Explain the three major functions of Exchange market

1. Converting one national currency to
another or transferring currency
from one country to another
FUNCTIONS OF FOREIGN
EXCHANGE MARKET

2. TRANSFER
FUNCTIONS
CREDIT
FUNCTIONS
HEDGING
FUNCTIONS
FUNCTIONS OF
FOREIGN EXCHANGE MARKET

3. It transfers purchasing power between the
countries involved in the transaction.
This function is performed through credit
instruments like
a)bills of foreign exchange,
b)bank drafts (it is a payment on behalf of a payer that is guaranteed by the
issuing bank)
c)telephonic transfers(TT)(Electronic method of transferring funds)
TRANSFER FUNCTION

4. It provides credit for foreign trade. Credit is
required for this period in order to enable the importer to
take possession of goods, sell them and obtain money to
pay off the bill.
Banker act as a middlemen between exporter and
importer
a) Purchase of bill of exchange
b) Direct loans
c) Issue of L/C
CREDIT FUNCTION

5. Hedging refers to coverage of export risk.
When exporters and importers enter into an agreement
to sell and buy goods on some future date at the
current prices and exchange rate, it is called hedging.
The purpose of hedging is to avoid losses that
might be caused due to exchange rate variations in the
future.
HEDGING FUNCTION