Risks and Honor in Trade

 Different types of Risks involved in trade

As I said in previous post in international trade there will be lot of risk involved

Country risk: Post contract between buyer and seller there might be changes in the policies of countries which then impact trade like change in import duty or export duty of the country

Political risk : there might change in political views of one country on other which in turn trouble trade

To avoid above risks in LC we have a method called confirmation wherein once a bank from different country confirms on the LC they are bound to pay for LC even applicant and Issuing banks get defaulted

Currency risk: Mostly common risk in international trade as trade happen between two different countries with easily convertible currency there might be change in FOREX rates post our trade contract is done which gives losses to buyer or seller

To avoid currency risk basically we will use forward contracts to block the exchange rate

Transport risk: there are lot transport risks happen when shipping goods via sea for longer periods due to natural calamities

For ex: when we ship some goods in Australia which have to come to India in 1 month via sea in between there are some natural calamities happen and most of goods might get damaged

To avoid above risk we will be using Insurance

 

Note : For Risk sharing and Responsibility of buyer and seller are clearly discussed with help INCOTERMS (International commercial terms)

 

Different Types of Honours in trade

Sight Payment: If a credit is available at sight we have to pay within 5 banking days once documents are compliant

Usance payment: Which pay at future date as agreed on LC .and Usance payment have 2 different approaches depending on the countries

1.       Acceptance or Usance payment: In this type of payment, we will paying to beneficiary on future date where in drafts should be available as per LC terms

2.       Deferred payment: Acceptance and Deferred payment both are but only difference rests with drafts as deferred payment doesn’t require Drafts

Now we might get a query why Drafts

Note : Drafts are financial documents which can be submitted in court of law on disputes

There are some countries local laws where there is no negotiable instrument act so these countries won’t take drafts into consideration when there is conflict raise in Trade

Negotiation : this means Nominated bank will purchase drafts not drawn on them by providing advance to beneficiary on compliant documents

Note: This blog is per knowledge purpose do not use for conflict management or any other purpose