Risks in Business

A German company makes metal milling machines. The machines employ laser technology to sculpt blocks of steel and other metals into gear wheels, cogs and other precision engineered components for use in aeroplane engines and high performance, expensive cars.
The company has received an order from a British firm to supply six machines, each costing €200,000. The terms of payment are under confirmed irrevocable letter of credit at sight, to be opened by the UK buyer in favour of the German supplier. Each time one of the machines is shipped a drawing will be made from the letter of credit to pay for it.
In terms of structure please write:

1 A brief introduction explaining the proposed transaction and identify the main risks facing the buyer and the seller.

2 Analyse the reasons each party might prefer to use a “confirmed irrevocable letter of credit at sight.” What comfort does it give to each of them and how?

3 How does the letter of credit work after the German supplier has shipped a machine? Use diagrams to explain the flows of documentation, goods and payment.

4 Consider which documentation you think should be called for under the letter of credit and why?

5 Research and explain how: (1) multiple drawings under a letter of credit would work and (2) a revolving letter of credit works. Please note that these were not covered in detail in class.

6 Summary and conclusion. Provide: a summary of the successful transaction and the benefits of using a letter credit.