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  • 10.4.2-RISK AND THE RELATION TO TRADE CREDIT-TRANSACTION RISKS

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  • Transaction risks

     
     

    It is not always appreciated that the lender and borrower have the same interest: that the transactions for which the funds are used come to a fruitful and profitable conclusion. Many of the average lender's preconditions are no more onerous than those any sensible owner or manager of an operation would apply in-house in any case.

    Category

    Description

    Potential remedies

    Speculative risk and volatility

    The deal is not fully hedged or not hedged at all.

    Prices for physicals affected by speculation on futures markets.

    Differentials move 'against us'.

    Increasing visibility of prices brings more volatility.

    Strict hedging rules and controls over 'open' positions.

    Strong management.

    Knowledgeable staff/brokers/agents.

    Pre-approved credit line for margin calls.

    Performance risk (technical)

    Supplier or buyer reneges on contract, for example because prices have moved sharply up or down.

    Inferior quality or weight is supplied. Coffee is rejected.

    Non-adherence to contract terms.

    Deal only with well-established reputable parties on approved list.

    Possibly provide pre-finance.

    Establish independent quality and weight controls.

    Strong monitoring and administrative skills.



    Performance risk (documentary)

    Exporter presents inaccurate or invalid shipping documents.

    Documents are delayed or lost.

    Standardize documentation and documentary processes.

    Facilitate access to electronic documentation systems.

    Performance risk (financial)

    One of the parties is declared insolvent.

    Limit total exposure to any one client or supplier.

    Monitor changes in behaviour which may point to difficulties ahead, for example gradual slowing down of payments.

    Currency risk

    Currency of purchase and sale are different.

    Currency rates move 'against us'.

    Match currency of purchase, borrowing and sale.

    Strictly control 'open' positions.

    Use pre-finance expressed in United States dollars.

    Use forward cover.