The Foreign Exchange Market and Its Main Functions
The Foreign Exchange Market and Its Main Functions

The Foreign Exchange Market and Its Main Functions

The Foreign Exchange Market is a market where buyers and sellers trade foreign currencies. Simply stated, a foreign exchange market is a market where various countries' currencies are bought and sold.

The FOREX market trading is a financial network that allows for global exchanges. The key functions of the foreign exchange market, which are the product of its operation, are as follows:

  • Function of Transfer

The movement of funds (foreign currency) from one country to another for payment settlement is the most essential and noticeable feature of the foreign exchange market. It essentially involves the exchange of one currency for another, with FOREX's function being to shift purchasing power from one country to another.

For example, if an Indian exporter imports goods from the United States and the payment is to be made in dollars, FOREX trading online would facilitate the conversion of the rupee to the dollar. Credit instruments such as bank drafts, foreign exchange bills, and telephone transfers are used to carry out the transfer purpose.

  • Function of Credit

FOREX offers importers a short-term loan to help with the seamless transfer of products and services from one country to the next. An importer can fund foreign purchases with credit. If an Indian company wants to buy machinery in the United States, it can pay for it by issuing a bill of exchange in the foreign exchange market with a three-month maturity.

  • Function of Hedging

A foreign exchange market's third role is to hedge foreign exchange risks. Foreign exchange participants are also concerned about variations in exchange rates, or the price of one currency in terms of another. The party affected by the change in the exchange rate could benefit or lose money.

As a result of this, FOREX trading online offers services for hedging expected or current claims/liabilities in return for forward contracts. A forward contract is a 12-week deal to purchase or sell foreign exchange for another currency at a price decided upon today at a future date. As a consequence, no money is exchanged during the contracting process.

Wrapping Up

In the foreign exchange markets, there are many dealers, with banks being the most prominent. Exchange Banks are banks that have branches in various countries that facilitate foreign exchange. Now that you've learned about the various functions of foreign exchange markets in India, it's time to put your experience to use, open a demat trading and trading account with Motilal Oswal today.

 

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