Function of foreign Exchange market:
Following are the important functions performed by the foreign exchange market:
(a) Facilitates Transfer: The basic function of the foreign exchange market is to transfer purchasing power between countries i.e. to provide a platform whereby currency of one country is converted into currency of another country at the prevailing exchange rate.
(b) Facilitates Credit: Foreign bills of exchange used in the international payments normally have maturity period of three to six months. The foreign exchange market performs the function of providing credit to promote foreign trade. Credit is provided on the basis of such foreign bills of exchange.
(c) Facilitates Hedging: In a situation of exchange risks, the foreign exchange market performs hedging function. Hedging is the act of equating one’s assets and liabilities in a foreign currency to avoid the risk resulting from future exchanges in the value of foreign currency.
(d) Facilitates trade and investment: International trade and investment would not have been possible without the arrangements or mechanism for buying and selling foreign currency. The foreign exchange market is required to undertake import/export transactions.