Foreign exchange
Foreign Exchange is the system of converting or exchanging the currency of different countries. It also means the mechanisms by which the payment in connection with external trade is made. When the things are purchased or sold in one's own country the purchaser pays the seller in the currency of that country but when the person in America or England sells things to a person in Delhi, it is transaction between the two persons living in different countries having different currency. It is not easy to make payments as is done in ones own country because money of each country being in different currency, there is a problem of converting the money of one's own country into that of another of country.
In addition to this there are some other differences. The currency of a country may not be accepted by another country. In these days the currency of a every country contains a large member papers notes and the foreign countries may hesitate to accept them. Lastly even inside the country the value of currency is not always the same as in the past we could get 10kg of wheat for rupees and now we get only 1/2 kg. So we can say that the value of currency changes with the lapse of time. Because of this reasons the foreign countries usually demand payment in the form of sold or in that currency which is supposed to be stable and secure. Thus todays dollars or Pounds (Sterling) are used as the media ofForeign Exchange lieu of gold. Therefore most of the countries keep stock of dollars or sterling. For this purpose they keep an account with the bank in the country the currency of which is accepted in place of gold. Thus we keep an account with the "bank of England" Whenever a foreign country is required to be paid we pay hear in sterling by drawing on her account with the "bank of England".
Mechanism of Exchange:
Payments in foreign trade are made through bills of exchange baker's drafts, telegraph transfer and letter of credit. These are explains as under.
Bills of Exchange:
A bill of exchange is an order drawn by a person upon a bank or another person asking the letter to make payment to the third party. The following example will make the mechanism clear. Suppose an Indian merchant "A" has exported shoes an American merchant "B worth Rs. 1.00.000. There is also an Indian merchant "C" who has purchased machinery from another merchant "D in America. The Indian exporter A" draws a bill on American importer B and sells to the Indian importer C who after buying the bill forward it to his American exporter B and receives payment from him. Thus the two debts are settled without actual transfer of money from one country to another and the trade is financed. This is what is called" Bill of Exchange"
In practice exporters and Importers do not directly deal with one another the banksForeign Exchange the banks are another banks how deal in exchange server as middlemen. The bank makes profit by acting as intermediaries between the two.
This bill of exchange is now replaced by:
Cable transfer (C T)
Mail transfer (M T)
Cable transfer: The Indian bank wires to the foreign bank with which it has an account to transfer the deposited at once to the credit of a specified person.
Mail transfer:
This instruction is similar to cable transfer but they are sent by a post. Both M.T and C.T have the advantage that there is no danger of loss.
Exchange rate:
The rate of Foreign Exchange the ratio of which the currency of a country can be exchange (converted) against foreign currency. For example Cars are to be purchased from Britain. This cost for India is a combination of Britain price and the pound-rupee exchanged rate and a change in the total car result from a variation in either of these two factors. Suppose if the case sold at 4000 Pound to an Indian merchant and the current exchange rate is one pound = Rs 40 nearly then the cost of the car for Indian merchant will be Rs 1.60.000. The cost will be rise. If the cost of production in Britain Increases is pound rupee exchange rate increases this will result fall in the number of their purchased. If any country finds that its exports and imports are becoming adverse them be should either adjust its internal price level (Home price level) or very they exchange rate of currency. The exchanged rate of currency depends on the following factors.
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