Module: | MODULE A: INTERNATIONAL BANKING
Q124: Consider the following statements regarding the All in Cost ceilings for Trade Credits:
1. The cost ceiling for Trade Credits is strictly linked to a dynamic benchmark rate plus a specified spread, currently capped at 250 basis points over the benchmark.
2. The benchmark rate utilized for calculating these ceilings is exclusively pegged to the London Interbank Offered Rate across all internationally traded foreign currencies.
3. The all in cost ceiling comprehensively encompasses the core interest rate, arranger fees, upfront fees, and management fees, but explicitly excludes withholding tax payable in domestic currency.
Which of the above statements is or are INCORRECT?
2. The benchmark rate utilized for calculating these ceilings is exclusively pegged to the London Interbank Offered Rate across all internationally traded foreign currencies.
3. The all in cost ceiling comprehensively encompasses the core interest rate, arranger fees, upfront fees, and management fees, but explicitly excludes withholding tax payable in domestic currency.
Which of the above statements is or are INCORRECT?
✅ Correct Answer: B
🎯 Quick Answer:
Statement 2 is the only incorrect statement.Structural Breakdown: This ceiling prevents expensive foreign borrowing.
It is calculated by taking a widely accepted benchmark interest rate and adding a maximum spread of 250 basis points.
The total cost includes almost all fees charged by the lending bank, except for domestic withholding taxes.
Historical Context: Historically, the London Interbank Offered Rate was the universal benchmark, and the spread was capped at 350 basis points.
However, following massive manipulation scandals, global financial markets phased it out entirely, prompting regulators to lower the spread to 250 basis points and shift to new benchmarks.
Causal Reasoning: Statement 2 is incorrect because the London Interbank Offered Rate has been officially decommissioned.
The central bank now mandates the use of widely accepted Alternative Reference Rates, such as the Secured Overnight Financing Rate for United States Dollar transactions, ensuring a more transparent and manipulation-resistant pricing mechanism.