A market where foreign exchange transactions take place is called Foreign Exchange Market. It’s a place where foreign moneys are bought and sold. The biggest Foreign Exchange Market is in United States of America.
Money has the same importance in the economy of a country as the blood in the human body. So every country has its own authorized currency. Currency of one country is acceptable only in that particular country. Currency of one particular country is not accepted in other country. So if you want transact with any other country, you will have to purchase the currency of that country or some countries (mostly less developed countries) deal in the US Dollar as well.For example if you want to purchase wheat from United States of America, you will have to make payments in US Dollar. You can purchase these US Dollars from Forex Exchange Market.
Functions of Foreign Exchange Market:
Determination of Exchange Rate:
When you purchase the US Dollar from foreign exchange market its demand increases. It goes on increasing if more and more people purchase the US Dollar from foreign exchange market. When demand of anything increases (more people are coming to buy it) its price also increases with simultaneous effect. So with this demand and supply rule the exchange rate of foreign exchange market is determined.
Transfer function:
Another important function of foreign exchange market is to transfer foreign moneys between countries. The country with more foreign exchange reserves is considered to be financially strong. The main credit instruments used for payments in foreign currencies are letter of credit, bills of exchange e.g. Banker’s draft, Telegraphic transfer.
Credit function:
Another function of the foreign exchange market is to provide credit to the importer who is a debtor. The credit facility is provided through the bill of exchange.
Hedging:
Foreign exchange market gives the option to the Investor to make payment of the foreign exchange reserves purchased from him at the spot rate (prevailing exchange rate of the market) or the fixed determined rate at the future date. When investor opts for the fixed determined rate, it is called hedging in the foreign exchange market.
Speculation:
In speculation business an investor foresee that the price of a particular currency will increase in the future so he purchases that currency and sells it when the price goes up in the foreign exchange market.
Money has the same importance in the economy of a country as the blood in the human body. So every country has its own authorized currency. Currency of one country is acceptable only in that particular country. Currency of one particular country is not accepted in other country. So if you want transact with any other country, you will have to purchase the currency of that country or some countries (mostly less developed countries) deal in the US Dollar as well.For example if you want to purchase wheat from United States of America, you will have to make payments in US Dollar. You can purchase these US Dollars from Forex Exchange Market.
Functions of Foreign Exchange Market:
Determination of Exchange Rate:
When you purchase the US Dollar from foreign exchange market its demand increases. It goes on increasing if more and more people purchase the US Dollar from foreign exchange market. When demand of anything increases (more people are coming to buy it) its price also increases with simultaneous effect. So with this demand and supply rule the exchange rate of foreign exchange market is determined.
Transfer function:
Another important function of foreign exchange market is to transfer foreign moneys between countries. The country with more foreign exchange reserves is considered to be financially strong. The main credit instruments used for payments in foreign currencies are letter of credit, bills of exchange e.g. Banker’s draft, Telegraphic transfer.
Credit function:
Another function of the foreign exchange market is to provide credit to the importer who is a debtor. The credit facility is provided through the bill of exchange.
Hedging:
Foreign exchange market gives the option to the Investor to make payment of the foreign exchange reserves purchased from him at the spot rate (prevailing exchange rate of the market) or the fixed determined rate at the future date. When investor opts for the fixed determined rate, it is called hedging in the foreign exchange market.
Speculation:
In speculation business an investor foresee that the price of a particular currency will increase in the future so he purchases that currency and sells it when the price goes up in the foreign exchange market.
