Functions of Foreign Exchange Market | What are the functions of foreign exchange market?

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Foreign exchange market refers to the market where different currencies are exchanged (Bought & Sold). So friends, in today’s article we are going to know about the Functions of Foreign Exchange Market. So let’s discuss in details.

What is Foreign Exchange Market?

Foreign Exchange Market Definition – The Foreign Exchange Market is a market in which foreign currencies or foreign exchanges are bought and sold against one another.

Functions of Foreign Exchange Market

The most important Functions of Foreign Exchange Market are given in the following ground –

• Transfer of Purchasing Power – The primary function of foreign exchange market is the transfer of purchasing power from one country to another country and from one currency to another currency. Hence, it helps international movement of capital.

• Provision of Credit – International trade depends on to a great extend on the credit facilities. Another most important functions of foreign exchange market is to provide credit facility, both the national and international traders to promotion the international trade.

• Provision of hedging Facilities – Hedging refers to covering of foreign trade risks. The foreign exchange market provides a mechanism to exporters and importers to guard themselves against losses arising from fluctuations in exchange rate.


• Credit Function – The foreign exchange market provides credit facilities for export and import of goods and services across different countries of the world.

• Hedging Function – The foreign exchange market gives protection against the risk related to the variations in foreign exchange rate. It is the most important function of the foreign exchange market.

• Transfer function – It means that the foreign exchange market transfers the purchasing power in terms of foreign exchange across different countries of the world.

Types of Foreign Exchange Market

Following are the important types of foreign exchange market –

• Retail Market – In the retail foreign exchange market the individual and and firms who require foreign currency can buy it and those who acquired foreign currency can sell it.

• Interbank Market – It serves to smoother the excessive purchases or sales made by individual banks.

• Spot Market – In the spot exchange market day-to-day rate of exchange is determined.

• Forward Market – In the forward exchange market future exchange rate is determined. The important dealers in the foreign exchange market are commercial banks, Central bank and treasury, brokers and acceptance houses.


So friends, this was the concept of Functions of the Foreign Exchange Market. Hope you get the full details about it and hope you like this article.

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