In banking, what is a foreign draft and when is it typically used?

Introduction / Context:
Foreign drafts are traditional instruments used for making payments across borders. Before electronic transfers became widespread, individuals and businesses often relied on such drafts to send money safely to beneficiaries in other countries. Banking awareness exams still include questions on foreign drafts because they illustrate how banks handle international payments, currency conversion and settlement risk.

Given Data / Assumptions:

• The term foreign draft refers to an instrument issued by a bank.
• The draft is denominated in a foreign currency or payable in another country.
• The purpose is to make a secure remittance for trade, education or personal reasons.
• The question is about definition and typical use, not about detailed procedures.

Concept / Approach:
A foreign draft is similar to a demand draft, but it is drawn on a bank branch or correspondent bank in another country and often in that country currency. The customer pays the issuing bank in the home country in local currency plus charges. The bank then issues the foreign draft in favour of the beneficiary abroad. Because the instrument is backed by the issuing bank, it is safer than sending cash or personal cheques by post. The beneficiary can deposit the foreign draft in their local bank, which collects the funds through the banking system.

Step-by-Step Solution:
Step 1: Identify that a draft is a bank issued instrument that orders another branch or bank to pay a specified sum to a named person. Step 2: Recognise that a foreign draft involves at least two countries and usually two currencies. Step 3: Understand that customers use foreign drafts for purposes such as paying tuition fees abroad, settling small trade invoices or sending family remittances. Step 4: Note that safety and certainty of payment are key advantages compared with mailing cash or personal cheques. Step 5: Select the option that clearly defines a foreign draft as a bank draft issued in one country and payable in another, typically in foreign currency, used for international payments.

Verification / Alternative check:
To verify, imagine a student in one country who must pay tuition to a university overseas. The student visits a bank, pays the local currency equivalent plus charges and requests a foreign draft in the university currency. The bank issues the draft payable at its correspondent bank in the university country. The student sends the draft to the university, which deposits it in its bank and receives funds after clearance. This simple example matches the description in the correct option and shows why foreign drafts have been a standard solution for cross border payments.

Why Other Options Are Wrong:
Option B is wrong because it describes a central bank policy document, not a payment instrument. Option C refers to a domestic credit card, which is not called a foreign draft. Option D talks about examination records and has nothing to do with banking. Option E is simply an informal note and does not carry the legal or financial characteristics of a bank draft. None of these alternatives reflect the secure, bank backed nature of a foreign draft used for international remittances.

Common Pitfalls:
A common pitfall is to confuse foreign drafts with electronic wire transfers. While both are used for international payments, drafts are physical instruments, whereas wire transfers are electronic messages. Another mistake is to assume that foreign drafts are risk free; although they are safer than cash, they still involve clearing time and possible exchange rate movements. Students may also think that foreign drafts are obsolete, but many exams continue to test the concept as part of foundational banking knowledge. Keeping the definitions of different international payment methods distinct helps answer such questions accurately.

Final Answer:
A bank draft issued in one country and payable in another country, usually in a foreign currency, used as a secure way to make international payments.