- 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.
Wednesday, April 29, 2009
Functions of Foreign Exchange Market
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