Course Code Course Name Section Code

SCM III – G3 International Trade Finance BU1243 – G3

Summer 2023 Type of Evaluation Percentage Weight of Total

Course Instructor Due Date Total Marks: /25

Submitted By:
Vipul Tyagi (202104121)
Nitika (202100686)
Gurjeet Singh (202103665)
Jotwansh Singh (202005147)
Lalit Kumar (202103886)
Question 1: In light of the entire transaction as it was outlined to them by Wisconsin, did
First Midwestern provide the correct advice to their customer on how to structure the
transactions? Did they appear to be fully diligent?
Answer-
The transaction between Midwestern and Wisconsin involved substantial risks, including payment
defaults, currency fluctuations, and quality issues. Unfortunately, Midwestern failed to adequately
guide Wisconsin in structuring the transaction to mitigate these commercial risks. This failure can
be attributed to insufficient information received from both the seller and buyer, leading to a lack
of accurate advice provided by the bank. Additionally, the bank neglected to highlight the
importance of purchasing an EDC insurance policy to decrease commercial risks. Consequently,
the transaction suffered from a lack of proper details about negotiations with the Vietnamese buyer
and the failure to disclose crucial information by both Wisconsin and Saige Jewels. The acceptance
of drafts as a payment method further increased the risk exposure for Midwestern, potentially
leading to financial losses.
Insufficient Guidance and Inadequate Information: Midwestern's failure to properly guide
Wisconsin in structuring the transaction played a significant role in the subsequent risks and issues.
Despite providing a proposal and recommendations to Wisconsin, the bank failed to sufficiently
demonstrate the transaction's instructions and specifics. This lack of guidance hindered
Wisconsin's ability to navigate the commercial risks associated with the transaction effectively.
Moreover, Midwestern did not possess comprehensive details about the negotiations conducted
with the Vietnamese buyer, impeding their ability to provide accurate and informed advice to
Wisconsin.
Neglected Importance of EDC Insurance: An additional oversight on the part of Midwestern was
its failure to emphasize the necessity of purchasing EDC (Export Development Canada) insurance
for the transaction. EDC insurance is designed to mitigate commercial risks, including payment
defaults, non-payment, and political or economic uncertainties.
Lack of Diligence by Wisconsin: Wisconsin also demonstrated a lack of diligence in the
transaction with Saige Jewels. The agreement explicitly stated that Wisconsin had an obligation to
repurchase the finished stones and jewels. This crucial information was not disclosed to the bank,
further exacerbating the issue. Wisconsin's failure to provide necessary details impeded
Midwestern's ability to assess and mitigate the associated risks effectively.
Acceptance of Drafts and Increased Risk: Adding to the complexity of the situation, Midwestern
accepted drafts as a payment method for the transaction. This decision increased the risk exposure
for the bank, as drafts are subject to potential non-payment or delays. By accepting drafts,
Midwestern potentially exposed itself to financial losses and enhanced the overall riskiness of the
transaction.
Conclusion: In conclusion, Midwestern's failure to properly guide Wisconsin in structuring the
transaction, combined with inadequate information received from both the seller and buyer,
resulted in the inability to provide accurate and genuine advice. The bank neglected to emphasize
the importance of purchasing EDC insurance to mitigate commercial risks adequately.
Additionally, the lack of diligence exhibited by Wisconsin in disclosing necessary details, coupled
with the acceptance of drafts as a payment method, further escalated the risks associated with the
transaction.

Question 2: What risks were faced by Wisconsin when they undertook to accept the
guarantee and to ship the goods under it?
Answer-
Wisconsin encountered significant threats throughout its transaction with Saige Jewels, primarily
related to commercial risks. These risks encompassed issues such as quality inconsistencies,
payment defaults, delayed deliveries, non-repayment, and currency fluctuations. The combination
of these challenges posed substantial concerns for Wisconsin, highlighting the importance of
proper risk mitigation strategies and diligent transaction management.
Quality Inconsistencies and Payment Defaults: One of the major risks faced by Wisconsin arose
from Saige Jewels' dissatisfaction with the quality of certain purchased items in the initial delivery.
This led Saige Jewels to instruct their bank not to issue drafts, creating a potential situation of non-
payment or delayed payment. Wisconsin, recognizing the gravity of the situation, took proactive
measures to address this risk by subsequently sending a small order of high-quality gems. This
strategic move ensured that they received payment for the goods delivered. However, the
possibility of delayed payment still loomed, as any future orders could be subject to the same
quality concerns.
Vendor's Non-Compliance and Financial Liability: Wisconsin encountered another significant risk
due to the vendor's failure to fulfill their commitment of buying back the finished stones and
jewels. This breach of the agreement left Wisconsin with unsold inventory and financial liabilities.
Unable to recoup their investment, Wisconsin faced the potential loss of the amount owed by the
buyer. This situation underscored the importance of meticulous due diligence and contract
negotiation to safeguard against vendor non-compliance.
Currency Fluctuations and Financial Impact: In addition to the aforementioned risks, Wisconsin
also faced currency risk during the transaction. With three payments scheduled over a 12-month
period, the fluctuation in currency exchange rates posed a potential challenge. If the currency
experienced inflation or depreciation, Wisconsin would receive a lower amount than initially
anticipated, impacting their profitability. This risk further underscored the need for effective
hedging strategies or provisions in the contract to mitigate the adverse effects of currency
fluctuations.
Conclusion: Wisconsin's transaction with Saige Jewels exposed the company to significant
commercial risks, ranging from quality inconsistencies and potential payment defaults to delayed
deliveries and non-repayment. The vendor's non-compliance with the agreement further increased
financial liabilities for Wisconsin. Additionally, the currency risk added an additional layer of
uncertainty, potentially impacting the profitability of the transaction. To mitigate such risks,
diligent due diligence, thorough contract negotiations, and proactive risk management strategies
are crucial. By adopting these measures, businesses like Wisconsin can better safeguard their
interests and navigate the complexities of international transactions while minimizing potential
financial losses.

Question 3: Given the underlying characteristics of this transaction and the country
involved, should First Midwestern Bank have been involved in the transaction and ultimately
purchased the drafts?
Answer-
The transaction between Saigon and Wisconsin involving a substantial sum of $3 million
encompassed multiple countries, including the USA, Canada, and Vietnam. The deal was not
without its challenges, and several oversights and weaknesses in the terms proposed by the Saigon
bank led to significant financial losses for the Wisconsin seller. Issues arose due to the absence of
a guarantee for the inspection certificate in the contract, Wisconsin's disregard for the value of the
letter of credit, and the erroneous decision by the Midwestern bank to purchase a draft despite the
letter of credit not being permissible in Canada and the USA. Furthermore, the Midwestern bank,
primarily focused on local recognition, lacked expertise in foreign trading. The lack of
transparency from the Wisconsin firm regarding their purchase of Saigon precious stones and
jewelry further complicated the transaction.
Weaknesses in the Contract and Wisconsin's Disregard: The contract between Saigon and
Wisconsin lacked clarity concerning the responsibility for the inspection certificate. The absence
of a guarantee regarding this crucial document increased the risk of disputes and potential financial
losses. Additionally, Wisconsin's disregard for the value of the letter of credit proposed by the
Saigon bank, despite its significance in securing payments and mitigating risks, further
exacerbated the situation. Wisconsin's arrogance and failure to recognize the importance of the
letter of credit ultimately led to substantial financial repercussions.
Erroneous Decision by Midwestern Bank: The Midwestern bank's decision to purchase a draft,
despite the letter of credit not being permissible in Canada and the USA, was a misstep. This
decision contravened the recognized laws of the International Chamber of Commerce. By opting
for a 3-year long-term draft, the bank exposed itself to significant risks. Over such a lengthy period,
commodity prices and currency fluctuations can fluctuate dramatically, potentially leading to
substantial financial uncertainties. The bank's lack of understanding and experience in foreign
trading contributed to this erroneous decision, which further increased the overall risk profile of
the transaction.
Lack of Transparency from Wisconsin: Another factor that complicated the transaction was the
lack of transparency exhibited by the Wisconsin firm regarding their purchase of Saigon precious
stones and jewelry. Failure to provide the necessary information to the bank hindered their ability
to assess and manage risks effectively. Open and transparent communication between the
Wisconsin firm and the bank would have allowed for a more informed and comprehensive risk
assessment.
Conclusion: The Saigon-Wisconsin transaction was marred by several oversights and weaknesses,
leading to significant financial losses for the Wisconsin seller. The absence of a guarantee for the
inspection certificate in the contract, Wisconsin's disregard for the value of the letter of credit, and
the Midwestern bank's erroneous decision to purchase a draft all contributed to the heightened risk
profile of the deal. The bank's lack of expertise in foreign trading further complicated the situation.
Transparent communication between Wisconsin and the bank regarding the purchase of Saigon
precious stones and jewelry would have aided in more effective risk management. Lessons can be
learned from these mistakes, highlighting the importance of thorough contract negotiations,
adherence to recognized laws and regulations, and open communication to mitigate risks and
ensure the success of future transactions.
Question 4: What recourse or courses of action are available to First Midwestern to recover
payment for the drafts?
Answer-
The Saigon-Wisconsin exchange experienced critical difficulties, prompting expected monetary
misfortunes for Wisconsin Fine Adornments (Wisconsin) and the requirement for restorative
estimates by First Midwestern Bank. Issues, for example, the unimportance of the letter of
assurance in the US and Canada, Wisconsin's inability to uncover significant subtleties, and the
commitment to repurchase completed stones and gems were huge elements. To amend what is
going on, First Midwestern Bank ought to think about returning the money for the drafts, utilizing
the Worldwide Office of Trade (ICC) for goal, and guaranteeing consistency with the Uniform
Traditions and Techniques for Narrative Credits.
The unimportance of the Letter of Assurance: Most importantly, because of the non-materialness
of the letter of assurance in the US and Canada, First Midwestern Bank ought to assume the
liability of returning the money got for the drafts from Wisconsin. Perceiving that the letter of
assurance isn't dynamic in these nations is critical to maintain the bank's obligation to consistency
and to safeguard the interests of the two players associated with the exchange.
Wisconsin's Inability to Reveal Commitments: Wisconsin's inability to uncover its obligation to
repurchase completed cleaned stones and gems from Saigon over a decent cost and a three-year
time frame fundamentally influenced the exchange. To correct this present circumstance, First
Midwestern Bank ought to guarantee exhaustive correspondence with Wisconsin to discover the
total subtleties of the discussions. This data is fundamental for a complete gamble evaluation and
will assist the keep money with settling on informed choices in regards to the exchange.
Utilizing the Global Office of Trade (ICC): First Midwestern Bank can consider applying to the
Worldwide Office of Business (ICC) to look for a discount for the accuses related of the letter of
credit. As the letter of credit was given under the Uniform Traditions and Techniques for Narrative
Credits of the ICC, using the ICC's debate goal instrument can give a fair and unprejudiced stage
for settling the issue. Drawing in with the ICC shows the bank's obligation to maintaining
perceived worldwide norms and guarantees straightforwardness in the goal cycle.
Consistence with Uniform Traditions and Strategies: Pushing ahead, First Midwestern Bank
should build up consistency with the Uniform Traditions and Methodology for Narrative Credits.
Careful comprehension and adherence to these rules will assist with moderating future dangers
and guarantee that exchanges line up with perceived industry guidelines. By stressing consistency,
the bank can give more prominent affirmation to its clients and limit the potential for monetary
misfortunes.
Conclusion: The Saigon-Wisconsin exchange featured a few main points of contention that
require consideration and remedial measures by First Midwestern Bank. Returning the money for
the drafts, utilizing the Worldwide Office of Business for goal, and building up consistency with
the Uniform Traditions and Methods are prescribed strides for the bank to really address the
difficulties. By making these moves, the bank can maintain its obligation to straightforwardness,
safeguard the interests of all gatherings included, and cultivate trust and trust in ongoing
exchanges.
Question 5: Given that First Midwestern sold the underlying drafts and all the associated
risk, which party is responsible for challenging the injunction and undertaking negotiations
to secure payment?
Answer-

The Saigon-Wisconsin transaction revealed significant issues that demand accountability and
improved negotiation practices from First Midwestern Bank. The bank, as the responsible party,
should take ownership of the bargaining process and address the shortcomings that arose.
Challenges such as the failure to secure payment for the second and third drafts, Wisconsin's non-
compliance with negotiation requirements and side agreements, and the bank's inability to obtain
cash from the issuing bank need to be rectified. It is essential for First Midwestern Bank to enhance
its negotiation strategies, conduct thorough due diligence, and ensure effective cash management
to mitigate risks in future transactions.
Responsibility for Bargaining and Draft Payment: First and foremost, First Midwestern Bank must
assume responsibility for the bargaining process. As the facilitating bank, it should actively engage
in negotiations to protect the interests of Wisconsin and ensure favorable terms. Furthermore, the
bank's failure to secure payment for the second and third drafts requires immediate attention. First
Midwestern Bank should work diligently to rectify this issue and ensure that the funds are received
from the recipient bank to minimize financial losses for Wisconsin.
Non-Compliance with Negotiation Requirements: Wisconsin's failure to meet the requirements
outlined in the negotiation process and side agreements regarding the purchase of gems from
Vietnam buyers is a significant concern. To prevent such issues in the future, First Midwestern
Bank should emphasize the importance of transparency and thorough compliance with negotiation
requirements. It is crucial for the bank to actively communicate with Wisconsin, ensuring that all
necessary details are disclosed to facilitate accurate risk assessment and informed decision-
making.
Inability to Obtain Cash from the Issuing Bank: First Midwestern Bank's inability to obtain cash
from the issuing bank highlights the need for improved cash management practices. The bank
should reassess its processes and ensure that appropriate due diligence is conducted to verify the
reliability and liquidity of the issuing bank. By strengthening cash management procedures, the
bank can minimize the risk of non-payment or delayed payment in future transactions.
Enhancing Negotiation Strategies and Due Diligence: Moving forward, First Midwestern Bank
should focus on enhancing its negotiation strategies and due diligence practices. This includes
conducting comprehensive research and analysis of potential risks, ensuring compliance with legal
and regulatory frameworks, and engaging in effective communication with all parties involved.
Thorough due diligence will enable the bank to identify and mitigate risks proactively, contributing
to successful transactions and minimizing the potential for financial losses.
Conclusion: The Saigon-Wisconsin transaction revealed areas of concern, particularly in relation
to bargaining responsibility, draft payment, compliance with negotiation requirements, and cash
management. First Midwestern Bank must assume accountability for the bargaining process,
rectify issues related to draft payment, and encourage Wisconsin's compliance with negotiation
requirements. Strengthening negotiation strategies, conducting thorough due diligence, and
implementing robust cash management practices are key to minimizing risks and ensuring
successful transactions. By addressing these challenges, the bank can foster transparency, trust,
and confidence in future dealings, safeguarding the interests of all parties involved.