What Is A Foreign Exchange Market And Its Functions?

A foreign exchange market is a place in which foreign exchange transactions take place. In other words it is a market where foreign money are bought and sold. It is a part of money market in the financial center.

The basic and primary function of a foreign exchange market is to transfer purchasing power between countries. The transfer function is performed through T.T, M.T, Draft, Bill of exchange, Letters of credit, etc. the bill of exchange is the most important and effective method of transferring purchasing power between two parties located in different countries.

Another important function of foreign exchange market is to provide credit to the importer debtor. The exporters draw the bill of exchange on importers on their bankers. On acceptance of the bills by the importer or their bankers, the exporter will get the money realized on the maturity of the bills. In case the exporters are anxious to receive the payment earlier, the bills can be discounted from their bankers, or foreign exchange banks or discount houses.

The foreign exchange market performs the hedging function covering the risks on foreign exchange transactions. There are frequent fluctuations in exchange rates. If the rate is favourable, the exporter will gain and vice verse. In order to avoid the risk involved, the foreign exchange market provides hedges or actual claims through forward contracts in exchange against such fluctuations. The agencies of foreign currencies guarantee payment of foreign exchange at a fixed rate. The exchange agencies bear the risks of fluctuation of exchange rates.

The foreign exchange market serves two main functions in the country.  The main and primary motive of the foreign exchange market is to convert the money of one country into the money of another country. The second purpose of the foreign exchange is to provide the security of the risk against the foreign exchange.  Which are the results of constantly changing exchange rates. Every country has its own currency which is used to quote the price of goods and services. For example dollar is used in the United States of America, pound is used in the United Kingdom, in the European member countries Euro is the common currency which is used between the European nations and similarly yen in the Japan.

So every country must have their own currency which is essential to trade international across the different countries of the world. When any tourist goes to any other country for any purpose he has to change his currency with the currency of country where he needs the money for carrying different functions. The exchange rate is the phenomena by which the currency of one country is converted to the currency of another country. So the foreign exchange market serves the country in many ways.

Is a foreign market and foreign exchange market the same

Functions of foreign exchange

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