Question 2

Apart from the financing arrangements with their bankers, what steps should TLP
have taken regarding the trade finance arrangements?

Answer

When KSM asked for a performance bond, TLP could have requested/asked for a
letter of guarantee to eliminate risks. In case if KSM does not comply, TLP should
have issued a stand-by letter of credit which covers the guarantees and bonds. Thus,
this would solve all the issues pertaining with the transaction instead of waiting for a
letter of acceptance, making a more feasible and smoother transaction helping TLP
not face a $20,000 reduction.

TLP should have also considered export credit insurance as a financial instrument to
mitigate risks. ECI would have protected TLP if KSM had failed to pay. This
instrument covers both commercial and certain political risks which can lead to non-
payment. ECI would have provided a guarantee to TLP and BT that they would be
paid.

Furthermore, TLP as a company should have had sufficient cash or operating lines of
credit. The plan must have included cash budget and a capital budget. Cash flow
planning could have helped TLP in the following cases:
a. Exchange rate fluctuations,
b. Transmission delays,
c. Political events,
d. Slower collection of account receivables.