In international trade and banking, what is an Irrevocable Letter of Credit (ILOC) and how can it be changed or cancelled?

Introduction / Context:
Letters of credit are widely used in international trade to reduce payment risk between buyers and sellers in different countries. An important distinction is between revocable and irrevocable letters of credit. This question focuses on the meaning of an Irrevocable Letter of Credit, often abbreviated as ILOC, and checks whether you understand its legal strength and the conditions under which it can be changed or cancelled.

Given Data / Assumptions:

• The context is international trade transactions involving importers, exporters and banks.
• A letter of credit is issued by a bank at the request of the buyer to guarantee payment to the seller.
• The question specifically refers to an Irrevocable Letter of Credit (ILOC).
• We assume normal practice under international rules such as the Uniform Customs and Practice for Documentary Credits.

Concept / Approach:
An Irrevocable Letter of Credit is a firm undertaking by the issuing bank to honor payment if the beneficiary presents documents that comply with the terms and conditions of the credit. The key feature is that once issued, it cannot be amended or cancelled unilaterally. Changes require the agreement of all principal parties, usually the issuing bank, the applicant (buyer) and the beneficiary (seller). Therefore, the correct option must emphasize the inability to revoke or change the credit without mutual consent, distinguishing it from revocable or informal arrangements.

Step-by-Step Solution:
Step 1: Recognize that ILOC stands for Irrevocable Letter of Credit and relate it to confirmed payment obligations in trade. Step 2: Recall that irrevocable means that the issuing bank cannot withdraw or alter its undertaking without consent of the beneficiary and other parties. Step 3: Read option A, which clearly states that the letter of credit cannot be amended or cancelled without the consent of all main parties. Step 4: Compare option A with option B, which wrongly suggests that the bank can revoke the credit at any time without notice. Step 5: Discard options C and D because they describe unrelated concepts such as domestic cash sales and personal loans, not letters of credit.

Verification / Alternative check:
To verify, think about why exporters often insist on irrevocable credits. They want assurance that once they ship goods and present conforming documents, the bank will pay. If the bank or buyer could cancel the credit unilaterally, the seller would still face heavy risk. International trade rules therefore treat irrevocable credits as a definite undertaking of the issuing bank. This logic matches option A, confirming that it accurately describes an Irrevocable Letter of Credit.

Why Other Options Are Wrong:
Option B is wrong because it describes the opposite of irrevocable; a facility that the bank can revoke at any time is not an ILOC. Option C is wrong because a letter of credit is usually used in documentary trade transactions, not for simple domestic cash sales where payment is immediate. Option D is wrong because an unsecured personal loan for employees is a consumer credit product and has nothing to do with the letter of credit mechanism. These options fail to capture the guarantee and non revocable nature of an ILOC.

Common Pitfalls:
Some learners think that irrevocable means that no change is ever possible. In reality, changes are possible but require consent from all parties to the credit. Another pitfall is to assume that bank guarantees and letters of credit are the same. While both manage risk, their legal structure and purpose differ. Also, mixing up revocable and irrevocable credits can cause errors in exam answers. Always link the word irrevocable with strong commitment and the need for mutual agreement for any amendment or cancellation.

Final Answer:
An Irrevocable Letter of Credit (ILOC) is a letter of credit that cannot be amended or cancelled without the consent of all the main parties involved, usually the issuing bank, applicant and beneficiary.