DEFINITION OF FOREIGN EXCHANGE :-
N.E. Evitt Says, " 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 other country's currency is known as foreign exchange" So the term foreign exchange rates to the principles that determine the rate of exchange. We know that money of one country for making payments. So there are different methods which are adopted to make international payment, through the banking system.
Following are the main methods :
1. Letter Of Credit :-
A letter of credit is a document issued by the importers bank to exporter authorizing him to draw drafts on the bank payable on demand on the specified terms and conditions. It is very useful instrument the international trade.
2. Mail Transfer (M.T) :-
The payment can be also made in other country by mail transfer. Here the selling office of the bank sends instructions in writing by mail to the paying bank for the payment of a specified amount of money. The payment is made of money. The payment is made by debiting to the buyers account.
3. Telegraphic Transfer (T.T) :-
It is quickest method of making inter national payments. Telegraphic transfer is an order by telegram to a bank to pay a specified sum of money to the specified person. But this type of transfer is more costly as compared to other mean.
4. Foreign Bank Draft :-
It is the simple method of international cash payment. The foreign bank draft is an order drawn by a bank on its foreign branch or correspondent to pay specific sum of money on demand to bearer or to the person designated by the purchaser the draft.
5. Personal Cheques :-
This method is not used commonly for making the international payments. A debtor with the approval of a foreign creditor may send him the cheque drawn on his own bank and also payable in the currency of his own country.
6. Money Order :-
The payment can be made to a person who is living in other country through money order. The payee receives a specific amount sent by the payer in the currency of his own country.
7. Travellers Cheque :-
Travellers cheque is an order drawn by a bank upon itself to pay a specified sum of money on demand the purchaser of the cheques. The paying bank after comparing the signatures of purchase, which he has signed at the time of the purchasing of cheques and makes the payment.
8. Travellers Letter Of Credit :-
These are used to finance foreign travel. These are addressed to a banks in foreign countries authorizing the person to whom it is issued to draw drafts on the issuer. The total amount and time limit is written on the each letter.
9. Open Account :-
According to this method, goods are sold on our open account. If an exporter has full confidence on the importer he can sell the goods in another country on our open account without getting any surety for the third party. In this case there is a risk of repayment.
10. Dealers Of Foreign Exchange :-
In every country foreign exchange dealers purchase and sell the foreign currency from the visitors of the other countries and pay them in the home currency for meeting their local money demands and sell the foreign notes and coins to the persons visiting foreign countries at the official rate.
11. A Bill Of Exchange :-
The bill of exchange is the main and most effective method of transferring payments between the two parties located in different countries. It is a written order addressed by one person to an other. The creditor orders to the debtor to pay a particular amount to the payee.