Letter of credit and Liquidity: Difference between pages

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(Expand and add links. Source: Voxeu.org Trade Finance Around the World http://voxeu.org/article/trade-finance-around-world)
 
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(LC or sometimes LOC).  
1.  


A promise document issued by a bank or another issuer to a third party to make a payment on behalf of a customer in accordance with specified conditions.  
An asset's ability to be turned into cash quickly and without significant loss compared with current market value.


Letters of credit are frequently used in international trade to make funds available in a foreign location.


2.


An entity’s ability to pay its obligations when they fall due, especially in the short term.


==== Letter of credit contrasted with documentary collection ====
Letters of credit are often contrasted, from the perspective of a seller, with an alternative structure of [[documentary collection]]s.


A letter of credit is a ''direct'' obligation of a bank to pay (against specified documents).
3.  


A documentary collection means a bank ''collecting'' payment from the buyer (by presenting documents to the buyer).
An entity's ability to source additional funds to meet its obligations, including in the medium and longer term.




A letter of credit therefore gives superior protection to the seller against credit risk or delayed cash flow, or both.
4.  


For this reason letters of credit are more expensive to arrange.
A financial measure designed to quantify an entity's ability to meet its obligations when they fall due.  
 
 
* For non-financial organisations, simple measures of liquidity include the ''current ratio'' and the ''quick ratio''.
Compared with documentary collections (DCs), letters of credit are used for larger transactions, and a larger total value of transactions.
* For banks and other financial institutions, liquidity measures include those which identify how long the bank could survive if wholesale funds were to dry up and retail funding was heavily stressed. This period is known as the ''survival period''.




== See also ==
== See also ==
* [[Advising bank]]
* [[Authorisation]]
* [[Bank payment obligation]]
* [[Authority limits]]
* [[Clean letter of credit]]
* [[Cash and cash equivalents]]
* [[Commercial risk]]
* [[Cash forecasting]]
* [[Condition]]
* [[Cash pool]]
* [[Confirmed letter of credit]]
* [[Current ratio]]
* [[Confirming bank]]
* [[Deep market]]
* [[Credit]]
* [[Headroom target]]
* [[Documentary collection]]
* [[Illiquid]]
* [[Documentary credit]]
* [[Liquidation]]
* [[Irrevocable letter of credit]]
* [[Liquidity buffer]]
* [[Issuing bank]]
* [[Liquidity Coverage Ratio]]
* [[LOC backed]]
* [[Liquidity preference]]
* [[Standby letter of credit]]
* [[Liquidity management]]
* [[Trade finance]]
* [[Liquidity premium]]
* [[Uniform Customs and Practice for Documentary Credits]]
* [[Liquidity risk]]
* [[Money management]]
* [[Net stable funding ratio]]
* [[Quick ratio]]
* [[Run]]
* [[Security]]
* [[Solvency]]
* [[Supply chain finance]]
* [[Survival period]]
* [[CertICM]]
* [[Yield]]




===Other links===
=== Other resources ===
[http://www.treasurers.org/node/5279 Letters of credit and supply chain finance, Will Spinney, ACT 2009]
*[[Media:2015_06_June_-_Safety_first.pdf| Safety first, The Treasurer, 2015]]


[[Category:Manage_risks]]
[[Category:Liquidity_management]]
[[Category:Risk_frameworks]]
[[Category:Trade_finance]]

Revision as of 16:08, 12 August 2016

1.

An asset's ability to be turned into cash quickly and without significant loss compared with current market value.


2.

An entity’s ability to pay its obligations when they fall due, especially in the short term.


3.

An entity's ability to source additional funds to meet its obligations, including in the medium and longer term.


4.

A financial measure designed to quantify an entity's ability to meet its obligations when they fall due.

  • For non-financial organisations, simple measures of liquidity include the current ratio and the quick ratio.
  • For banks and other financial institutions, liquidity measures include those which identify how long the bank could survive if wholesale funds were to dry up and retail funding was heavily stressed. This period is known as the survival period.


See also


Other resources

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