NOTES

 International trade is a trade which takes place between two or more countries of the world. it involves exports and imports of goods and services which in turns involves receipts and payments unlike the primitive economy the exchange of goods and services is no longer carried out directly on barter basis. Nowadays every country of the world is a politically sovereign country having independent currency of its own which is a legal tender in its territory. This currency does not act as legal tender money outside its boundary. The same thing happens in case of other countries of the globe. Thus different countries of the globe have got different currencies which circulate a legal tender money in the respective country viz. Rupee in India, pound sterling in England, US Dollar in USA, Franc in France, Rubbles in Russia. Therefore whenever a country buys or sells goods and services from or to another country the residents of the two countries have to exchange their currencies. Thus the problem of foreign exchange arises. The importing country, while making payment to exporting country has to convert its currency into the exporting country’s currency, or into the internationally acceptable currencies like US Dollar, pound sterling etc. This type of conversion or transfer is facilitated by the foreign exchange market.

NEED OF FOREIGN EXCHANGE

                  The need for foreign exchange can be explained with the help of a hypothetical example. If India exports tea to Japan and Japan exports electronic goods to India, Yen being the currency of Japan, Japan will pay Yen to India and India will pay Rupees to Japan. But Yen can’t be accepted by India as Yen can’t be used for making payments to the raw materials and the wage earners. So will be the case of Japan. In Japan Indian rupee can’t be used as means of payment. Hence the problem of foreign exchange will crop up. Japan will have to convert Yen into rupees and make payment for imports in Indian rupees. Similarly India will have to convert Indian rupees into Yen and make payment for imports to Japan in Yen. Thus there is a need for foreign exchange to facilitate the international trade transactions. The payments and receipts for international trade transactions can be effected in internationally accepted foreign exchange like US Dollar, Pound Sterling or Gold.

                  Foreign exchange gets highlighted due to the growing importance of foreign trade in the national income not only of the DE’s but also of the LDC’s. Secondly most of the world countries have abandoned exchange control due to which there is a wide spread of capital flows. Thirdly there is a widespread move to make foreign exchange market a part and parcel of money market. Fourthly the move of globalization of the economics has also rendered a helping hand to boost up the importance of foreign exchange.

CONCEPT OF FOREIGN EXCHANGE

                  The term foreign exchange can be defined as the mechanism through which payments are effected between two or more countries of the globe having different currencies. The term foreign exchange is a very broad term which includes in its fold not only foreign money but also near money instruments denominated in foreign currency.

                  In India as per Foreign Exchange Regulation Act 1973 section 2(b) foreign exchange means foreign currency which includes the following:-

i)     all deposits, credits and balances payable in any foreign currency and any drafts, traveler’s cheques, letters of credit and bills of exchange, expressed or drawn in Indian currency but payable in foreign currency.

ii)    Any instrument payable, at the option of drawer or holder thereof or any other party thereto, either in Indian currency or in foreign currency or partly in one & partly in the other.

INSTURMENTS OF INTERNATIONAL PAYMENTS:

Following are the instrument of international payments:-

i)     Foreign Bill of Exchange:-

           A foreign bill of exchange can be defined as a negotiable credit instrument. It is an unconditional order in writing drawn by a drawer addressed to the drawee to pay a sum of money on demand to the payee or to the undersigned at a specified future date for the volume of goods received. It arises out of genuine trade transaction.

ii)    Bank Draft :

     A Bank draft can be defined as an order of a bank on its branch or on another bank to pay a sum of money to the bearer of a bank draft on demand. in the international trade transactions a debtor who imports goods from the creditor or an exporters approaches his bank, deposits adequate money with commission and obtains a bank draft. He sends that bank draft to the creditor by registered post. On receipt of the bank draft the creditors presents it across the counter of the said branch of the bank and gets it encased.

iii)   Mail Transfer

     Just as funds are transferred from one bank account to another bank account of the same bank at two different places through post office by mailing the post card in the international trade transactions are effected through air mail other things remaining the same.

iv)  Telegraphic Transfer

     It is a telegraphic order of a bank to its branch or to the correspondent bank to pay a sum of money to a person concern. when a Debtor would like to remit money quietly then he makes such types of an agreement. He deposits the money in his bank asking the bank to remit the sum of money through telegraphic transfer to a person concerned through its branch or through a correspondent bank. It is a quicker mode of payment.