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  • 10.8.3-RISK AND THE RELATION TO TRADE CREDIT-PRICE RISK

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  • Price risk

     
     
    In this context, price risk is the risk that the market as a whole (the price risk), or the differential (the differential or basis risk), will change to the borrower's disadvantage. Remember that banks do not normally encourage or finance speculation: whether a bank will permit a client to hold stocks without hedging them depends on the relationship and the guarantees that the borrower may have provided.

    Unless the goods have been bought to fulfil a fixed price contract, it is likely that the bank will insist on the regular hedging of the price risk on all stocks. In a general sense, smaller exporters especially should understand that banks are risk averse and do not like to finance speculative transactions. That is, they do not really approve of 'open' positions. But only the price risk can be hedged. The differential risk cannot be hedged.