The term ‘foreign exchange’ is used in its narrow as well as broad senses:
1. Narrow Meaning”:
In the narrow sense, 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.
2. Broader Meaning:
In the broader sense, the foreign exchange is related to the mechanism of foreign payments. It refers to the system whereby one currency is exchanged for or converted into another. Foreign exchange market is a market where foreign currencies are bought and sold by the traders’ to meet their obligations abroad.
According to Encyclopedia Britannica. “Foreign exchange is the system by which commercial nations discharge their debts to each other.” In the words of Hartly Wethers, “Foreign exchange is the art and science of international monetary exchange.”