LETTER OF CREDIT
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What is a Letter of Credit (LC) in the context of international trade?
A Letter of Credit is a written undertaking issued by a bank (issuing bank) on behalf of its customer (applicant/importer) promising to pay the beneficiary (exporter) a specified amount upon presentation of stipulated documents within a defined period.
What is the primary purpose of issuing a Letter of Credit in international trade?
To provide payment assurance to exporter from a bank.
Who are the four main parties involved in a Letter of Credit transaction?
The four main parties are the Applicant (importer/buyer), the Issuing Bank (buyer's bank), the Beneficiary (exporter/seller), and the Advising Bank (correspondent bank in the exporter's country).
Who is the 'applicant' in an LC transaction?
The buyer or importer who requests the LC issuance.
Which international set of rules governs Letters of Credit transactions globally?
Letters of Credit are governed by the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the International Chamber of Commerce (ICC), which came into effect on 1 July 2007.
Who is the 'beneficiary' in a Letter of Credit?
The seller or exporter in whose favour LC is issued.
What is the principle of 'independence' or 'autonomy' in a Letter of Credit?
The independence principle means that an LC is a separate and independent contract from the underlying sale contract; the issuing bank's obligation to pay is based solely on the documents presented and not on disputes or defences arising from the underlying trade contract.
What is the 'Issuing Bank' in an LC transaction?
The bank that opens the LC on behalf of the applicant.
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