The means and methods by which rights to wealth expressed in terms of the currency of one country are converted into rights to wealth in terms of the other country's currency is known as the foreign exchange". So the term foreign exchange refers to the principles to determine the rate of exchange.

We all know that one cannot use the currency of one country for trade in another country under normal circumstances. So there are several methods which are adopted to make international payments through the banking system.

A letter of credit is a document issued by the importer's bank to exporter authorizing him to draw drafts on the bank payable on demand on the specified terms and conditions. It is a very useful instrument for international trade.

The payment can also be made in other countries by mail transfer. Here the selling office of the bank sends instructions in writing by mail to the paying bank for the payment of the specified amount of money. The payment is made by debiting the buyer's account.

Telegraphic Transfer is another method of making international payments. Telegraphic transfer is an order by telegram to a bank to pay a specified sum of money to the specified person. But this type of transfer is more costly as compared to other means.

Foreign bank drafts are a simpler method of international payments. A bank draft is an order drawn by a bank on its foreign branch with instructions to pay the amount to the person designated in the draft.

Although not commonly used personal checks can also be used to make payments. Similarly payments can be made via money orders.

Traveler cheques are order drawn by a bank upon itself to pay a specific sum of money on demand to the purchaser of the cheques.

Open accounts are also used to settle international payments. Goods are sold on an open account. It an exporter has full confidence on the importer he will sell goods on open account without getting any surety from the other party.

Payments can also be made via dealers of foreign exchange. Bills of exchange are another method of payment.