Economics • Banking & FinanceEasy
What is a 'Letter of Credit' primarily used for in international trade?
A. A guarantee issued by a bank assuring that a buyer's payment to a seller will be received on time and for the correct amount.✓ Correct Answer
B. A long-term loan provided by the central bank to commercial importers.
C. An equity investment document issued by multinational corporations.
D. A certificate of origin issued by customs authorities.
💡 Solution & Explanation
A Letter of Credit acts as a binding banking instrument where an issuing bank guarantees that the seller will receive the stipulated payment from the buyer on time, provided all shipping documents and trade conditions are fulfilled. Financial instruments of this nature differ fundamentally from long-term central bank loans or corporate equity shares. This mechanism minimizes default risk in international trade contracts where buyers and sellers operate in different jurisdictions.
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