When are letters of credit typically used in trade financing?

Letters of credit are primarily used in international trade to provide a secure method of payment between buyers and sellers from different countries. This financial instrument serves as a guarantee from the buyer's bank that the seller will receive payment for goods or services, provided that the seller meets the specified conditions outlined in the letter.

In international transactions, the complexities and risks increase due to additional factors such as currency fluctuations, different legal systems, and varying commercial practices. By using a letter of credit, sellers can mitigate the risk of non-payment, as the issuing bank assures that payment will be made if the necessary documentation is presented as stipulated.

The other options presented do not align with the typical use cases for letters of credit. Immediate payments are usually managed through other payment methods like cash or wire transfers. Local transactions generally do not require the additional security and complexities of letters of credit due to the reduced risk and ease of dealing within the same jurisdiction. Lastly, letters of credit are not outdated; they remain a crucial tool in modern trade financing, enabling secure transactions across borders and promoting international commerce.