Letter of guarantee - an agreement issued by a bank on behalf of a customer who has entered into an agreement for the purchase of goods from a supplier.
Letters of guarantee tell the supplier that they will be paid even if the bank’s customer defaults.
The bank may issue a letter of guarantee on behalf of the seller of the call guaranteeing that the seller owns the underlying asset and that the bank will deliver the underlying securities if the call is exercised.
Letters of guarantee are often used when one party to a transaction is unsure that the other party involved will be able to meet its financial obligations, especially when purchasing expensive equipment or other property.
Letters of guarantee are used in a variety of business situations, including contracts and construction; funding from a financial institution; or declarations during the export and import processes.