The role of letter of credit in foreign trade and an application in terms of payment risk management

Foreign trade transactions have a strategic importance in these days and it has been being more important for our country, too. Because the buyers and seller are loceated in different countries, foreign trade transactions are more risky and cost more according to domestic trade activities. Some risks arise about payment because of the contractors locate in different countries, differences in country trade regulations, currencies and languages. Risks that can be caused because of the distance, could be avoided by contracts between the parts. So, risks about goods and payents can be controlled by the parts. Parts can meet some risks during realizing foreign trade transactions and they use some different payment methods. But, sometimes exporter has advantage regarding to importer, and sometimes importer has more advantage. In order to have a successful transaction, parts have to choose the payment method in thought of minimize their risk. All the payment methods do not distributes risk fairly. In all the payment methods, a part of transaction has more advantage according to other part except Letter of Credit. So, Letter of Credit is different from other payment methods so that gives the same advantage to both of the parts. Foreign trade payment risk is the most important risk and Letter of Credit protects both of the parts and controls payment risk for exporter and he guarantees his money by Letter of Credit. In this three-part study, the importance of Letter of Credit in foreign trade transactions and contribution to control the payment risk management have been underlying. In the first part, it has been discussed that a general view to foreign trade transactions, difference from domestic trade transactions, documents that are used in foreign trade transactions and payment methods in foreign trade activities. In the second part, it has been discussed Letter of Credit detailly and the role of Letter of Credit in the management of the payment risk. And in the third and last part, it has been discussing a case about the role of the Letter of Credit that manages the payment risk.