Answer (D) is correct . If a U.S. company sells goods to a foreign company, the U.S. company may not know whether the foreign company will pay the contract price, is solvent, or whether it will reject a delivery of the goods. Requiring a letter of credit addresses the problem. A letter of credit is an engagement by the issuing bank (DCo’s bank in Denmark) to pay on behalf of its customer when the requirements of the letter of credit are complied with. When the beneficiary (XCo) is in another country, the letter of credit is often sent to a confirming bank (in the U.S. in this case), which will pay the beneficiary directly upon presentation of a document of title. The confirming bank will then be paid by the issuing bank.
Answer (A) is incorrect because XCo may find it profitable to transact business with DCo, but requiring a letter of credit may be preferable to relying on litigation in the event of a breach.
Answer (B) is incorrect because XCo may find it profitable to transact business with DCo, but requiring a letter of credit may be preferable to relying on litigation in the event of a breach.
Answer (C) is incorrect because XCo may find it profitable to transact business with DCo, but requiring a letter of credit may be preferable to relying on litigation in the event of a breach.
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