Final answer:
A letter of credit is a guarantee of payment to the seller, and it shifts the seller's credit risk to the issuing bank. It is irrevocable without the consent of all involved parties and is a key instrument in international trade finance.
Step-by-step explanation:
In the context of international trade and finance, a letter of credit serves as an important financial instrument providing various advantages and protections. Answering the question regarding letters of credit:
B) A letter of credit is a guarantee of payment to the seller. This is because it involves a bank that issues a letter of credit on behalf of the buyer, which assures the seller that payment will be made. This assurance is contingent upon the seller meeting the terms and conditions specified in the letter of credit.
D) Letters of credit shift the seller's credit risk to the bank issuing the letter of credit. By doing this, a level of security is offered to the seller, as the bank effectively guarantees the payment provided the agreed-upon conditions are met.
Answer option A is deceptive because it assumes letters of credit afford the highest protection second only to cash in advance, which is not always the case due to varying types of credit arrangements. Option C mentions the completion of the contract as the endpoint of the letter of credit procedure, which is misleading since the letter of credit has to be settled or honored before the completion of the contract occurs. Finally, E is incorrect as an irrevocable letter of credit cannot be altered without the consent of all parties involved, making it binding and secure for the seller.