Introduction to Finance

Traveler’s Letter of Credit 
A fi rm’s buyer who is traveling abroad may not know in 
advance from which individuals or fi rms purchases will be made—for example, an art buyer 
touring several countries. The buyer could carry U.S. currency, but this involves possible 
physical loss of the money and sometimes a substantial discount for its conversion into the 
local currency. A traveler’s letter of credit is a convenient and safer method for travelers who 
need large amounts of foreign currency.
The 
traveler’s letter of credit
is issued by a bank in one country and addressed to a list of 
foreign banks. These banks are usually correspondents of the issuing bank and have agreed to 
purchase sight drafts presented to them by persons with appropriate letters of credit. When a bank 
issues a letter of credit, it sends a copy of the signature of the person to whom the letter is issued 
to each of its foreign correspondent banks. When someone presents a draft for payment in foreign 
currency to one of these correspondent banks, his or her signature is compared with the signature 
the bank already has. The bank may also ask the individual for supplementary identifi cation.
As with a commercial letter of credit, a maximum total draft amount is stated in a traveler’s 
letter of credit. So that an individual with such a letter does not exceed authorized withdrawals, 
each bank to which the letter is presented enters on it the amount of the draft it has honored.
Traveler’s Checks 
Traveler’s checks, which are off ered by banks and other fi nancial 
intermediaries in the United States, are generally issued in several diff erent denominations. 
These checks, generally purchased by an individual before leaving for a foreign country, prom-
ise to pay on demand the even amounts indicated on the face of the checks. Each check must 
be signed by the purchaser twice, once when it is bought and again in the presence of a repres-
entative of the business, hotel, or fi nancial institution where it is presented for payment. This 
allows the person cashing a traveler’s check to determine whether the signature is authentic.
The use of traveler’s checks is widespread and off ers several advantages to the traveler, 
including protection in the event of loss and almost certain acceptance when they are presented 
for payment. Traveler’s checks are usually sold for their face amount plus a charge of 1 percent. 
They can now be purchased in the United States in major foreign currency denominations—for 
example, British pounds. This eliminates a traveler’s exposure to varying exchange rates and 
the extra amount that is often charged (in the form of a less favorable exchange rate than the 
offi
cial rate) when U.S. dollar checks are cashed in a foreign country.