A New Method for Computing Letter of Credit Risks

Abstract

This study targets problems in the risk assessment and control processes of letter of credit settlements for Chinese export enterprises. It applies the quantitative method of exploratory factor analysis to extract the main factors and uses a confirmatory factor analysis to test the validity these constructs. VENSIM software is used to design the system dynamics causal tree and flowchart of the letter of credit system. The equation sets of DANAMO parameters are then constructed using the software. Finally, through analysis of the system risk fluctuation diagram with system simulation, it offers enterprises advice on how to identify potential risk points to prevent and control letter of credit risks in advance.