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Overall Concept of Foreign exchange Market & Foreign Trade

Updated on July 26, 2011

Foreign trade:

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.

Foreign trade:

Foreign trade can be easily defined as a business activity, which crosses national boundaries. These may be between parties or government ones. No country can produce all kinds of goods and another country, from this sense; mainly this is the origin of foreign trade. When two countries exchange goods or services between them we can call it foreign trade. Many writers define it in many ways. Some of them are given below:

According to Prot C.P. Kridleberger - “International trade is the transaction of goods and services between two or more countries”

According to Professor O.M. Amos- “International trade is the exchange of goods across nation trade is the exchange of goods across nation al boundaries”.

According to V.M. Mittari - “International trade is a trade among different countries or trade across political frontiers”.

Different modes of International Trade Payments

In International trade methods of payment could take any of the following forms:

1. Cash in advance

2. Open account

3. Collection

4. Documentary credit

The first three are traditional trade payment methods, which view the bank's role as an agency for transmitting and receiving funds or documents. Under documentary credit, on the other hand, the bank assures payment subject to the completion of documentary conditions.

1. Cash in advance

Under this system the exporter may receive value of export in advance from the importer before the actual shipment of goods through cheque, draft or T.T. This practice though expensive and risky is resorted to in cases where either the buyer's credit worthiness is doubtful or where there is an unstable political or economic environment in the buyer's country or where manufacturing process or service delivered are specialized and capital intensive.

2. Open account

An open account method is an arrangement between the buyer and seller whereby the goods are manufactured and delivered before payment is made. Under this method, since the payment has to be made at some stated future date and there is no negotiable instrument in evidence of the buyer's commitment to pay the seller faces the risk of release of goods without assurance of payment.

3. Collection

Collection is a method under which goods are shipped and the bills of exchange (Draft) is drawn by the seller on the buyer. The documents are sent to the bank with clear instruction for collection through on of its correspondent bank located in the buyer's country. The documents are to be delivered only after the payment has been made or Draft is accepted.

4. Documentary credit

Documentary credit is the classic form of international trade payment, especially in trade between distance partners. This method substantially reduces payment related risk for both exporter and importer.

Documentary credit is a conditional bank undertaking of payment. It is a conditional undertaking given by a bank (Issuing Bank) at the request of a customer (Applicant) or on its own behalf to pay a seller (Beneficiary) against stipulated documents provided all the terms and conditions of the credit are complied with.

These stipulated documents are likely to include those required for commercial, regulatory, insurance or transport purposes, such as commercial invoice, certificate of origin, insurance policy or certificate and a transport document of a type appropriate to the mode of transport used.

Foreign Exchange Market

The foreign exchange market is a market where conversions take place. In our country inter Bank Foreign Currency/Exchange Market operated through electronic media using Dealing Room of Bank/Financial Institution for buying and selling of foreign currency among banks and other financial institutions at floating rate based on market demand and supply. Only authorized dealers deal directly with each other in foreign exchange markets who are licensed to operate in the foreign market by the Bangladesh Bank. Authorized deals who are generally commercial bank on behalf of their customer handles all the foreign transaction.

Type of Foreign Exchange Market:

There are three types of foreign exchange market existed in our country-

· Spot Market- where exchange of one currency with another takes place on the spot.

· Forward Market- where actual delivery of the currency will happen at a future date as per agreement of present date.

· 0ption Market- Wherein a contract is made specifying the right to buy or sell a standard amount of foreign currency within a specific date at a certain price.

Term Used in Foreign Exchange Market Operation:

Usually three terms used in our foreign exchange market operation. There are-

  • Arbitrage- Spot purchase of FC where the price is low and sells where the price is high i.c. By low and sell high. Currency Arbitrage due to price difference in to financial centers.
  • SWAP- Purchasing FC on the spot for selling Forward or selling spot for purchasing forward Due to difference in interest rate of the concerned currencies.
  • Hedging- to avoid exchange risk, agreement is made to day to buy or sell FC to be delivered at some future date at a rate agreed upon to day.


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    • lctodd1947 profile image

      lctodd1947 3 years ago from USA

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      Sorry, but it is never too late, right?


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      Julie 5 years ago

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    • profile image

      Julie 5 years ago

      I rily love ds cos it has helped in broadening my knowledge

    • Jakir13 profile image

      Jakir13 6 years ago from Bangladesh

      Thanks for visiting my blog and also Thank you very much for the comment.

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    • ratnaveera profile image

      ratnaveera 6 years ago from Cumbum

      Indeed Great Hub on Foreign Trading! This would be very helpful for the people who want to earn money doing foreign trading. Thanks a lot for such a Great Article! Thumbs Up! Jakir13