Question

***This an International Finance Course***

Examine the parties and roles involved with a letter of credit.

Your response should be at lest 200 words in length.

Answer 1

Letter of credits are instruments which guarantee payments to the seller (exporter) if they satisfy certain terms and conditions mentioned in the letter of credit.

First buyer and seller agree on the terms of sales i.e type and quality of product, delivery schedule etc., then buyer meets with his bank (Issuing Bank) to open letter of credit for the seller with the instruction of the buyer for the documents required for the payment to occur.

Then Issuing Bank transfers the letters of credit to advising bank in the sellers country. The advising bank checks the authenticity of the letter of credit and sends it to the seller.

The seller looks at the terms and conditions of the letter of credit and informs the buyer if any modifications are required.

The terms and conditions of the letter of credit are finalized and then seller starts producing the products as per specification in the contract and make is ready for the shipment at the agreed location. The seller obtains documents required in the letter of credit such as the bill of lading by shipping the product.

The Seller then presents the documents to the advising bank and advising bank checks the documents for compliance with terms and conditions of payment.

If the documents are correct then the advising bank will claim the funds from the issuing bank by sending the documents to issuing bank.

The issuing bank will check the documents for compliance and debit the buyer's account and forward the documents to the buyer.

The buyer presents these documents to carrier companies to receive the goods.