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Foreign Exchange Market ppt

Foreign Exchange Market ppt

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Functions of Forex Market
Functions of Forex Market

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Published by: carolsaviapeters on Feb 08, 2014
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02/08/2014

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Chapter III Foreign Exchange Market

By, Carol Peters Prabhu II B Com Mahesh College of Management

Thus it is a market in which the claims to foreign moneys are bought and sold for domestic currency. A foreign exchange market refers to buying foreign currencies with domestic currencies and selling foreign currencies for domestic currencies. Exporters sell foreign currencies for domestic currencies and importers buy foreign currencies with domestic .

According to Ellsworth. "A Foreign Exchange Market comprises of all those institutions and individuals who buy and sell foreign exchange which may be defined as foreign money or any liquid claim on foreign money". . Foreign Exchange transactions result in inflow & outflow of foreign exchange.

What Exactly Is Forex? With a daily trade volume of up to 4 trillion USD. forex is the largest financial market in the world. In comparison. the daily trade volume of the New York Stock Exchange is only USD 25 billion.  Its actual trade volume is more than 3 times the total trade volume of the stock and futures market! . There is an evident disparity in the trade volumes between forex and stock markets.

. “Forex trading is the buying of one currency and the selling of another simultaneously” Trading of foreign currency is done in pairs. money. e. for example.g.What is traded in the Forex Market? The answer is simple. Buying and selling foreign currencies is like investing in a country’s stock. you are actually acquiring a stake in Japanese economy. When you buy Japanese Yen. Euro against US Dollars (EUR/USD) or British Pounds against Japanese Yen (GBP/JPY).

Foreign exchange is also referred to as forex market  Participants are importers. letter of credit etc. commercial banks. are . tourists and investors. exporters. bank draft. telegraphic transfer. traders and speculators. brokers and central banks Foreign bill of exchange.

The foreign exchange market performs the following important functions: (i) to effect transfer of purchasing power between countries. .hedging function.credit function.transfer function. (ii) to provide credit for foreign trade . (iii) to furnish facilities for hedging foreign exchange risks .

. the foreign exchange market carries out . such as telegraphic transfers.e. i. In performing the transfer function.1. This transfer of purchasing power is effected through a variety of credit instruments. to accomplish transfers of purchasing power between two countries. bank drafts and foreign bills.Transfer Function The basic function of the foreign exchange market is to facilitate the conversion of one currency into another.

Credit Function The foreign exchange market also provides credit to both national and international.2. Mr. to promote foreign trade. Obviously. A can get his bill discounted with a foreign exchange bank in New York and this bank will transfer the bill to its correspondent in India . the international payments get delayed for 60 days or 90 days. till their maturity. when foreign bills of exchange are used in international payments.  For e.g. It is necessary as sometimes. a credit for about 3 months. is required.

we mean covering of a foreign exchange risk arising out of the changes in exchange rates. Under this function the foreign exchange market tries to protect the interest of the persons dealing in the market from any unforeseen changes in exchange rate. this can either bring gains or losses to concerned parties. By hedging. Hedging guards the interest of both exporters as . Hedging Function A third function of foreign exchange market is to hedge foreign exchange risks. The exchange rates under free market can go up and down.3.

Hedging can be done either by means of a spot exchange market or a forward exchange market involving a forward contract. No money passes at the time of the contract. . But the contract makes it possible to ignore any likely changes in exchange rate. “A forward contract which is normally for three months is a contract to buy or sell foreign exchange against another currency at some fixed date in the future at a price agreed upon now.” The existence of a forward market thus makes it possible to hedge an exchange position.

Thank You…. Thank You .

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