FUNCTIONS OF FOREIGN EXCHANGE MARKET

Explain the three major functions of Exchange market

1. Converting one national currency to another or transferring currency from one country to another Functions of foreign exchange market

2. Functions of foreign exchange market

3. It transfers purchasing power between the countries involved in the transaction. This function is performed through credit instruments like a)bills of foreign exchange, b)bank drafts (it is a payment on behalf of a payer that is guaranteed by the issuing bank) c)telephonic transfers (TT) (Electronic method of transferring funds) Transfer f unction

4. It provides credit for foreign trade. Credit is required for this period in order to enable the importer to take possession of goods, sell them and obtain money to pay off the bill . Banker act as a middlemen between exporter and importer Purchase of bill of exchange Direct loans Issue of L/C Credit function

5. Hedging refers to coverage of export risk . 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 hedging. The purpose of hedging is to avoid losses that might be caused due to exchange rate variations in the future . Hedging function