The basic duty of the international exchange market is to move purchasing power in between countries, i.e., to facilitate the counter of one money into another. The transfer role is performed with the credit instruments like, international bills the exchange, financial institution draft and telephonic transfers.

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2. Credit Function:

Another role of foreign exchange market is to administer credit, both national and also international, come promote foreign trade. Receipt of exchange offered in the international payments usually have a maturity period of 3 months.

Thus, credit transaction is forced for that period to permit the importer to take it possession the goods, offer them and obtain money come pay turn off the bill.

3. Hedging Function:

In a situation of exchange risks, the international exchange industry performs the hedging function. Hedging is the plot of equating one’s assets and also liabilities in foreign money to prevent the risk resulting native future changes in the worth of foreign currency.

In a free exchange market, when the value of foreign currency varies, there may be a get or loss come the traders concerned. To protect against or mitigate this exchange risk, the exchange market gives facilities because that hedging guess actual insurance claims or liabilities with forward contract in exchange.

Forward contract is a contract of to buy or marketing foreign money at part fixed date in future in ~ a price agreed top top now. Thus, without transferring any kind of currency, the forward contract provides it feasible to ignore the likely readjust in the exchange rate and avoid the feasible losses from such change.

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