The Role of Letters of Credit in Risk Management and International Trade

Credit Risk Management and RAROC
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Manager, Egypt

The Role of Letters of Credit in Risk Management and International Trade

What is in current financial risk management the role of the Letter of Credit (LOC)?
How can the LOC reduce risks in international trade?
The current economical crisis affects international trade and increases the probability of exposures, how can the LOC play a significant role in reducing most financial risks.
Thanks for your reactions...

  Emmanuel Duru
Analyst, Nigeria

The Role Letters of Credit can play in Risk Management and in International Trade

The understanding of what a letter of credit is, and the relevance in business, especially in international trade, is very important.
Letters of credit simply put will avoid the rigors of illicit transaction called money laundering, or block silly conduits/pipes for siphoning funds.
It prevent funds getting into the wrong hands thus, mitigating huge losses. It's safe and faster, dealing with reputable corresponding banks than with individuals.
It enables you to transfer your risk through a corporate body, who can indemnify you at any slightest circumstances. The only issue that need to be tackled is to hedge in exchange rate against fluctuations in the currency which may occur.
Again, the macroeconomic stability of host countries should be taken into consideration at the point of decision. Consider also cross-border policies transaction taxes and the economic policies at which your business is tailored; which should not be contraband items. These might help mitigate credit risk which are inherent in international trade/business.

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