Managing a Forfait Transactions-Risks for Exporters and Importers

The exporter and importer’s risks

1. An exporter who has sold quantity due to a forfaiter has nearly no outstanding risk arising from the group action. His only risks might arise throughout the period between the acceptance of his tender or bid for the importer’s client and also the delivery of the products or services, that is, throughout a period once he is committed to taking a forfait finance at an agreed discount rate although the contract with the importer has however to be completed. Any rate of interest risk throughout this era should not, however, be overemphasized because it only represents an ‘opportunity’ risk.

   

   Forfaiting

2. There is the risk, of course, that the importer can randomly cancel the contract throughout the commitment period or that, for a few alternative reasons, the contract will not be completed. In this event, the businessperson is duty-bound to recompense the forfaiter for any value or loss he suffers. In apply; a forfaiter can usually think the matter em-pathetically, if only since he desires to keep up his relationship with the exporter.
3. Once he is committed to pay a promissory note or bill of exchange, the importer is sure, as an obligatory, to create payment at a selected time within the future. The quantity concerned and also the currency during which it is denoted are mounted. He has no risk from unsteady interest rates, since interest on his debt is already calculated and enclosed within the price of the bill or notes itself. Provided that the currency of the bill or note is the same as that during which his accounts are according, typically his home currency, he has no risk from currency parity movements. The only risk to the importer is the possibility that he can have insufficient funds accessible to impact reimbursement on the due dates. This risk is often decreased by careful watching of his money and debt positions.

Controlling the exporter’s risks

The exporter should maintain an inventory of his Forfaiting commitments by currency so he will monitor his exposure to currency parity movements and enter into forward currency contracts if acceptable. As within the case the importer and explained below, an exporter  with giant numbers of commitments exporting at completely different dates might have to list them by maturity tranche net of any forward currency contracts.