The Role of Forex in the World of Trade
The Foreign Exchange Market or commonly known as Forex plays a vital role in the global trade market. It determines the strength of the economy and development itself. The two parties, i.e., buyers and sellers, are generally the ones to determine the price. In currency markets, these roles may vary among different parties, central banks, and governments, financial centres, and institutions, freelancers or independent investors. This is the global marketplace for currencies that are trading. Traders use the changing exchange rates to their ultimate advantage.
Foreign Exchange Market and its Role
The foreign exchange market is the place where the buyers and sellers are indulged in the buying and selling of foreign currencies, respectively. It is all about the conversion of one currency to another. Forex plays the role of transferring the purchasing power from the country to the other. Foreign exchange transactions help in the inflow and outflow of foreign exchange.
Role of Forex in Global Trade
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1. Transfer of Purchasing Power and Clearing Function:
The primary purpose of the foreign exchange market is to carry out the conversion of one currency into another i.e. payment done between exporters and importers. For example, the Indian rupee is converted into the U.S. dollar and vice versa. In performing this particular function, several credit instruments are used that are telegraphic transfers, bank drafts, and foreign bills. Telegraphic transfer is the quickest method helping to transfer the purchasing power.
2. Credit Function:
The foreign exchange market even provides credit to both national and international to promote foreign trade. It is vital as sometimes, the international payments get delayed. When foreign bills of exchange are implemented in global payments, a credit for about 3 months until the maturity of the same is required.
3. Hedging Function:
Another function of the foreign exchange market is to face foreign exchange risks. This means covering a foreign exchange risk arising out of the changes in exchange rates. With the help of this function, the foreign exchange market protects the interest of the persons who are dealing in the market from any unforeseen changes in the exchange rate. The exchange rates under the free market can vary, going up and down.
