Functions of Foreign Exchange Market

• The foreign exchange market is the mechanism by which participants (to trade)
  transfer purchasing power between countries, obtain or provide credit for
  international trade transactions, and minimize exposure to the exchange rate
  changes.
• Transfer of purchasing power becomes necessary as international trade involves
  parties living in different countries, with their own currencies. Each party may want
  to deal in its own currency but for the trade or capital transaction to be invoiced
  one party must deal in a foreign currency.
• With the movement of goods between countries taking time, goods-in-transit must
  be financed. The foreign exchange market in such cases provides a source for credit.
• The foreign exchange market also provides hedging (Hedging is an investment
  strategy to minimize exposure to an unexpected business risk, while still allowing
  the business to profit from an investment activity) facilities to minimize exposure to
  the risks of exchange rate changes.