Case Study 1: Nanomia Ltd.
Nanomia Ltd. have placed an order on a supplier, Vallera Ltd. They have not dealt with this supplier before. It has been agreed that a letter of credit will be used as the mechanism for payment. The supplier requires the letter of credit before the commencement of manufacture. The manufacturing lead time is 60 days. The agreed payment term is 30 days after the date of shipment. Because of the size of the supplier, Vallera Ltd., and the quantities they ship globally, they command good freight rates, much better than those that can be achieved by the buyer, Nanomia Ltd.. Freight is therefore to be arranged by the supplier. The goods are fragile, and care will need to be taken on handling and transportation. The letter of credit will be for USD 55,551.75. The required latest date of shipment is 30 April 20. The port to port sea transit time is 22 days. The order must be delivered in one shipment and evidence provided of the country of origin, which must also be shown on the goods. If the first transaction is successful, a 12-month supply contract totalling USD 666,621 will be agreed for the purchase of toys each month by letter of credit.
Vallera Ltd.
Vallera Ltd. have received an order from a new buyer, Nanomia Ltd., for the supply of toys. It has been agreed that a letter of credit will be used as the mechanism for payment. The seller, Vallera Ltd., need the letter of credit before the commencement of the manufacture of toys in China. The manufacturing lead time is 60 days. The agreed payment term is 30 days after the date of bill of lading. The letter of credit will be for USD 55,551.75. The buyer’s required latest date of shipment is 30 April 20. The port to port sea transit time is 22 days. If the first transaction is successful a 12-month supply contract will be agreed for the sale of toys each month by letter of credit for the aggregate value of USD 666,621. Sales are forecast to be constant throughout the year.
Questions: 1. What are the risks for Nanomia Ltd.?
2. What are the risks for and Vallera Ltd.?
3. Develop the letter of credit for the transaction?
