What Is Ment By Foreign Exchange?

The word foreign exchange is related to the exchange methods and mechanism through which the payments in connection with the international trade are made. It covers the methods by which the currency of the country is exchanged for that of another: the forms in which exchanges are conducted and the ratio at which they are affected.


There is not a single country in the world which is self sufficient. There is constant inflow and outflow of goods and services from one country to another. When goods and services are exported, the money is to be received from the foreigners, and when they are imported, the money is to be paid to them. The receiving or making of payments to a person, firm or government in foreign countries involves many problems.


First, the transfer of the means of payment across national boundaries, and second is the conversion of the currency of one country into that of another country. The problems of international payments would not have been so diversified.

The problem of international payments would not have been so diversified if there has been only one common currency acceptable to all the people of the world. As every country now has its own measure of value: U.K., its pound, Germany its mark, Russia its rebel, Japan its yen, Pakistan its rupee, America its dollar, etc. so that the currency of one country is not legal tender in other countries. Thus the problem of the conversion of the currency of one country into that of another has arisen.