Question

What are the major purposes of the foreign exchange markets?

Answer 1

The foreign exchnage market is the market, is not a place infcat it is a system where a large mumber of currencies are traded and exchnaged freely. It is just not confined to the single country or a few countires but it involves a large number of currencies and these currencies are traded freely in the foreign exchange market.

The major purposes of foreign exchange are:

• The foreign exchange market transfers the purchaisng power between countries: With the help of credit instrumnets like bank drafts and bills of foreign exchange this function is performed.
• It provides the credit period needed to make payments : when the importers import goods, the bills of exchange helps to make international payments and generally provide a period of 3 months to make the interntaional payments.
• It also provides the benefits of hedging : when the exporters and importers enter into an agrement to make future payments at a locked in price which is the current price to avoid losing money due to the currency or exchange rate fluctuations . This process is called hedging.