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What role would the money market have in a letter of credit arrangement?
Ans: Discounting the banker’s acceptance. Could you please explain this sir?
Suppose you owe me $10,000 payable in 1 months time. For me to be certain that I will receive the money you get a banker’s acceptance – this means that the bank guarantees that I will get the money in 1 months time.
If I decide that need the money urgently and don’t want to wait a month, I can sell the acceptance to someone else and they will receive the money in a month’s time. However the buyer will not pay me the $10,000 for it (because they will not get it back for a month). They will pay me a bit less (as though they were charging me interest). So the pay me at a discount.