Financial Risk Under Letter Of Credit And Its Precaution

With the growth of international trade, business between countries all over the world is getting more and more frequent. The practice of international settlement, of which Letter of Credit is the most important method of payment in the current international trade. Statistically, volume of trade under the terms of payment by Letter of Credit is about 90% of the total trade volume. In recent years, the financial risk arose from Letter of Credit grows continuously, and causes various degrees of damages to the banks in China, Hong Kong and Macau. I-low actually is the risk happened? How to avoid it? These are the topics for discussions in this thesis. First of all, this thesis will give a simple explanation regarding the operational principle of Letter of Credit, and the cause of its associated risk. This will then follow by analysis of damages to different parties involved, lists up the financial risks one by one and dissects the reasons for their arising. Secondly, explains how the court should deal with the cases related to Letter of Credit in order to avoid interrupting the normal operation of the financial institutions. Then, from the point of view of the Authority, discusses how to assist the financial institutions to take precautions against risks and how to monitor them. Finally, as part of the main topic of this thesis, we will discuss about the fact that commercial banks, during the operation of Letter of Credit, they will face lending risks, operational risks and risk of internal control, etc.. Although it is impossible to avoid risk completely, it should be necessary to find a measurement that is feasible to avoid risk and to minimize damage.