Foreign Exchange and its Function

The foreign exchange market is an over- the – counter or decentralized market for trading of different currencies. The foreign exchange market determines the exchange rates for all the available currencies. It includes the aspects like exchanging currencies at the present rate, buying and selling goods and services. Now I will discuss about different functions of the foreign exchange market. 

Transfer Function

The basic and important function of the foreign exchange market is to properly facilitate the conversion currencies of different countries; it helps in converting one currency with respect to another currency. This is to attain the transfer of purchasing power between two different countries.  This transfer is affected by different kinds of credit instruments like telegraphic transfer, foreign bills and bank draft. For performing the transfers the exchange market carries payments internationally eliminating all debts simultaneously, domestic and analogous clearings are also done. 

Credit Function

Another important function of foreign exchange market is providing credit, both 

international and national for promoting foreign trade. When the foreign bills of exchange are used for international payments, a credit for 3 months i.e. at the time till maturity is required. 

Hedging Function 

Hedging is one of the important functions of foreign exchange market.  It is basically providing protection against foreign exchange risks. In the international market when the exchange rates change there may be a loss or gain for some concerned party, in these kinds of unfavorable situation a firm can take huge amount of exchange risks if there are high amounts of net liabilities that has to be met in foreign money. It is very important to eliminate or reduce foreign exchange risks as failing to do that can cause a great amount of problem in the world economy. So it is very important for the foreign exchange market to look after the risks as quickly as possible.

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