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DEFINITION According to kindleberger, foreign exchange market is a place where foreign moneys are bought and sold. The exporters sell the foreign currency and importers buy them.
Electronic market: foreign exchange does not have a physical place. It is a market whereby trading in foreign currencies takes place through the electronically linked network of banks, foreign exchange brokers Geographical dispersal: the foreign market is vastly dispersed throughout the leading financial centers of the world such as London, New York, Paris, Zurich, Amsterdam, Tokyo, Hong Kong
Transfer of purchasing power: Foreign exchange aims at permitting the transfer of purchasing power denominated in one currency to another currency where one currency is traded for another. Intermediary: The market act as an intermediary between sellers and buyers of foreign exchange. Volume: A special feature of the foreign exchange market is that out of the total trading transactions that takes in the foreign exchange market around 95% takes from the cross border purchase and sale of assets.
Provision of credit: Foreign exchange markets provide credit through specialized instruments such as bankers acceptances and letters of credit. Minimizing risk: It helps exporters and importers in foreign trade to minimize their risks. This is done through the provision of hedging facilities.
The foreign exchange market is classified on the basis of the nature of transactions in 2 categories:
Spot market: The sales and purchases transactions settled with in two days Forward market: In this they deal for exchange after 90 days
Hedging function: a third function of foreign exchange market is to hedge foreign exchange risks. In free exchange, market when exchange rate, i.e., the price of one currency in terms of another currency, change may be gain or loss to the party concerned