Category Archives: International Trade

Difference Between Overbought and Oversold

Overbought and Oversold Overbought means that a bank’s assets and purchases of a particular foreign currency exceed its liabilities and sales of that currency. Where oversold means that a bank’s liabilities and sales in a particular foreign currency exceed the’ assets and purchases of that currency. In order to avoid risk on account of exchange… Read More »

Difference Between Interest rate and Exchange rate

Interest rates and Exchange rates The question of interest rate arises when currencies are borrowed or lent; whereas exchange rates are involved when different currencies are being bought or sold. Exchange rates are subject to more frequent fluctuations than interest rates. Interest rate is a factor that affects exchange rates. High interest rates cause speculative… Read More »

Difference Between Hedging and Speculating

Hedging and speculating Hedging means avoiding or covering foreign exchange risk. The need for hedging arises because exchange rates fluctuate continuously. Accordingly, individuals, companies and banks who expect to make or receive payments in foreign currencies at a future data face the risk of having to pay more or receiving less in domestic currency than… Read More »

Difference between Pips and Points

Pips & points: A point is a unit of decimal, the fourth place to the right of the decimal (0.0001) whereas a pip is the fifth place to the right (0.0001).  One point is one ten thousandth of a dollar thus, 100 points become one cent. Which decimal place is implied by a point varies… Read More »

Risks inherent in Spot and Forward transactions

In spot transactions, settlements are effected within two working days of striking the deal. Although both payments are to be made simultaneously, because of geographical distance, the differing timing zones and the technicalities of the respective clearing systems, it is only possible to ascertain on the following day whether payment has actually been made by… Read More »

Correspondent Bank

Correspondent Banking The term “correspondent banking” is defined as informal arrangement whereby a smaller bank maintains deposit balances with larger banks in nearby cities and looks to them for a wide variety of services and assistance. Another writer has described “Correspondent Banking” as an informal linkage between banks in different countries set up when banks… Read More »

Types of Letter of Credit

Standby Letter of Credit Standby letter of credit is a guarantee and is mainly used in USA where according to local laws American Banks are not permitted to issue guarantees. Standby LC differs from a documentary letter of credit in that the latter requires “performance” while the former requires “non-performances” i.e. under a documentary letter… Read More »

Difference between Financial Documents and Commercial Documents

Differentiate between “Financial Documents” and “Commercial Documents” Financial documents Financial documents mean bills of exchange, promissory notes, checks or other similar instruments used for obtaining the payment of money. Commercial documents Commercial documents mean invoices, transport documents, documents of title or other similar documents or any other documents whatsoever not being financial documents.

Performance Guarantee or Performance Bond

Performance Guarantee or Performance Bond Article 2 of ICC publications 325 defines “Performance Guarantee” as an undertaking given by bank (guarantor) at the request of a supplier of goods or services or other contractor (principal) to a buyer or to an employer (the beneficiary) whereby the guarantor undertakes, in the event of default by the… Read More »

Bid Bond

Tender Guarantee or Bid Bonds The Uniform Rules for Contract Guarantee, Article two states that for the purpose of these rules, a “tender guarantee” means an undertaking given by bank (guarantor) at the request of a tenderer (principal) to a party inviting tenders (beneficiary) whereby the guarantor undertakes, in the event of default by the… Read More »