Situation 1

Hakim Beverages Berhad based in Malaysia has signed a contract on 1st May 2021 for
Euro 222,000 to import oranges from GAMBIN Citrus located in Spain. However, an
upfront payment is compulsory to be made before the shipment of goods commence. In
order to finance this contract, Hakim Beverages Berhad has decided to apply for a trust
receipt from a local bank except for the upfront payment. Hence, the business needs to
choose the most suitable bank which can provide this financing facility.

Requirement:

i. Explain what Trust Receipt, advantages and disadvantages is of using Trust

Receipt as well as the risk involved under this financing facility.
ii. Choose any 2 banks in Malaysia which offer the Trust Receipt financing facility to
the traders
iii. Compare and decide which bank is suitable for the business to apply for this
financing facility. (Please provide detail comparison and reason for each decision
made)

Answers:

(Question 1)
Trust Receipt
Hakim Beverages Berhad has decided to apply for a trust receipt from a local bank
because it is a short-term trade financing option that helps importers in paying for
commodity imports. The bank will deliver shipping documents to the importer, who will
keep and sell the goods on behalf of the bank, on the condition that Hakim Beverages
Berhad signs the trust receipt. Hakim Beverages Berhad was required to repay it with
interest on the maturity date or after the goods were sold (whichever is earlier). If the
buyer does not make the agreed-upon payment, the bank has the authority to sell the item.

Advantages of using trust receipt

There are advantages for Hakim Beverages Berhad when using trust receipt that
easy source of finance. Banks typically don't hesitate to extend trust credit. Once the goods
are sold, the loan would undoubtedly be repaid with interest. Both the lender and the
borrower benefit since the bank receives money in the form of interest and the business
makes money without having to make an initial investment. Furthermore, Hakim
Beverages Berhad will get enjoy from pre-approved credit terms from the bank with
principal and interest only due at maturity, allowing it to repay the bank at the maturity
date or as soon as the items are sold, whichever earlier. Maturity date in trust receipt,
which is often between 30 and 180 days. If the payment is not made by the maturity date,
the bank may sell the goods. At the maturity date, the loan must be repaid in full, plus
interest. The last one is instant liquidity. Hakim Beverages Berhad must pay by cash
otherwise will be used for other working capital and investment. As a result, the treasury
management will be effectively. This company takes possession of the goods and free to
do whatever they want with them as long as they do not break the terms of their contract
with the bank, even if the bank has a security interest in them under the typical conditions
of a trust receipt. The company may tender the amount advanced on the goods and take
full possession of them if it chooses to revoke the bank's security interest and connect it to
the inventory.

Disadvantages of using Trust Receipt

There are also have disadvantages using this trust receipt, excessive control. Banks
place a lot of requirements on the importer, which are to maintain the trust credit in
inventory separately, to maintain and submit reports to the bank on a regular basis, and the
provision that "banks may perform a stock audit if required." Hakim Beverages Berhad
might have to pay more in interest fees and other fees to satisfy the banks' other
requirements. A cost-benefit analysis of our current situation must be done as a result.
Next, the overabundance of documentation. The documents must be provided in order for
Hakim Beverages Berhad to be granted a trustworthy credit. Practically, it is difficult to
export the goods to the importer without first manufacturing them.

Risk involved
In a typical trust receipt arrangement, Hakim Beverages Berhad made no
investments at all to acquire the goods, which is one of the risks associated with applying
this trust receipt. As a result, the bank is responsible for the majority of the contract's credit
risk. Hakim Beverages Berhad, keeps the profit from the sale of the goods but also
responsible for the business risk. This risk is what can happen if the buyer is unable to sell
the goods or if there isn't a market for them. Additionally, Hakim Beverages Berhad is
responsible for the risk of items being lost, damaged, or losing value and more.
(Question 2)
We chose Maybank and Hong Leong Bank. Based on our observations, these two
banks were involved as Hakim Beverages Berhad can gain several advantages from these
banks.
Maybank Trust Receipt financing is available for businesses in both import and
domestic trade. The advantages of a Maybank Trust Receipt include liquidity, which can
improve cash flow and allow for better fund management. It also has a broad range of
financing options, including freight charges and import duties. It also has a strong
standing, which gives it more negotiating power when it comes to setting trade terms.
However, Maybank pays suppliers in advance and collects purchases of goods before bill
payments.
Following that is a Trust Receipt from Hong Leong Bank. Hong Leong Bank is
more adaptable. It allows you to settle at your leisure (early settlement) but is subject to the
maturity date of the Trust Receipt. Next, it offers flexible financing for the full invoice
amount, with interest calculated only up to the settlement date.

(Question 3)
There are several differences between these two banks based on the benefits
mentioned. In comparison to Hong Leong Bank, Maybank makes advance payments to
suppliers and collects purchases of goods before bill payments. Hong Leong Bank is more
flexible, allowing traders to settle at their leisure for early settlement, subject to the
maturity date of the Trust Receipt.
As a result, we chose Hong Leong Bank Trust Receipt because it is more flexible
in terms of upfront payment and meets the requirements of Hakim Beverages Berhad.
Situation 2
(Question 1)
On 1st June 2021, Hakim Beverages Berhad signed a contract to sell orange juices to Light
Tasty based in London, England for Sterling 350,000. Both parties agreed that the payment
were to be as follows:
i. 20% of the price is to be paid immediately upon signing the contract
ii. 40% of the amount is to be settled one month later
iii. The balance is to be paid two months after contract signed

The first and second payments are paid according to the agreement. However due
to some problems Hakim Beverages Berhad delayed the last shipment of the orange juices
and the company allowed Light Tasty to make the last payment on 17th September.

On the same day, Hakim Beverages Berhad placed an order to buy a machine from
Hardcore Metal located at German at a price of DM400,000. Half of the price is to be paid
one month after the contract is signed and the balance is due in September. Forward cover
is arranged to avoid foreign exchange risk for all the credit transactions.

Calculation 1:

i. Using the rates quotes below, calculate the amount in Ringgit to be received by
Hakim Beverages Berhad.
Selling Buying
1st June spot 5.8940 5.8765
1 month forward 5.9150 5.8800
2 month forward 5.9220 5.8975
1st September spot 5.9125 5.8910
17th September spot 5.9225 5.9110

(buying rate will be used)

First payment:
20% x Sterling 350,000 = Sterling 70,000
Sterling 70,000 x 5.8765 (1st June spot buying rate) = RM 411,355

Second payment:
40% x Sterling 350,000 = Sterling 140,000
Sterling 140,000 x 5.8800 (1 month forward buying rate) = RM 823,200

Third payment:
40% x Sterling 350,000 = Sterling 140,000
Sterling 140,000 x 5.8975 (2 month forward buying rate) = RM825,650

Due to some problems Hakim Beverages Berhad delayed the last shipment of the orange
juices and the company allowed Light Tasty to make the last payment on 17th September.

Close-Out Contract: (sell at spot on 1st September)

40% x Sterling 350,000 = Sterling 140,000
Sterling 140,000 x 5.9125 (selling rate on 1st September) = RM 827,750

Sell back: 40% x Sterling 350,000 = Sterling 140,000

Sterling 140,000 x 5.9110 (buy rate on 17th September) = RM827,540

TOTAL RECEIVED BY HAKIM BEVERAGES BERHAD:

= 411,355 + 823,200 + (825,650 – 827,750) + 827,540
= RM 2,059,995
(Question 2)
On the same day, Hakim Beverages Berhad placed an order to buy a machine from
Hardcore Metal located at German at a price of DM400,000. Half of the price is to be paid
one month after the contract is signed and the balance is due in September. Forward cover
is arranged to avoid foreign exchange risk for all the credit transactions.

ii. Using the rates quotes below, calculate the amount in ringgit to be paid by Hakim
Beverages Berhad.
Buying Selling
1st January spot 1.8200 1.8760
1 month forward 1.8390 1.8830
2 months forward 1.8425 1.8960
3 months forward 1.8550 1.9025

(selling rate will be used)

First payment:
DM200,000 x 1.8830 (1 month forward selling rate) = RM376,600

Second payment:
DM200,000 x 1.9025 (3 months forward selling rate) = RM380,500

TOTAL TO BE PAID BY HAKIM BEVERAGES BERHAD:

= RM376,600 + RM380,500
= RM 757,100.00