Foreign Exchange and Foreign Exchange Market

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INTRODUCTION TO FOREIGN EXCHANGE AND FOREIGN EXCHANGE MARKET DEFINITION OF INTERNATIONAL TRADE The recent trend in globalization has given rise to international trade and investment has grown at a tremendous pace in the last few decades. The flow of goods, services and capital goods across various national boundaries is possible only if there is a good functioning monetary system. International trade refers to trade between the residents of two different countries. Each country functions as a sovereign state with its own set of regulations and currency. The difference in the nationality of the export and the importer presents certain peculiar problem in the conduct of international trade and settlement of the transactions arising there from. Important among such problems are: a) Different countries have different monetary units; b) Restrictions imposed by counties on import and export of goods: c) Restrictions imposed by nations on payments from and into their countries; d) Different in legal practices in different countries. The existing of national monetary units poses a problem in the settlement of international transactions. The exporter would like to get the payment in the currency of own country. For instance, if American exporter of New York exports machinery to Indian rupee will not serve their purpose because Indian rupee cannot be used as currency inn rupees. Thus the exporter requires payment in the importer’s country. A need, therefore, arises for conversion of the currency of the importer’s country into that of the exporter’s country. Foreign exchange: Foreign exchange is the mechanism by which the currency of one country gets converted into the currency of another country. The conversion is done by banks who deal in foreign exchange. These banks maintain stocks of foreign currencies in the form of balances with banks abroad. For instance,

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