Foreign Exchange Market
Foreign exchange market is a worldwide over the counter (OTC) market where the transactions of foreign currencies are made. It is one of the largest financial markets in which the exchanges of foreign currencies take place with different exchange rates. The foreign currencies can be purchased by paying national currency in the forex market.
There are some dealers’ instruments which can also be exchanged in terms of foreign currencies in the forex market such as- bank drafts, exchange bills, telegraphic transfers etc. Foreign exchange market facilitates the international trade and investment to conduct business activities by converting the domestic currency into international currency. It also assists to carry out the trade where low- yielding currencies are borrowed by the investors and high yielded currencies are lent which is useful to reduce the potential losses.
Functions of foreign exchange market
Transfer function – It is the major function of the foreign exchange market. The market transfers the purchasing capacity between two countries and currencies as well as other various instruments such as bank drafts, bills of exchange, and mail transfers can also be used to transfer the purchasing power.
Credit functions - The foreign marketers such as Importers and Exporters are provided credit by the foreign exchange market due to which they can make international transaction without any difficulty.
Hedging Functions - It is the most crucial function of foreign exchange market in which the business traders are protected from the foreign exchange risk and they can make the transactions without any risk because there are not the matters of losses as well as profits in the market transactions.
Instruments of foreign exchange market
There are some forex market instruments which are used to perform the above market functions which are:
Cheques and Bank drafts - The traders who are doing the transactions of foreign exchanges can use the bank drafts and bank cheques for the payment. The particular bank draws the cheques but not the particular person.
Bills of exchange - These are foreign bills of exchange which are considered as unconditional order in a writing form in which one party addresses to another party in which the name of the party to whom a particular amount is to be paid either on a specified date or on demand.
Mail Transfers - Basically mail transfer refers to the transformation of the fund from one place to another place or from one account to another account with the help of mail transfers. Basically airmails are used for the international transactions.
Telegraphic Transfers- It is the fast and reliable process to transfer fund from one place to another place with the help of telex and cable.
Foreign exchange market is the world- wide over the counter market where the transactions of foreign currencies are made different foreign exchange rates by using various foreign exchange market instruments such as- Bills of exchange, cheques and bank drafts, mail transfers and telegraphic transfers.