datain adocument,whenreadincontextwiththe
credit, thedocumentitselfandinternationalstandardbankingpractice,neednotbeidenticalto,butmustnotconflictwith,datainthatdocument,any
otherstipulateddocumentorthecredit.Therefore,ifthedocumentsdonotcarryanyotherdiscrepancy, theopeningbankortheapplicantcannotrefuse
payment,onthisbasis.
Case 6
AnLCprovidesforshipmentof500piecesof trousersin200cartons.Italsoprovidesthatpartialshipment isnotallowed.Thebeneficiaryhandsover
100cartonstotheshippingcompanyonJul10andanother100cartonsonJul16.TwobillsoffadingwithdatesJul10andJul16,areissued.The
cartonsaretobecarriedinasinglevesseltosailonJul20.
Thedocumentsarenegotiatedbythenegotiatingbankbutthesearereturnedbackbytheopeningbank,statingthattheLCdidnotpermitpartial
shipment:
a) Openingbankcannotbeforcedtopaybecausethepart shipment isnotpermitted
.b) Openingbankshouldpay, as it isnotpartial shipment, sincevessel isone
c) Bynegotiatingdefectivedocuments, thenegotiatingbankhasmademistake,henceit cannot forcethe
openingbank toreimburse
d) Negotiatingbankhasmademistake.It shouldrecover thepaymentfromthebeneficiary
Answer:
Solution:AsperArticle31ofUCPDC600,documentswith2ormoresetsof transportdocuments coveringshipmentof goodsonthesamemeans
of transport andsamejourney, arenot consideredpartial shipment.Hence, thestandtakenby theopeningbank isnot correct.
Case7
UniversalBank(theissuingbank) receivedthedocumentsunder LCfromPopularBank(thenegotiatingbank)onDec22(Tuesday). It tookonedayto
checkthedocumentsandforwardedthedocumentsforacceptancebytheapplicant.OnDec29, theapplicantpointedoutthattheinsurancepolicy
wasinacurrencydifferent fromtheoneasmentionedinLC.(Dec25wasaholidayduetoXmasandDec27wasSunday).Theopeningbank
immediatelyinformedthenegotiatingbankaboutthisdiscrepancybywayofanEmailandsoughtdirectionsfordisposalofthedocuments.The
negotiatingbankpointedoutthattheopeningbank couldconveytheobjectionifany,within5daysandnotlater,duetowhichitshouldmakethe
payment:
--a) Observationmadebythenegotiatingbankisnotcorrect. Ithasreceivedtheobjectionintime.
b) Observationmadebythenegotiatingbankiscorrect.Openingbankhasconveyedtheobjection2days
late.
c) Observationmadebythenegotiatingbankisnotcorrect.Itshouldconveythistothebeneficiaryand
recovertheamount
d) Losswouldbetotheaccountofapplicant,ashetookmorethan5days.
Answer: a
Solution:AsperArticle16ofUCPDC,theissuingbankgets5bankingdaystodeterminewhetherthedocumentscarrydiscrepancyornot.Dec25being
XmasholidayandDec27beingSunday(whicharetobeexcludedfromcounting),theissuingbankconveyedthediscrepancywithin5bankingdays.
Hencenegotiatingbankcannotrefutetheclaimoftheopeningbank.
EXPORTFINANCE
Case-8
Anexporterapproachesthepopularbankforpre-shipmentloanwithestimatedsalesofRs.100lakh.ThebanksanctionsalimitofRs.50lakh,with
followingmargins:Pre-shipmentloanonFOBvalue—25%;ForeignDemandBill-10%;Foreignusancebilis—20%.
ThefirmgetsanorderforUSD50,000(CIF)toAustralia.On1.1.2011whentheUSD/INRratewasRs.43.50perUSD,thefirmapproachedtheBankfor
releasingpre-shipmentloan(PCL),whichisreleased.
On31.3.2011,thefirmsubmittedexportdocuments,drawnonsightbasisforUSD45,000asfullandfinalshipment.Thebankpurchasedthedocuments
atRs.43.85,adjustedthePCLoutstandingandcreditedthebalanceamounttothefirm'saccount,afterrecoveringinterestforNormalTransitPeriod
(NTP). The documents were realized on 30.4.2011 after deduction of foreign bank charges of USD 450. The bank adjusted the
outstanding post shipment advance. against the bill. Bankchargedinterestforpre-shipmentloan@7%upto90daysand,@8%over90days
upto180days.ForPostshipmentcredit,theBankchargedinterest@7%fordemandbillsand@7.5%forusance(D/A)documentsupto90daysand
@8.50%thereafterandonalloverdues,interest@10%.
01 What is the amount that the Bank can allow as PCL to the exporter against the given export order, considering the profit
margin of 10% and insurance and freight cost of 12%?
a) Rs.2200000 b) Rs.1650000 c) R6.1485000 d) Rs.1291950
02What is the amount of post shipment advance that can be allowed by the Bank under foreign bills
purchased, for the bill submitted by the exporter?
a) Rs.19,80,000 b) Rs.17,75,925 c) Rs.19,73,250 d) Rs.21,92,500
03 What will be the period for which the Bank charges concessional interest on DP bills, from date of purchase of the bill?
a) 90 days b) 25 days c) 31 days d) Up to date of realization
04 in the above case, when should the bill be crystallized (latest date), if the bill remains unrealized for over two months, from the
date of purchase-(ignore holidays)?
a) On 30.4.2011 b) On 24.4.2011 c) On 24.5.2011 d) On 31.5.2011
05 What rate of interest will be applicable for charging interest on the export bill at the time of realization, for the days beyond
Normal Due Date (NDD)?
a) 8% b) 7% c) 7.5% d) 10%
Ans. 1-d 2-c 3-b 4-c 5-d Explanations:
1. FOBvalue=
CIF Value i.e. 50000x43.5 = 2175000
Deduct Insurance & freight 12% of 2175000 = 261000
Balance = 1914000
Deduct profit margin 10% of 1914000 = 191400
Balance = 1722600
Less Margin 25% = 430650
PCL = 1291950
2. 45000x43.85=1973250
3. Concessional• rate will be charged for normal transit period of 25 days and there after overdue interest will be charged.
4. Crystallisationwillbe donewhen the billbecomesoverdueafter 25 daysof normal transitperiod.Date of overduewillbe25.4.2011. if bill
remains overdue, itwillbecrystalisedwithin30 days i.e. upto 24.5.2011.
5. Rate of interestwillbe 10%as theoverdueinterest is statedas 10%in thequestion.
