Function and structure of the fx market


function and structure of the fx market

the market in which sale and purchase of foreign currency is settled on a specified future date at a rate agreed upon today. (i) Spot Market: Spot market refers to the market in which the receipts and payments are made immediately. Thus, no money is exchanged at the time of the contract. There is a wide variety of dealers in the foreign exchange market. This transfer of purchasing power is effected through a variety of credit instruments, such as telegraphic transfers, bank draft and foreign bills. The foreign exchange market is merely a part of the money market in the financial centers is a place where foreign moneys are bought and sold. A forward contract is usually a three month contract to buy or sell the foreign exchange for another currency at a fixed date in the future at a price agreed upon today.

Transfer Function: It transfers purchasing power between the countries involved in the transaction. Generally, a time of two business days is permitted to settle the transaction. Transfer Function : The basic function of the foreign exchange market is to facilitate the conversion of one currency into another,.e., to accomplish transfers of purchasing power between two countries. Kinds of Foreign Exchange Markets : Foreign exchange markets are classified on the basis of whether the foreign exchange transactions are spot or forward accordingly, there are two kinds of foreign exchange markets: (i) Spot Market, (ii) Forward Market. These banks discount and sell foreign bills of exchange, issue bank drafts, effect telegraphic transfers and other credit instruments, and discount and collect amounts on the basis of such documents. For example, If the exporter of India import goods from the USA and the payment is to be made in dollars, then the conversion of the rupee to the dollar will be facilitated by forex.

Meaning: Foreign exchange market is the market in which foreign currencies are bought and sold. Today, however, those authorities manage exchange rates and implement exchange controls in various ways. This function is performed through credit instruments like bills of foreign exchange, bank drafts and telephonic transfers. The buyers and sellers of claims on fore' money and the intermediaries together constitute a foreign exchange market. In a free exchange market when exchange rate,. Hedging means the avoidance of a foreign exchange risk. The most important amongst them are the banks. The central bank and treasury of a country are also dealers in foreign exchange. They help effect foreign remittances by accepting bills on behalf of customers. Forward exchange rate becomes useful for both the parties involved in the transaction. In performing the transfer function, the foreign exchange market carries out payments internationally by clearing debts in both directions simultaneously, analogous to domestic clearings.

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