Friday, September 4, 2009

Instruments of foreign exchange market: bills of exchange

One of the oldest and most important of all international financial instruments is the bill of exchange. Frequently today the word draft is used instead of bill. Either way a draft or bill of exchange is a written order requiring a person, business firm, or bank to pay a specified sum of money to the bearer of the bill.
We may distinguish between sight bills, which are payable on demand (presentation), or time bills, which mature at a future date and are payable only at that time. There are also documentary bills, which typically accompany the international shipment of goods. A documentary bill must be accompanied by shipping papers (such as bills of lading), allowing importers of goods to pick up their merchandise. In contrast, a clean bill has no accompanying documents and is simply an order to a bank to pay a certain sum. The most-common example arises when an importer requests its bank to send a letter of credit to an exporter in another country. The letter authorizes the exporter to draw bills for payment, either against the importer‘s bank or against one of its correspondent banks. Most bills of exchange drawn in connection with U.S. imports and exports are payable in U.S. dollars

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