Foreign Exchange Transaction Law & Legal Definition. Foreign exchange transaction is a type of currency transaction that involves two countries.Generally, a foreign exchange transaction involves conversion of currency of one country with that of another. The conversion of currency in a foreign exchange transaction can be performed through :1. buying or selling of goods and services on credit;2. borrowing or lending funds. A foreign exchange transaction is usually carried out in foreign exchange markets. An example of a foreign exchange transaction is where a person buys dollars and sells pounds.. buying or selling of goods and services on credit; 2. borrowing or lending funds. A foreign exchange transaction is usually carried out in foreign exchange markets. An example of a foreign exchange transaction is where a person buys dollars and sells pounds.