Last year will be remembered as a year in which the global economy was buffeted by subprime debt defaults. While these events have shaved billions of dollars from portfolio valuations, the day-to-day economic activity of world commerce continues largely unaffected. Why is this the case, and what role does trade finance play in allowing buyers and sellers to transact with relative assurance that their goods will be delivered and paid for?
Over the years, trade practitioners have developed numerous mechanisms to provide for the financing and settlement of commercial transactions. Tools as traditional as the letter of credit as well as sophisticated hedging and risk distribution capabilities are designed to address the key risk aspects of cross-border transactions. While trade has been designated by many primary regulatory authorities as a "high-risk" business in terms of money laundering and potential dealings with sanctioned parties, the actual risk of financial loss to participants (including investors in trade paper) remains quite low by historical standards.
As a generally short-term, self-liquidating form of debt, trade risk provides a predictable underpinning to the global capital programs that allocate funds flows among various investment options. While changing market conditions and volatilities will certainly drive the trade community to explore new and different options for improving risk management techniques in the business, trade debt should continue to be looked upon as a relatively attractive investment opportunity.