FOREIGN EXCHANGE MARKET
Foreign Exchange Market is the market in which foreign currencies are bought and sold. The buyers and sellers include individuals, firms, foreign exchange brokers, commercial banks and central banks.
The transactions in the foreign exchange market are not limited to the only one or few foreign currencies. In fact, there are a large number of foreign currencies which are traded, converted and exchanged in the foreign exchange market.
FUNCTIONS OF FOREIGN EXCHANGE MARKET
There are mainly three kinds of functions that a foreign exchange market do, they are as follows
- Transfer Function
- Hedging Function
- Credit Function
01. Transfer Function
Foreign Exchange market transfers the purchasing power between the countries involved in the transaction. This function is performed through credit instruments like bills of foreign exchange, bank drafts, telephonic transfers, etc.
02. Hedging Function
When exporters and importers enter into an agreement to sell and buy goods on some future date at the current prices and exchange rate, it is called as hedging.
03. Credit Function
Foreign Exchange market provides the credit for foreign trade bills of exchange, with a maturity period of three months are generally used in the foreign exchange market.
KINDS OF FOREIGN EXCHANGE MARKET
There are essentially two kinds of foreign exchange market, they are as follows
01. Spot Market
In the spot market, the receipts and payments are made immediately i.e. transaction day + 2 days is permitted usually.
02. Forward Market
In forward market, the sale and purchase of foreign currency is settled on the date which is agreed by both parties.