TeachMeFinance.com - explain Marginal credit
Marginal credit -- In exchange, particularly foreign exchange ,
the term marginal credit refers to a commercial letter
of credit which may be drawn against within the margin of
the letter, or in other words, up to the amount specified in the
Such a credit is as a rule employed in a triangular operation.
Example : A merchant in New York wishes to buy
goods in China. He procures a letter of credit from a dealer
in foreign exchange in New York which is to be honored by
the correspondent in London of the dealer who issued it. Ordinarily
goods purchased in China by a New York merchant
are paid for in London. The New York merchant forwards
the letter of credit with his order for goods to the party of
whom he is to buy the goods in China. The seller of the
goods in China ships the goods and draws a draft for the
amount of them against the New York merchant's credit in
London. To the draft is affixed the authorization to draw, the
letter of credit, and likewise the bill of lading for the goods.
The draft is sold in China and forwarded to London for col1
lection the same as any other draft and in due course it is transmitted
with the bill of lading to New York. Thus, the seller
of the goods in China has not parted with his goods until he
has obtained or made sure of payment and the New York merchant
who has bought them has not paid for them (by use of
his letter of credit) until the bill of lading giving title to them
has been surrendered.
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