Exchange Market Functions

The foreign exchange market, Forex, spans the globe with prices moving and currencies traded in anywhere at every hour in every business day. The participants are able to buy, sell, exchange and conjecture on the currencies in the market. Currencies are important to the people because they need currencies to do the foreign trade and business. For example, if you are living in Malaysia and you want to buy white wine from France, either you or the company must pay in euro currencies in order to get white wine from France. The same applies to travel. A French tourist in Japan can’t pay in euros to see Mt. Fuji because it is not locally accepted currency. Meanwhile, the tourist has to exchange euros for the local currency, which is yen, at the

For example, attain the transfer of purchasing power between two countries. This transfer of purchasing power is effected through a variety of credit instruments, such as telegraphic transfers, bank draft and foreign bills. To perform the transfer function, the foreign exchange market has to carries out payments internationally by clearing debts in both directions concurrently, alike to domestic clearing. Another function of the foreign exchange market is to provide credit for both national and international, in order to promote foreign trade. Apparently, when foreign bills are used in international payments, it required a minimum credit for about three month till the maturity date. The third function of the foreign exchange market is to hedge foreign exchange risks. Hedging means the avoidance of a foreign exchange risk. When the price changes of one currency due to the another currency, there may have a gain or loss to the party concerned. Therefore, a person or a firm is in charge a great exchange risk for a huge amounts of net claim and net liabilities. Exchange risk is better to be avoided or reduced. The exchange market provides facilities for hedging anticipated, actual claims or liabilities through forward contract in exchange. A forward contract will normally be about three months contract to buy or sell foreign exchange against another currency in a price agreed at some fixed date in the future. During the time of the contract, money is not allowed to flow. However, the contract makes it possibly to ignore any changes in exchange rate. Consequently, the existence of a forward market make it likely to hedge an exchange position. The important foreign exchange instruments such as telegraphic transfer, foreign bills of exchange, letter of credit, bank draft and others used in the foreign exchange market to carry out its