The term ‘foreign exchange’ is, generally used to refer to foreign currencies. But the foreign exchange is also used to refer to the mechanism by which the curreny of one country is converted into the currency of another country.
Need for Foreign Exchange:
In the case of foreign trade, there is trade between one country and another. Each country has its own currency. So, for the settlement of foreign trade transactions, the currency of one country is required to be exchanged for the currency of another country.