Chapter One
Introduction

1.1 INTRODUCTION
Foreign exchange refers to the financial transaction where currency value of one country is traded into another country’s currency. The whole process gets done by a network of various financial institutions like banks, investors and governments. The exchange rate varies according to the value of each country’s currency which is based on the health of that particular country’s economy. Any individual or company engaged in overseas business should be aware of the risks of currency fluctuations. Customers without commercial contracts expressed in domestic currency (or fixed by an agreed rate of exchange) are fully exposed to what is known as an exchange risk. Exchange risk may arise because of exchange rate movements in the period from the original commercial contract, to the time of settlement of the domestic equivalent of the foreign currency amount. Foreign exchange risk management is designed to preserve the value of currency inflows, investments and loans, while enabling international businesses to compete abroad. Although it is impossible to eliminate all risks, negative exchange outcomes can be anticipated and managed effectively by individuals and corporate entities. Businesses do so by becoming familiar with the typical foreign exchange risks, demanding hard currency, diversifying properly and employing hedging strategies.
No countries of the world can produce all their necessary commodities and services. So it has to buy the commodities and services which it cannot produce or produce insufficiently from other countries. On the other hand countries producing commodities and services excess of their necessity export a portion of it to other countries. The activities of buying and selling or of exchange of commodities and services between two different countries are done by banks. So Banks play the important role of