Foreign Exchange Market
Foreign exchange market is a part of money market I financial centers and considered as a place where foreign exchange transactions take place. In the words of “Kindle Berger”, Foreign exchange market is a place where foreign moneys are bought and sold.
There are three main functions of foreign exchange market:
Transfer of Exchange:
The basic and primary function of foreign exchange market is to transfer purchasing power between countries. The transfer function is performed through T.T., M.T., Bank draft, Bill of Exchange, Letter of Credit, etc.
Another important function of foreign exchange market is to provide credit to the importer (debtor). The exporters drew the bill of exchange on importers or on their bankers. On acceptance of the bills by the importers of their banker, on exporters 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.
The foreign exchange market performs the hedging function by covering the risks of foreign exchange transactions. There are frequent fluctuations in exchange rates. If the rates favorable, the exporter will gain and vice versa. In order to avoid the risk involved, the foreign exchange market provides hedgers or actual claims through forward contracts in exchange against such fluctuations.