under a market limit has been left to ad hoc treatment. Views
have tended to fall into two broad camps:
a
Exposure controls are intended to control the
rescheduling risk as this has been the prime cause of claims payments in recent times. This would allow the
short term foreign exchange risk to be excluded as short
term business (ie credit terms up to 365 days) is not
normally rescheduled. Such business has in fact been
excluded from Market Limits which have traditionally been
seen as controls confined to medium and long term business
only.
b
Exposure controls are designed to control and monitor
the foreign exchange risk. This is often referred to
simply as the transfer risk. This approach captures all
payments involving transfer across the exchanges from the
buyer to the exporter's country
including "cash"
payments.
5
Neither of these approaches provides a completely
satisfactory solution as they do not adequately address various
difficulties, including the single largest problem area of risk
monitoring the treatment of Long Delivery Cash Contracts and
Short Term business where credit terms are less than 365 days.
These categories would be excluded under a. above but included
under b.
PMS
6
We need to turn to PMS for a more logical and convincing
framework for deciding "what to count". Under PMS the role of
market controls is much clearer: they are designed to contain
exposure levels relative to risk in order to reinforce the
chances of break-even on the political risk portfolio. The
Control Review
for individual markets
Stock
Points (SCRPS)