Cisco Systems (U.S.) has sold to France-

Telecom Internet servers for the amount of €10 million to be paid in three months. The transaction is secured by a trade acceptance from France-Telecom.

a. What are the risk(s) faced by Cisco Systems?

b. Explain what a trade acceptance is. How does it differ from a plain account receivable?

c. Explain the different ways whereby Cisco Systems can hedge and finance this export transaction. The following conditions prevail when Cisco Systems is reviewing its different options:

■ Spot dollar price of one euro is 1. 41.

■ Forward dollar price of one euro is 1. 45.

■ Discount rate on trade acceptance are, respectively, 4 percent p.a. in euros and 6 percent p.a. in U.S. dollars.

d. Assume that Cisco systems decides to ship the servers on open account to France-Telecom and to discount with recourse its receivables with Citibank at 5 percent. What additional risk (if any) is Cisco Systems assuming? France-

Telecom is AAA-rated.