Foreign Exchange
The
foreign exchange dealing of a bank with its customer is known as merchant business and the
exchange rate at the transaction takes place is the ‘merchant rate’. The merchant business in which the contract with the customer to buy or sell foreign exchange is agreed to and executed on the same day is known as ‘ready transaction’ or ‘cash transaction’. As in the case of inter bank transactions, a ‘value next day’ contract is deliverable on the next business day and a‘spot contract’ is deliverable on the second succeeding business day following the date of the contract. Most of the transactions with customers are on ready basis. In practice, the terms ‘ready’ and
‘spot’ are used synonymously to refer to transactions concluded and executed on the same day.
Foreign Exchange Transactions
Foreign exchange dealing is a business in which foreign currency is the commodity. It was seen earlier that foreign currency is not a legal tender. The foreign currency can be considered as the commodity in foreign exchange dealings.
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Purchase and Sale transactions of foreign exchange transaction:
Any trading has two aspects 1. Purchase. 2. Sale. A trader has to purchase goods from his suppliers which he sells to his customers. Likewise, the bank purchases as well as sells its commodity, -- the foreign currency.
Two points need be constantly kept in mind while talking of a foreign exchange transaction:
1. The transaction is always talked of from the bank’s point of view
2. The item referred to is the foreign currency. Therefore, when we say a purchase, we imply that the bank has purchased, and it has purchased foreign currency. Similarly, when we say a sale , we imply that the bank has sold; ans it has sold
foreign currency. In a purchase transaction the bank acquires foreign currency and parts with home currency. In a sale transaction the bank parts with foreign currency acquires home currency.
