Foreign trade financing is one major activity pursued by banks, small and large.Various forms of guarantees, including the letter of credit, facilitate foreign trade for enabling exporters to minimize the risk of payment and importers to minimize the risk of performance. Although financing is not a necessary condition for providing these guarantees, financing is usually a part of the package.
In addition to trade financing, banks also provide or convert foreign exchange for trade participants. Participants may also require arrangements for “local” borrowing or hedging the currency exposure of the trade transactions. Firms with foreign operations would require these services on an ongoing basis and on a larger scale.
The term “local” here connotes not only the foreign location where the participant has the business interest and is subject to government regulations but also the unregulated, offshore markets. Offshore markets are commonly called “Euro”-markets. One segment of the Euro markets is the Euro currencies market where spot currency transactions as well as trading in short- and medium-term funds and instruments are undertaken.The “interbank” market, where banks conduct business among themselves, significantly overlaps the Euro markets; hence, the term “interbank” is often used interchangeably with “Euro-” or “Euro currencies” markets.13 Euro currencies markets are notable in two respects: (a) over 80 percent of foreign exchange trading takes place in these markets; and (b) given their informational and cost efficiencies, these markets greatly facilitate banks’ asset-liability management to attain targets of liquidity and interest rate exposures.
In addition to trade financing, banks also provide or convert foreign exchange for trade participants. Participants may also require arrangements for “local” borrowing or hedging the currency exposure of the trade transactions. Firms with foreign operations would require these services on an ongoing basis and on a larger scale.
The term “local” here connotes not only the foreign location where the participant has the business interest and is subject to government regulations but also the unregulated, offshore markets. Offshore markets are commonly called “Euro”-markets. One segment of the Euro markets is the Euro currencies market where spot currency transactions as well as trading in short- and medium-term funds and instruments are undertaken.The “interbank” market, where banks conduct business among themselves, significantly overlaps the Euro markets; hence, the term “interbank” is often used interchangeably with “Euro-” or “Euro currencies” markets.13 Euro currencies markets are notable in two respects: (a) over 80 percent of foreign exchange trading takes place in these markets; and (b) given their informational and cost efficiencies, these markets greatly facilitate banks’ asset-liability management to attain targets of liquidity and interest rate exposures.