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Difficulty: MediumForms and Instruments of Credit

In foreign trade, an exporter requires maximum protection against default by requesting a credit instrument where both the importer's issuing bank and an advising bank in the exporter's country guarantee payment upon presentation of compliant shipping documents. Which credit instrument provides this dual guarantee?

  1. Confirmed irrevocable letter of creditAnswer
  2. B
    Revocable letter of credit
  3. C
    Clean bill of exchange
  4. D
    Documentary sight draft

Answer

Confirmed irrevocable letter of credit
A confirmed irrevocable letter of credit provides the highest level of security in international commercial transactions. 'Irrevocable' ensures the terms cannot be modified or cancelled without the explicit consent of all parties, while 'confirmed' means a second bank (usually in the exporter's home country) adds its binding undertaking to pay the exporter upon presentation of compliant documents.

Step-by-Step Solution

1
Identify the core feature requested in the transaction scenario.
The requirement is for a financial instrument offering a dual guarantee (issuing bank plus a bank in the exporter's country) that cannot be unilaterally cancelled.
Exporters use confirmed credit instruments to eliminate both buyer credit risk and political/country risks.
2
Analyze how different letters of credit function.
An irrevocable letter of credit cannot be modified without consent, and adding a confirmation from an advising/confirming bank adds the second layer of legal payment undertaking.
Confirmation commits the local bank in the seller's home country to pay even if the issuing foreign bank fails.
3
Select the option that meets both irrevocable and confirmation criteria.
The confirmed irrevocable letter of credit fulfills all security obligations outlined.
Other options either lack bank guarantees altogether or permit unilateral cancellation.

Key Concept

Confirmed Irrevocable Letter of Credit
Estimated Time:1m 0s
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Topics

Forms and Instruments of Credit

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