Ninety-Day Usance: Negotiation, a USD Loan, or a Forward?

Assumptions: 90/360 day count; funds available 25 June; conversion at the 1,335 buying rate; the fee at 1,340.

C - hold and hedge with the forward. USD 800,000 × 1,322 = KRW 1,057,600,000 on 18 September. Discounted at the won rate (÷1.009) the present value is about KRW 1,048.2 million.

A - negotiate now. Discount = 800,000 × (5.1% + 1.2%) × 90/360 = USD 12,600. Net USD 787,400 × 1,335 = KRW 1,051,179,000. Less the USD 900 fee (≈ KRW 1,206,000) = KRW 1,049.97 million received today.

B - USD loan. Borrow 800,000 ÷ (1 + 5.9% × 0.25) = 800,000 ÷ 1.01475 = USD 788,371; convert at 1,335 = KRW 1,052.48 million received today; the maturity proceeds repay the loan, leaving no further KRW flow.

Ranking (present value): B 1,052.5m > A 1,050.0m > C 1,048.2m. The spread between best and worst is about KRW 4.3 million, roughly 0.4% of the receivable - smaller than the FX rate can move in a week.

So the arithmetic does not decide it. Choose on structure:

• B creates a matched USD asset and liability, a natural hedge, but consumes a foreign-currency credit line, needs the underlying export documentation and a loan limit, and must be repaid even if the issuing bank later refuses the documents.
• A moves the receivable and the issuing-bank risk to the negotiating bank, but usually with recourse to Samil, so it is not a true sale - and the bank will examine documents first, where the soft inspection clause may stop it.
• C leaves Samil carrying the US bank's credit risk for 90 days and locks it into a binding forward it must honour on the value date.

Recommendation. B if the credit line exists and the documents are clean; A if Samil wants the receivable off its books and accepts recourse; C only if Samil wants to keep the relationship with the US bank and is confident about the shipping date. All three assume the inspection certificate can actually be obtained - that is the real gate.

What it is. The certificate must be signed by the applicant's own representative. It is a stipulated document, so it is not a non-documentary condition caught by UCP 600 article 14(h); the bank will examine it as a document and, if it appears on its face to comply, must honour. The problem is commercial, not documentary: the buyer controls whether the document ever comes into existence, and therefore controls whether Samil is paid. This is the classic 'soft clause'.

Concrete risks. The buyer can withhold signature until Samil concedes a price cut; the signature may come from someone whose authority the bank cannot verify; and the buyer can time delivery of the certificate so that the 21-day presentation period lapses, giving the bank a documentary reason to refuse even though the real reason is commercial.

Actions before shipment.

1. Ask for an amendment replacing the certificate with one issued by an independent inspector (SGS, BV, Intertek) or by the beneficiary. Say plainly that this is a condition of shipping; creditworthy buyers usually agree.
2. If the amendment is refused, do not ship until the signed certificate is physically in hand - not promised, in hand.
3. Confirm in writing who signs, in what capacity, and in what form, and check the specimen against the credit.
4. Look at credit insurance, but do not assume it covers the exposure: K-SURE and private insurers scrutinise soft clauses and may exclude the risk.
5. Confirmation of the credit is not a cure - a confirming bank examines the same documents - so do not pay for confirmation believing it solves this.

Documentation. Keep every exchange about the certificate. If payment is later withheld for a reason unrelated to the goods, that record is the evidence in any claim against the buyer.

What happens. The forward is a binding contract to deliver USD 800,000 on 18 September at 1,322. If the cash arrives on 17 November, Samil has a shortfall on the value date. The bank will not simply wait: it will either close out the forward at the prevailing spot on 18 September and book the difference - a 30-won move on USD 800,000 is about KRW 24 million, several times the entire benefit of the hedging exercise - or roll the contract to the new date, re-pricing it at the new forward rate and adding swap cost plus an extension fee. Either way, an operational request from the buyer turns into a P&L event for Samil.

What Samil should have done.

• Hedge the confirmed exposure only, and keep a buffer, or ladder several forwards across expected receipt dates so that a slip in one tranche does not leave a naked position.
• Use an option or a collar where the receipt date is genuinely uncertain: a premium buys the right rather than the obligation, and the premium is the price of that flexibility. Compare it with the rollover cost above.
• Price the clause into the contract: any extension of usance at the buyer's request should be for the buyer's account, including the bank's rollover and funding cost.
• Get the amendment, not the email. The payment date is fixed by the credit; until the issuing bank issues an amendment extending the tenor, the original maturity stands and Samil should treat the request as unagreed. If Samil concedes without an amendment, it is financing the buyer for free.
• Watch position limits. Korean foreign-exchange rules require reporting of derivative positions above set thresholds and expect hedging to be backed by real exposure; an over-hedged position created by a delayed receipt is a compliance question as well as a commercial one, so confirm the treatment with the bank before rolling.