Many of the risks in foreign trade are reduced by the work of the banks. They provide several services which give security to exporters and importers.
The risk of buyer default or non-delivery by exporters is removed by the method of payment against shipping documents. Also exporters' banks provide information about the financial reliability of their customers. They also help arrange buyer credit or finance for the sellers. Without this a lot of trade would not take place at all.
There is also a risk of financial loss because of a change in the exchange rate. If an Indian exporter agreed to sell goods for dollars and the value of the dollar in terms of rupees went down, the exporter would get fewer rupees for the dollars. Conversely, if the price of the dollar went up, the importers would lose money. An Arabian importer would have to pay more rials to buy the dollars. This kind of loss can happen in any export-import situation where the national currencies go up and down in terms of the payment currency, whether it is Deutschmarks, sterling, yen or francs. But the risk can be avoided, with the help of a bank, by buying the foreign exchange on the forward exchange market.
An exporter who is due to receive dollars arranges to sell them at a price fixed in the present but for delivery in two or three months. The time for delivery of the dollars depends on the length of credit given to the importers. At the same time the importers can arrange to buy dollars forward. In each case the traders pay a premium, but they can base their calculations on fixed exchange rates and avoid uncertainty and risk of loss.
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