Foreign Exchange Instruments

The principal foreign exchange instruments may be classified as follows, roughly in order of importance: Bank drafts, not drawn under letter of credit.

Mail transfers.

Commercial or trade drafts and drafts drawn under letters of credit.

Traveler's checks and letters of credit.

Postal money orders.

Express orders and bank post remittances.

Bank Drafts

For whatever the reason--to pay for goods, for securities, and so on--Americans frequently need to remit to foreigners under conditions which make money orders generally undesirable. The amount may be large, or the remitter may wish to send the remittance in his own mail. In all these cases the ordinary bank draft is a most convenient form of remittance.

In this country, in purely domestic trade, we have become so accustomed to making payments by personal check that we may forget that in general the personal check is not used in foreign trade. It is true that in trade with Canada, Cuba, and Mexico, payments are sometimes made by dollar checks drawn by the buyer (i.e., debtor) on his own bank account, just as in domestic trade. Usually, however, the importer, or anyone else, wishing to remit to a foreigner by check obtains from his bank a "bank draft" drawn by it on one of its correspondents or branches abroad.

Here, again, it should be noticed that an American bank cannot sell a foreign-currency draft to its customer unless: (1) it has a correspondent bank or branch in that foreign country; and (2) it makes arrangement to reimburse the correspondent for the drawing. It may, of course, have an adequate deposit in that bank already; but if it does not, it must purchase exchange in order to avoid an "open" or "uncovered" position in the foreign currency involved. The bank check reproduced is a "demand" draft.

That is, it is payable "at sight" (i.e., on presentation) in London, and it will be sold to the buyer (or remitter) at the current market rate.