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Difficulty: MediumMeans of Payment in Foreign Trade

A foreign supplier requires a financial guarantee from an issuing commercial bank that ensures payment will be made once valid shipping documents are presented. Which instrument used as a means of payment in foreign trade meets this requirement?

  1. Letter of CreditAnswer
  2. B
    Bill of Lading
  3. C
    Certificate of Origin
  4. D
    Balance of Payments Schedule

Answer

Letter of Credit
A Letter of Credit is a binding document issued by an importer's bank guaranteeing that the exporter will receive payment provided all terms and document stipulations are satisfied.

Step-by-Step Solution

1
Identify the payment requirements described in the scenario
The exporter requires a bank guarantee of payment tied directly to presenting valid shipping documents.
Foreign trade involves credit risk due to distance and different legal jurisdictions.
2
Distinguish between payment instruments and shipping documents
A Letter of Credit provides a conditional bank guarantee of payment, whereas shipping documents like the Bill of Lading serve proof of ownership or shipment.
Only a Letter of Credit transfers the payment obligation to an issuing bank upon document presentation.

Key Concept

Letter of Credit as a secure payment instrument in foreign trade
Estimated Time:1m 0s
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Topics

Means of Payment in Foreign Trade

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