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

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.