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Difficulty: EasyMeans of Payment in Foreign Trade

Which payment instrument in foreign trade involves an issuing bank guaranteeing payment to an exporter on behalf of an importer upon presentation of specified shipping documents?

  1. Letter of CreditAnswer
  2. B
    Bill of Lading
  3. C
    Certificate of Origin
  4. D
    Credit Note

Answer

Letter of Credit
A Letter of Credit is a binding financial undertaking issued by a commercial bank assuring the seller that payment will be remitted once stipulated shipping and trade documents are submitted in full compliance.

Step-by-Step Solution

1
Identify the key function requested in the question stem.
The instrument must serve as a bank guarantee of payment to an exporter in international trade.
Foreign payment mechanisms vary by the level of financial security and bank involvement offered.
2
Evaluate the payment instruments against commercial shipping documents.
A Letter of Credit (L/C) is issued by an importer's bank promising payment upon submission of matching shipping documents.
This protects both parties by substituting bank credit for buyer credit.

Key Concept

Letter of Credit as a Bank Guarantee in Foreign Trade
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Topics

Means of Payment in Foreign Trade

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