Main functions of the foreign exchange market

In simple words, the foreign exchange market is a financial exchange zone for fiat currencies. Forex traders buy and sell international currencies in this market and these currencies are always traded in pairs. Visit multibankfx.com

In order to trade in the forex market, you will have to find a dealer or a forex broker. There are many options to choose from, however, it is worth mentioning that most forex brokers are banks. Generally, banks tend to have branches at international locations and thus they have a large corpus of funds in various currencies. These corresponding branches often labelled as Exchange Banks enable access to the forex market. To do this, these banks facilitate numerous processes such as issuing bank drafts, conducting telegraphic transfers among other credit instruments, and of course, discounting, selling, and collecting forex bills. 

While banks are direct dealers, there are also bill brokers who act as intermediaries. They help in connecting the right buyers with their respective sellers who wish to carry out a trade. 

The forex market has to carry out certain operations in order to allow the exchange of currencies globally. These are also the main functions of the forex market: 

• Function of Transfer

Without the forex market, it would be very difficult to trade internationally. This is because a key and perhaps the most important aspect of the forex market is that it facilitates the movement of foreign currency from one nation to another. To settle payments through forex, a trader/business can exchange a currency for another. 

Let’s understand this better with an example. Say an English exporting company wants to import products from the United States and the payment for it should be made in dollars. Then via online forex trading, Euros or pound sterling would have to be converted to dollars. Further to enable the transfer of funds, credit instruments like bank drafts, foreign exchange bills, and telephone transfers come into the picture. 

• Function of Credit

In order to ease the import process of goods, products, and even services, short-term forex loans are offered to importers. For example, a Dubai-based company that wishes to buy equipment in Japan may use a bill of exchange for the purchase. The bill of exchange, issued by the forex market, would have a maturity period of three months or more. 

• Function of Hedging

Hedging forex-related risks is another key feature of the foreign exchange market. Price fluctuations, changes in the exchange rate, or an unprecedented fall in currency prices often concern traders as the stakes are high and one may profit greatly or lose severely. 

To safeguard against unexpected scenarios, most online forex trading brokers roll out hedging offers for existing claims and liabilities in exchange for forwarding contracts. What are forward contracts to mt4 white label? These are deals of usually 12 weeks that allow the sale or purchase of one currency for another at a pre-decided rate at a particular date in the future. Note that in this process, there’s no exchange of money.  Banks are the most important forex brokers as they have international branches that can facilitate foreign exchange. Since you’re now at the end of this article, we hope that you’ve learned about the functions of forex markets and are thus ready to trade. Open a Demat trading account with Multibank Group and start trading!