Question

Why letters of credit is the most important instrument of payment in international credit?

Answer 1

Letter of credit is one of the most secure documents that is used in International trade. Letter of credit is issued by the bank on behalf of the buyer to the seller that the bank will make the payment for goods and services if the buyer is not able to make the payment. Letter of credit becomes an Important instrument because the default risk of buyer is transferred to the bank, so bank will make the payment if the buyer defaults on it. The default risk of the bank is generally low that is why letter of credit is one of the most important documents in the international trade. It reduces the default probability significantly.