Association for Financial Professionals (AFP) 2025 – 400 Free Practice Questions to Pass the Exam

In a letter of credit transaction, the advising or negotiating bank plays a critical role as an intermediary between the issuing bank and the beneficiary (the party receiving the payment). Its primary responsibility is to advise the beneficiary about the letter of credit and ensure that the documents presented comply with the terms set forth in the letter of credit. This involves examining the documents to verify that they meet the specified requirements, which can include things like shipping documents, invoices, and insurance certificates.

By providing this service, the advising or negotiating bank adds a layer of security and professionalism to the transaction, helping to mitigate the risks of non-compliance or misrepresentation. This function is essential in global trade, where parties may not know each other well and are reliant on documentation to ensure that contractual obligations are fulfilled.

The other roles mentioned in the options relate to different functions within the letter of credit process, such as the issuing bank's responsibility for issuing the letter itself, or the bank collecting payments, which typically falls to other parties involved in the transaction.