Letter Of Guarantee

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DEFINITION of 'Letter Of Guarantee'

1. A type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier and promises to meet any financial obligations to the supplier in the event of default.

2. A document issued by a bank on behalf of a call writer guaranteeing that the writer owns the underlying asset and that the bank will deliver the underlying securities should the call be exercised.

BREAKING DOWN 'Letter Of Guarantee'

A letter of guarantee often helps firms conduct business with parties they would never normally get the chance to deal with. Many suppliers will often choose to do business with customers that have a letter of guarantee because it eliminates the risk that they will not receive the appropriate payment for the goods that they are selling.

Additionally, call writers will often use a letter of guarantee when the underlying asset of a call option is not held in their brokerage account.

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RELATED FAQS
  1. What's the difference between a bank guarantee and a letter of credit?

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    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
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