Kinds of Foreign Exchange Transactions

The foreign exchange transactions are usually put into four categories:-
(1) Current Transactions

As regards the Current Transaction, they are further divided into two clauses: (a) Visible Trade (b) Invisible Trade. Visible trade is based on the import and export of physical goods known as merchandise. The invisible trade has no direct relation with the import and export of merchandise. It is the payment made or received from the foreigners for the shipping, banking, insurance services, received or provided to them. Interest on capital, dividend or remittance of profits, from one country to another also fall in the category of invisible trade.

(2) Capital Transactions

Capital transactions are different from financial transactions. When a country grants aids or gives long term loans or invests employing foreign exchange in another country, a capital transaction is then said to have operated.

(3) Short Term Financial Transactions

If the citizens of one country, due to political or economic reasons, transfer their foreign exchange resources to another country for a short period, it is then said to be a short term financial transaction of foreign exchange.

(4) Working Balances

The commercial banks sometimes keep their working balances in foreign money in other countries for earning higher profit or fear of devaluation in the home currency or unfavourable political conditions at home. In all such cases, the demand for and supply of foreign exchange is affected.