Letter Of Guarantee

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Actual Authority

    Specific powers, expressly conferred by a principal (often an ...
  2. Default

    1. The failure to promptly pay interest or principal when due. ...
  3. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a ...
  4. Default Risk

    The event in which companies or individuals will be unable to ...
  5. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific ...
  6. Bank

    A financial institution licensed as a receiver of deposits. There ...
Related Articles
  1. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  2. Options & Futures

    Principal-Protected Notes: Hedge Funds For Everyday Investors

    PPNs guarantee to return at least 100% of the original investment and have the potential to return much more.
  3. Investing

    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 that a transaction proceeds as planned, while bank guarantees reduce ...
  4. Options & Futures

    What is the difference between arbitrage and hedging?

    Dive into two very important financial concepts: arbitrage and hedging. See how each of these strategies can play a role for savvy investors.
  5. Options & Futures

    A Detailed Look Into China's Options Market

    As the Chinese options market gradually takes shape, we provide an overview, including details of the initial phase and building blocks, primary beneficiaries, the impact on the overall financial ...
  6. Options & Futures

    How do you trade put options on E*TRADE?

    Learn all about put option trading at E*TRADE. Explore margin accounts and become familiar with the different types of option writing.
  7. Trading Systems & Software

    How do you trade put options on Ameritrade?

    Learn about option trading with TD Ameritrade. Explore the different types of options and their possible impacts on the investors that write them.
  8. Options & Futures

    Avoid These 10 Mistakes When Trading in Cheap Options

    Cheap options can be very risky. Reduce your risk by avoiding these 10 common mistakes in trading in cheap options.
  9. Options & Futures

    What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being bought and sold.
  10. Options & Futures

    Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct option brokers.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center