Letter Of Guarantee

What is a 'Letter Of Guarantee'

A letter of guarantee is 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?

    A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure ... Read Answer >>
  2. How does a company obtain a bank guarantee?

    Find out how bank guarantees work, why they are issued and the process that a business normally goes through to acquire one ... Read Answer >>
  3. What is a bank's legal liability when issuing a letter of credit?

    Learn the responsibility of banks that issue letters of credit Letters of credits ensure payment on transactions between ... Read Answer >>
  4. What's the difference between a letter of credit and a bank guarantee?

    Learn how letters of credit and bank guarantees differ, how they are used by banks and companies, and how buyers apply to ... Read Answer >>
  5. When are you legally required to get a letter of credit?

    Learn how exporters or importers who deal in international trade use letters of credit to ensure that transactions are safe, ... Read Answer >>
  6. When is it necessary to get a letter of credit?

    Capitalize on assets and negate risks by using a letter of credit. Letters of credit are often requested for buying, selling ... Read Answer >>
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