The trade between the two neighborhood countries is known as International Trade.  With its
own set of regulations and currency each country functions as a Sovereign State.  The conduct of International Trade and settlement of transactions has some peculiar problems arising from the difference in the rationality of the exporter and the importer.  Some of the important problems are follows:

a)   Each & every country has its own monetary units,

b)   On import and export of goods countries may charge with restrictions,

c)    Countries prescribe on payments from and into their nations with restrictions,

d)   There is a difference in the legal practices in every country.

Foreign Trade and Foreign Exchange

The monetary units of a international transactions.  The exporter of one country would like to get the payment in the currency of his country.  For example, If Angel Ltd. From Los Vegas exports Machinery to Dhill Ltd. in Kolakata, the exports like the payment to get in the US dollars.  Payment in Indian rupees will not serve their purpose because Indian rupee cannot be used as currency in the USA.  In other side, the imported have their savings and debts in India in rupees only.  Here, the importer can pay only in rupees and the exporter needs the payment in US dollars of his country.  The currency of one country gets converted into the currency of another country is named as the process of foreign exchange.

Here, the bank, which deals in foreign exchange, does the currency conversion.  With the help of banks abroad, these banks maintain the stocks of foreign currencies in the form of balances. For example, Bank of India, Kolkata can maintain account with American Bank, Los Vegas in which dollar balances are held.  In the earlier example, Dhill Ltd. pay the equivalent rupees to Bank of India, it would arrange to pay the Angel Ltd. at Los Vegas in dollars from the dollar balances held by American Bank.

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