Need of foreign currency:
Currency of each country is different. For example, India’s currency is Rupee (₹), America’s currency is US Dollar ($), England’s currency is pound (£), and so on.
- When a foreigner comes to India, he cannot make payment in dollars or pounds to purchase products or services from our traders. He will have to make payment in Indian currency only.
- Similarly, when an Indian importer imports goods from a foreign country he will have to make payment to that country either in the currency of that country or in an internationally acceptable currency.
- To fulfill such types of transactions individuals and a country needs foreign currency.
Currency conversion:
- Foreign tourists or people involved in import/export will need to convert the currency they have either into currency of the country with which they wish ’ to transact or into internationally acceptable currency.
- Therefore, such tourists or traders approach banks or officially registered currency traders to convert their domestic currency into a foreign or internationally acceptable currency.
- Such conversion of currency done at a specific rate and at a specific time is known as the exchange rate.
- Exchange rate is the price of a foreign currency in terms of domestic currency. In other words, it is the units of home currency required to buy one unit of a foreign currency.
