Final answer:
The true statement about a foreign draft is that it is an instrument used in international trade to facilitate payments, drawn in one nation and payable in another nation. They are essential for businesses engaging in trade across borders as they need to convert currencies to meet local and international financial obligations.
Step-by-step explanation:
The correct answer to the question 'Which of the following is true of a foreign draft?' is 'b. It is drawn in one nation and payable in another nation.' A foreign draft is a financial instrument used in international trade that facilitates payment between two parties in different countries. It is essentially a check that can be readily converted into the currency of the exporting country. Given that businesses operating in international trade often find that their production costs are in the currency of the nation where production occurs, while their revenues from sales are in the currency of the nation where the sales took place, foreign drafts play a crucial role in streamlining the payments across borders. This is essential in the context where companies are suppliers of one currency and demanders of another, as evident in foreign exchange markets.
For instance, a Chinese firm exporting goods will receive U.S. dollars for its sales but needs Chinese yuan to pay its local expenses. They would utilize the foreign exchange market to supply dollars and demand yuan. Additionally, when a country, such as Brazil, borrows funds from a foreign lender, the repayment often has to be made in the lender's currency, which necessitates such conversion mechanisms. Furthermore, the participation in international trade implies the necessity of engaging in international capital movements, further underlining the importance of tools such as foreign drafts.