by Scope
Transfer Function
This function is to transfer finance and purchasing power from one country to another country. Through foreign bills or remittances which were made through telegraphic transfer, such type of transfer gets affected.
Hedging Function
This function is for hedging facilities such as; facilitate buying and selling spot or forward foreign exchange. Hedging refers to the “foreign exchange risk avoidance” as in foreign exchange market there might be gain or loss to the party because of change in the price of one currency in terms of another currency. In case of huge amount of net claims or net liabilities in foreign exchange then a person or a firm as the case may undertake a high exchange risk.
Such exchange risk should be reduced. In exchange, through forwarding contracts, foreign exchange market provides such facilities for anticipated hedging. A forward contract is a type of contract related to buying or selling foreign exchange against another currency in future at the fixed date on the agreed price. This type of contract makes it possible to avoid changes in exchange rate. This forward market helps in hedging exchange position.
Credit Function
This function is to issue credit for the purpose of international trade.
Foreign Exchange Markets helps in determining the value of foreign savings. It is a marketplace where the foreign money is bought and sold and we can also say it is a type of institutional arrangement where the foreign currencies are bought and sold. Under this, importers buy the foreign currency which is sold by the exporters.
In financial centers, this type of market merely forms a part of money market where the foreign money is bought and sold. Foreign exchange market is not restricted to any geographical area. It is a market for foreign currencies.
In foreign exchange markets, there are a wide variety of dealers such as banks. Banks which deal in foreign exchange have their branches in different countries. These are also called as “Exchange Banks” from where the services are available in all over the world.
Significance
- It acts as a central focus whereby prices are set for different currencies.
- With the help of foreign exchange market investors can hedge or minimize the risk of loss due to adverse exchange rate changes.
- Foreign exchange market transfers purchasing power across different countries, which results in enhancing the feasibility of international trade and overseas investment.
- Foreign exchange market allows traders to identify risk free opportunities and arbitrage these away.
- It facilitates investment function of banks and corporate traders who are willing to expose their firms to currency risks.
