This lesson introduces the concept of trade finance and its role in managing the risks of international trade. The ACT syllabus defines trade finance as external solutions for managing risk, in contrast to internal working capital management .

6.1 Trade Finance vs. Working Capital

The ACT syllabus distinguishes between working capital management (internal: managing cash) and trade finance (external: managing risk). Trade finance provides solutions for the risks arising from international trade, including non-payment, currency fluctuations, and political instability .

6.2 Key Trade Finance Instruments

The syllabus covers a range of trade finance instruments, including letters of credit, bank guarantees, surety bonds, documentary collections, factoring, and forfaiting . The selection of appropriate risk management solutions depends on the specific transaction and the parties involved .

6.3 Counterparty Risk and Credit Management

A critical element of trade finance is managing counterparty risk—the risk that the other party in a transaction will default. The syllabus covers assessing the risk of providing credit, counterparty risk management, and the role of credit insurance .