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Practice paper

Trade finance as a financial asset: Risks and mitigants for non-bank investors

Robert M. Kowit, William May and Erick Rengifo
Journal of Risk Management in Financial Institutions, 9 (1), 59-70 (2016)
https://doi.org/10.69554/MTXC4731

Abstract

With a global volume estimated at US$18 trillion in 2014, trade finance plays a critical role in international finance and in the domestic finance of both advanced and emerging economies. Trade finance is a significant business line for many banks and an area of growing interest for non-bank financial players as well. As such, the need for effective and adaptive risk management — while always in existence — has grown in importance. This paper presents an overview of the trade finance market and the common instruments used to finance trade. Through a description of Federated’s Composite for its Project and Trade Finance investment strategy1, many of the risks inherent in trade finance are presented along with risk management practices that have shown some success in measuring, monitoring and mitigating them.

Keywords: international trade; trade finance; credit risk; structural risk; macro risks

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Author's Biography

Robert M. Kowit is senior vice president at Federated Investors, Inc. (Federated), which he joined in 1995 to start the international fixed income operation. Robert has spent his entire 43-year career in the international bond and foreign exchange markets, working as a vice president of White Weld, senior vice president at Kidder Peabody, director at Midland Montagu and senior vice president at John Hancock, before joining Federated. In these previous capacities he came into contact with trade finance assets and thought they would provide a unique source of alpha in federated international bond portfolios. Robert has spoken at many conferences around the world about the importance of attracting more financial investors to trade finance. In the post-crisis period of 1998, Robert was invited to speak at the World Bank/ IMF annual meeting on the topic of the importance of developing local capital markets in order to avoid future currency crises. Robert received his AB from Washington University in St Louis and his MBA in finance from Iona College.

William May is a senior vice president and the FRM programme manager in GARP’s Research and Educational Programs area. William has over 20 years of market experience, including serving as a senior director in Fitch Ratings’ credit market research group and as a senior research officer at UBS Wealth Management. He has worked for several buy-side and sell-side firms, including Bank of America and Federated as well as specialty firms like Andrew Kalotay Associates and the Law and Economic Consulting Group. He began his career in the research function of the Federal Reserve Bank of New York and has worked on the Open Market Trading Desk and as a bank examiner. William has served as an associate professor of finance and graduate programme director at Manhattanville College and has taught in the MBA programme at StonyBrook University’s College of Business. He holds a BS in applied mathematics and economics from SUNY Stony Brook, an MBA and an MA in economics from Fordham University and an MS in financial engineering from Polytechnic University. William is currently a graduate student studying applied statistics at Columbia University’s Teachers College.

Erick Rengifo is an associate professor in the economics department at Fordham University. Erick is an active scholar with interests in trade finance, intra- and inter-regional markets development, emerging and frontier markets investments, risk management, market microstructure, behavioural finance, insurance, socio-economic development, microfinance, micro-insurance and econometrics. He is a private consultant in the fields of export financing, mining investments in Latin America, algorithmic trading, emerging and frontier markets investments, risk management, microfinance and micro-insurance. He is also the founder and director of the Center for International Policy Studies, a centre specialising in economic and social development, with an extensive network around the globe. Erick holds a PhD in economics with a concentration in finance and econometrics from the Catholic University of Louvain-Belgium.

Citation

Kowit, Robert M., May, William and Rengifo, Erick (2016, January 1). Trade finance as a financial asset: Risks and mitigants for non-bank investors. In the Journal of Risk Management in Financial Institutions, Volume 9, Issue 1. https://doi.org/10.69554/MTXC4731.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 9 / Issue 1
© Henry Stewart
Publications LLP

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