CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based
Sagar Exports Ltd has a net working capital need assessed by its bank. It also asks for a Rs 8 crore letter of credit limit. The bank applies a credit conversion factor of 20% to the LC for computing its exposure on a funded-equivalent basis. The funded-equivalent exposure on the LC is:
Applying the 20% credit conversion factor to the Rs 8 crore letter of credit limit gives a funded-equivalent exposure of Rs 1.6 crore. Conversion factors translate off-balance-sheet contingent commitments into an on-balance-sheet equivalent for exposure and risk measurement.
- ARs 1.6 croreCorrect
- BRs 6.4 crore
- CRs 8 crore
- DRs 0.16 crore
Explanation
Funded equivalent = 20% x Rs 8 crore = Rs 1.6 crore. Rs 6.4 crore is the 80% remainder, a wrong-base error. Rs 8 crore ignores conversion. Rs 0.16 crore is a decimal slip.
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