Buyer’s Credit in Cross Currency

Note: Since the time this article was written, 6 Month Euribor has come down from 1.79% (July 2011) to 0.070%. Concept of cross currency still holds but the example would change. Please take below example as reference only.

Question of Buyers Credit in Cross Currency comes up in below cases.

  1. International trade is carried out in USD, EUR, JPY and other currencies. But when it comes to arranging buyers credit, arranging buyers credit against USD and EUR is much easier, with better price range and more options of banks to choose from is  than in other currencies. But even with above understanding, at times it is not possible to transact in these currencies and thus cross currency buyers credit is required.
  2. Possibility of arbitrage. Meaning move transaction from say Euro to USD because of difference in costing may result in  some cost saving. Has been explained in detail further in the article with example.

Process flow for doing Cross Currency

At the time of receipt of the document, importer will book a cross currency Spot+2 or forward as per his comfort with his bank, to get the exact conversion from one currency to other currency. Rest of the process is same as buyers credit which importers already carry out.

Example of Cross Currency from Arbitrage perspective

Cross currency can at times, lead to cost saving. An Example of  import payment due in Euro to buyer’s credit into Dollar  is given below.

Assumption

Transaction Value: EURO $100000
USD Value of Buyers Credit: $141713 (as per current market)
Tenure: 6 Months
Quote under both USD and EURO is L + 1.50%
LOU Charges are same for both transactions
Forward for both currency is booked (Rate taken from NSE India Website)

Market Rates – 15/07/2011

6 Month EURO Libor Rate: 1.79188%
6 Month USD Libor Rate: 0.41575%
6 Month EURO Forward Premium: 1.60 (64.64 – 63.07)
6 Month USD Forward Premium: 1.235 (45.73-44.49)

Calculations (LOU charges not are taken below, as per assumption that it is same in both transaction)

Currency Amount LIBOR Margin L + M 180       days INR Interest Cost Forward Premium In INR
EURO 100000 1.79 1.5 3.29 1646 106394 160000 266394
USD 141713 0.42 1.5 1.92 1357 62075 175016 237091
Savings 29303

Other factor to be considered before taking decision

Cross currency Foreign Exchange margin charged by bank on such transaction

Advertisements

4 thoughts on “Buyer’s Credit in Cross Currency”

  1. your calculations seems to be all perfect but have checked with some banks about the same and they have clarified that in case we do such type of cross currency transaction then each time the currency has to be changed into more liquid currency such as USD or GBP i.e Swiss Frank===>GBP====>Swiss Frank hence each time due to currency exchange the charges the residual cost advantage is lost.

  2. Can I take buyers credit in JPY while my underline is in USD. Further, would it be able to make payment in JPY on maturity.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s