FOREIGN EXCHANGE

Foreign exchange simply means the money of a foreign country. Thus, American dollars are foreign exchange
to an Indian and Indian rupees arc foreign exchange to an American. In practice, foreign exchange is often
used to refer to a country's actual stock of foreign currency, i.e., foreign currency notes or the means of
obtaining such money through travelers cheques or letters of credit.

Foreign Exchange Rate can be defined as, "the amount of the foreign currency that may be bought for one unit of
the domestic currency."

It can also be defined as, "the cost in domestic currency of purchasing one unit of the foreign currency."

Suppose the exchange rate between Indian Rupee and the U.S. Dollar is expressed as Re. 1 = $0.0211227 or $ 1 =
Rs.47. It simply means the value of one Indian Rupee is 0.02127 dollars or in other words one dollar costs Rs.47.

Thus, exchange rate is the price of one currency expressed in any other currency. In order to simplify the
fulfilment of international transactions an expression of exchange rate is must in external economic transactions.
Suppose an Indian importer wish to import goods from New York, then he must convert his Indian rupees in to
U.S. dollars in order to make payments. However, on the other side when the U.S. importer buys goods in India,
then he has to convert U.S. dollars in to the Indian Rupees. The rate at which this conversion takes place is called
as an exchange rate.