• Source: Trade finance

      • Trade finance is a phrase used to describe different strategies that are employed to make international trade easier. It signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade. Trade finance manifests itself in the form of letters of credit (LOC), guarantees, or insurance, and is usually provided by intermediaries.


      Description


      While a seller (or exporter) can require the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer's bank may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract.
      Other forms of trade finance can include export finance, documentary collection, trade credit insurance, fine trading, factoring, supply chain finance, or forfaiting. Some forms are specifically designed to supplement traditional financing.
      Export finance - When an exporter’s operating cycle (length of time it takes to sell its inventory and collect on its sales) exceeds the credit terms extended by its trade creditors (suppliers), the exporter has a financing requirement. Export finance is needed to cover the gap between when an exporter is able to turn inventory and trade receivables to cash and when it has to pay on its trade payables.
      Secure trade finance depends on verifiable and secure tracking of physical risks and events in the chain between exporter and importer. The advent of new information and communication technologies allows the development of risk mitigation models which have developed into advance finance models. This allows very low risk of advance payment given to the Exporter, while preserving the Importer's normal payment credit terms and without burdening the importer's balance sheet. As trade transactions become more flexible and increase in volume, demand for these technologies has grown.


      Products and services


      Banks and financial institutions offer the following products and services in their trade finance branches.

      Letter of credit: It is an undertaking/promise given by a Bank/Financial Institution on behalf of the Buyer/Importer to the Seller/Exporter, that, if the Seller/Exporter presents the complying documents to the Buyer's designated Bank/Financial Institution as specified by the Buyer/Importer in the Purchase Agreement then the Buyer's Bank/Financial Institution will make payment to the Seller/Exporter.
      Bank guarantee: It is an undertaking/promise given by a Bank on behalf of the Applicant and in favour of the Beneficiary. Whereas, the Bank has agreed and undertakes that, if the Applicant failed to fulfill his obligations either Financial or Performance as per the Agreement made between the Applicant and the Beneficiary, then the Guarantor Bank on behalf of the Applicant will make payment of the guarantee amount to the Beneficiary upon receipt of a demand or claim from the Beneficiary.
      Bank guarantee has various types like
      1. Tender Bond
      2. Advance Payment
      3. Performance Bond
      4. Financial
      5. Retention
      6. Labour
      7. ready for basic analysis

      Export
      Import
      Collection and discounting of bills: It is a major trade service offered by the Banks. The Seller's Bank collects the payment proceeds on behalf of the Seller, from the Buyer or Buyer's Bank, for the goods sold by the Seller to the Buyer as per the agreement made between the Seller and the Buyer.
      Supply Chain intermediaries have expanded in recent years to offer importers a funded transaction of individual trades from foreign supplier to importers warehouse or customers designated point of receipt. The Supply Chain products offer importers a funded transaction based on customer order book.


      Methods of payment


      Popular methods of payment used in international trade include:
      Advance payment- the buyer arranges for their bank to pay the supplier around 30% of the order value upfront when ordering, and the other 70% when the goods are released or shipped.
      Letter of credit (L/C) - this document gives the seller two guarantees that the payment will be made by the buyer :one guarantee from the buyer's bank and another from the seller's bank.
      Bills for collection (B/E or D/C) - here a bill of exchange (B/E) is used; or documentary collection (D/C) which is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the buyer for payment.
      Open account - this method can be used by business partners who trust each other; the two partners need to have their accounts with the banks that are correspondent banks.
      Bill of exchange- is used in international trade to bind one party to pay a fixed amount of money to another party on demand date or at certain point in future.
      Documentary Credit- Similar to LCs, documentary credits provide assurance of payment to the seller. However, unlike LCs, they are issued by financial institutions other than banks.
      Priority payment- in this method funds are being transmitted through secure inter- bank computer network known as SWIFT (Society for Worldwide Inter- bank Financial Telecommunication) or by fax.


      See also


      Supply chain engineering
      Financial risk management § Corporate finance


      References




      External links


      "Trade Finance Guide: A Quick Reference for U.S. Exporters", International Trade Administration, U.S. Department of Commerce
      Federation of International Trade Associations

    • Source: Trade (finance)

      • In finance, a trade is an exchange of a security such as stocks, bonds, commodities, currencies, derivatives or any valuable financial instrument for "cash". Such a financial transaction is usually done by participants of an exchange such as a stock exchange, commodity exchange or futures exchange with a short-dated promise to pay in the currency of the country where the 'exchange' is located.
      The price is agreed between the buyer and seller on the execution of the trade and is guided by the supply and demand for that financial instrument. Once the trade is executed a number of steps take place until the trade is finally settled. There is a pre-defined settlement period for this to happen in each market.
      Trading in financial markets is key part of a countries economics, providing liquidity, enabling price discovery, and facilitating efficient capital allocation. When trading in financial markets, financial traders balance risk and potential reward to attempt to make profit from the trades.


      Life cycle


      The securities trade life cycle involves:

      Order initiation and execution. (Front office function)
      Risk management and order routing. (Middle office function)
      Order matching and conversion into trade. (Front office function)
      Affirmation and confirmation. (back office function)
      Clearing (back office function)
      Settlement. (back office function)


      Participants


      Participants in the financial markets include:

      Speculators or retail traders
      Institutional traders such as insurance companies, private funds, hedge funds
      Central banks such as the U.S. Federal Reserve(Fed), Bank of Japan (BOJ), European Central Bank (ECB)
      Corporations such as Multinational companies (MNCs)
      Governments


      See also


      Electronic trading platform
      Stockbroker
      Stock exchange
      Stock market
      Trader


      References

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