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Clear Concept Of Foreign exchange

Updated on May 9, 2011

Foreign exchange

One of the largest businesses carried out by the commercial bank is foreign trading. The trade among various countries falls for close link between the parties dealing in trade. The situation calls for expertise in the field of foreign operations. The bank, which provides such operation, is referred to as rending international banking operation. Mainly transactions with overseas countries are respects of import; export and foreign remittance come under the preview of foreign exchange transactions. International trade demands a flow of goods from seller to buyer and of payment from buyer to seller. In this case the bank plays a vital role to bridge between the buyer and seller.

H.E. Evitt defined “Foreign Exchange” as the means and methods by which rights to wealth expressed in terms of the currency of one country are converted into rights to wealth in terms of the currency of another country.

Foreign Exchange Department is an international department of the bank. It deals with globally and facilitates international trade through its various modes of services. It bridges between importers and exporters. Bangladesh Bank issues license to scheduled banks to deal with foreign exchange. These banks are known as Authorized Dealers. If the branch is authorized dealer in foreign exchange market, it can remit foreign exchange from local country to foreign country. This department mainly deals with foreign currency. This is why this department is called foreign exchange department.

Some national and international laws regulate functions of this department. Among these, Foreign Exchange Act, 1947 is for dealing in foreign exchange business, and Import and Export Control Act, 1950 is for Documentary Credits. Governments’ Import &Export policy is another important factor for import and export operation of banks.

Foreign trade financing is an integral part of banking business. Documentary Credit (also called letters of credit or “L/Cs”) is the key player in the foreign exchange business. According to foreign exchange regulation Act, 1947, as adapted in Bangladesh, "Foreign exchange means foreign currency and includes all deposits, credit and balances payable in foreign currency as well as all foreign currency instruments, such as Drafts, Travelers cheques, Bills of Exchange and promissory notes payable in any foreign country. Anything that conveys a right to wealth in another country is foreign exchanges”. With the globalization of economies international trade has become quite competitive. Timely payment for exports and quicker delivery of goods is, therefore, a pre-requisite for successful international trade operations. Growing complexity of international trade, separation of commercial parties across the globe and operating in a totally unknown environment underlined the need for evolving a system that balances between the expectations of the seller and the buyer. Documentary Credit has emerged as a vital system of trade payment, and fulfilled the requisite commercial need. This system substantially reduces payment-related risks for both exporter and importer. Not surprisingly, therefore, the letter of credit is the classic form of international export payment, especially in trade between distant partners. Payment, acceptance or negotiation of the credit is made by the bank upon presentation by the seller of stipulated documents (e.g., bill of lading, invoice, inspection certificate).

Foreign exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country and thereby involves the international transfer of money. It is the means and method by which rights to wealth in a country’s currency are converted into rights to wealth in another country’s currency. In banks when we talk of foreign exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another. Foreign trade gives rise to foreign exchange. Foreign trade is transacted either in the currency of the exporter’s country or that of the importer’s country, or that of a third country acceptable to both the exporter and the importer.

o Dr. Paul Einzig

“Foreign exchange is the system or process of converting one national currency into another and of transferring the ownership of money from one country to another.”

o Mr. H. E. Evitt

“Foreign exchange is that section of economic science which deals with the means and methods by which rights to wealth in one country’s currency are converted into rights to wealth in terms of another country’s currency. It involves the investigation of the method by which the currency of one country is exchanged for that of another, the causes which render such exchange necessary, the forms which in exchange may take and the ratios or equivalent values at which such exchanges are effected.”

The term “currency” as earlier stated includes not only such notes and coins as are legal tenders, but also bank balances and deposits in foreign currency and all instruments- credit instruments which are capable of being used as currency, such as bills of exchange, promissory notes, letter of credit, travelers cheques, cheques, drafts, airmail transfers, telegraphic transfers (TT) and all other instruments which convey to holder a right to wealth.

Thus foreign exchange means foreign currency and includes –

I. All deposits, credits and balances payable in any foreign currency and

any drafts, travelers cheques, letters of credit and bills of exchange, expressed or drawn in local currency but payable in any foreign currency; and

II. Any instrument payable, at the option of the drawee or holder thereof or any other party thereto, either in local currency or in foreign currency or party in one and party in the other.

Foreign exchange is concerned with the settlement of international indebtedness, the methods of effecting the settlements and the instruments used in this connection, and the variation in the rates of exchange at which settlement of international indebtedness is made.

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      Mon29 

      7 years ago

      nice hub. best of luck

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