Reference no: EM132596759

Question - The San Antonio Aviation Company of San Antonio, Texas, has received an order for 195,000 seats for the Airbus A-320 from the Airbus Consortium in Great Britain, payment to be in British pounds sterling. The seats will be shipped to Airbus under the terms of a letter of credit issued by the Royal Bank of Scotland on behalf of Airbus for the benefit of SA Aviation. This Letter of Credit specifies that the face value of the shipment, 20,500,000, will be paid 180 days after the Royal Bank of Scotland accepts a draft drawn in accordance with the terms of the Letter of Credit. No exchange rate is quoted in the Letter of Credit.

The current discount rate in London on 180-day banker's acceptances is 8% per annum, and SA Aviation estimates its weighted average cost of capital to be 9% per annum. The commission for selling a banker's acceptance in the discount market is 1.25% of the face amount.

(a) Would the San Antonio Aviation Company gain by holding the banker's acceptance to maturity or discounting the banker's acceptance at once?

(b) Does San Antonio Aviation Company incur any risks in this transaction? How might they manage these risks given the information below?