Define foreign exchange transaction among international bank, Financial Management

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How are foreign exchange transactions between international banks settled?

Answer: a network of correspondent banking relationships is known as the interbank market with large commercial banks maintaining demand deposit accounts along with one another, known correspondent bank accounts. The correspondent bank account network permits for the well-organized functioning of the foreign exchange market. As an instance of how the network of correspondent bank accounts services international foreign exchange transactions, refer a United States importer desiring to purchase merchandise invoiced in guilders from a Dutch exporter. The United States importer will contact his bank and query about the exchange rate. If the United States importer allows the offered exchange rate, after that the bank will debit the United States importer’s account for the purchase of the Dutch guilders. The bank will instruct its correspondent bank in the Netherlands to debit its correspondent bank account the suitable amount of guilders and to credit the Dutch exporter’s bank account. The importer’s bank will then debit its books to offset the debit of United States importer’s account, reflecting the decrease in its correspondent bank account balance.

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