CHAPTER-TWO
FOREIGN EXCHANGE

2.1 DEFINITION OF FOREIGN EXCHANGE

Foreign Exchange is a process which is converted one national currency into another and transferred money from one country to another countries.

According to Mr. H. E. Evitt. Foreign Exchange is that section of economic science which deals with the means and method by which right to wealth in one country's currency are converted into rights to wealth in terms of another country's currency. It involved the investigation of the method by which the currency of one country is exchanged for that of another, the causes which rented such exchange necessary the forms which exchange may take and the ratio or equivalent values at which such exchanges are effected.

Foreign exchange is the rate of exchange in the both country's currency.

2.2 FOREIGN TRADE AND FOREIGN EXCHANGE
International trade refers to trade between  the residents of two different countries.
Each country functions as a sovereign State with its set of regulations and currency. The difference in the national of the exporter and the importer presents certain peculiar problems in the conduct of international trade and settlement of the transactions arising therefrom. Important among such problems are :

(a) Different countries have different monetary units;
(b) Restrictions imposed by countries on import and export of goods;
(c) Restrictions imposed by nations on payment from and into their countries;
(d) Differences in legal practices in different countries.

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 Indian currency but payable in any foreign currency;
(ii) Any instrument payable, at the option of the drawee or holder thereof or any other party thereto. Either in Indian currency or in foreign currency or partly in one and partly in the other. Thus, foreign exchange includes foreign currency, balances kept abroad and instruments payable in foreign currency.  


2.3 PRINCIPLES OF FOREIGN EXCHANGE

The following principles are involved in Foreign exchange :
i) The entire system
ii) The media used
iii) The monetary unit.

2.4 FUNCTION OF FOREIGN EXCHANGE

The Bank actions as a media for the system of foreign exchange policy. For this reason, the employee who is related of the bank to foreign exchange, specially foreign business should have knowledge of these following functions :-

i) Rate of exchange.
ii) How the rate of exchange works.
iii) Forward and spot rate.
iv) Methods of quoting exchange rate.
v) Premium and discount.
vi) Risk of exchange rate.
vii) Causes of exchange rate.
viii) Exchange control.
ix) Convertibility.
x) Exchange position.
xi) Intervention money.
xii) Foreign exchange transaction.
xiii) Foreign exchange trading.
xiv) Export and import letter of credit.
xv) Non-commercial letter of trade.
xvi) Financing of foreign trade.
xvii) Nature and function of foreign exchange market.
xviii) Rules and Regulation used in foreign trade.
xix) Exchange Arithmetic.