Advantages of Letter of Credit in Forex Market
Posted by admin on July 1, 2009 under Forex Trading | 
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Advantages of Letter of Credit in forex market affect both the exporter and the importer. The advantages accruing to either of the parties differ depending upon the nature of credit opened. However, there are certain common benefits accruing from the use of credit of whatever type which is discussed below.
Letter of Credit in forex market provides the sort of assurance that an exporter likes before he or she embarks on manufacturing the goods for export. In an international deal, the exporter and the importer rarely meet and it is clinched only through exchange of correspondence. The exporter, therefore, requires ensuring himself or herself that on shipping the goods he or she will receive the payment promptly. There is always the risk of the importer failing to pay. The risk is greater if the antecedents of the importer are not known. The letter of credit protects the exporter against failure of the importer to pay. A superior undertaking of a bank under the letter of credit assures the exporter that when the documents are tendered as per the terms of the credit, payment would be made to him or her. Thus it also helps the seller to expand the business by enabling to conclude deals which in the absence of credit would be hesitant to do.
The exporter is absolved of botheration of knowing in detail the exchange control regulations of the importer’s country and is also insured to some extent against changes in such regulations. The bank which issues the credit would take care to see that the goods covered by the letter of credit would be permitted to be imported under the exchange control regulations. Even in case there is a subsequent change in government policies, the government would think twice before restraining the bank from executing its commitment under the Letter of Credit in forex market.
The Letter of Credit in forex marketenables the importer to purchase materials without making full advance payment. Further, on the strength of the superior credit of the bank, he or she is able to finalize contracts which the seller may not agree had he or she rely only on the importer. If he or she takes certain safeguards, like calling for packing certificates, etc., the quality and quantity of the goods consigned is assured. Provided the buyer has a big credit with his or her bank he or she may get goods released by the bank under trust and pay for them on sale.
Thus, advantages of Letter of Credit in forex market mentioned above are in addition to those available under a bill transaction.
