Which of the following statements is true?
A)An FI that issues a documentary letter of credit to one of its customers implicitly believes that the customer's credit standing is not sufficiently high enough to engage in international transactions.
B)An FI that issues a documentary letter of credit to one of its customers implicitly assumes the borrower's credit risk.
C)An FI that issues a documentary letter of credit to one of its customers has created a contingent asset.
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

An FI (Financial Institution) that issues a documentary letter of credit on behalf of its customer essentially steps in to guarantee payment to the seller, thereby assuming the credit risk associated with the transaction. This is because the FI commits to paying the seller upon fulfillment of the terms specified in the letter of credit, regardless of the buyer's ability to pay directly.

Which of the Following Statements Is True