Question

Write about the Foreign Exchange Market. Describe the functions of the foreign exchange market

Answer 1

1st part:

Foreign exchange market (Definition):

It is the place in which both the buyers and sellers get involved in buying and selling foreign currencies. In simple words, it can be said that the market place which witnesses the buying and selling of the different currencies are called a foreign exchange market. The most known foreign exchange market as FOREX is exchanged around the globe.

2nd part (Functions):

The functions of the foreign exchange market are divided into three parts:
1.   Transfer function
2.   Credit function
3.   Hedging function
  
Describe:

1.   Transfer function: The main function under the category of foreign exchange market is to transfer the foreign currency from one part of the country to another. It is used for the settling of the payment process and basically converts the currency to another. It achieves the purchasing power by transferring between two countries. Credit instrument of different varieties is performed by transferring purchasing power like bank draft, foreign bills, etc.
2.   Credit function: It is generally used for the purpose of international payments that are used for foreign trade to provide credits. For international payment, when the foreign bill of exchange is used it gives the maturity period of three months. To take the ownership of the goods, credit is required in such a period to allow the importer for selling and receiving money to paying off the bill.
3.   Hedging function: For making the foreign exchange market out of risk hedge function is used. When the change in exchange rate price occurs at one currency with respect to another, gain or loss may be witness to the party concern for such a free exchange.
To avoid the risk, exchange market provides facilities like forwarding contracts for protecting actual claims or liabilities. It is basically a three months contract for buying and selling foreign exchange on some future fixed date with the price that is negotiated on today’s date. There remain no possibilities for money exchange at the time of the contract.
There exist several dealers for the foreign exchange market but among them, bank of different country branches plays the vital role for the facilitation of foreign exchange and such service of a bank can be called as exchange banks.