Functions of Foreign Exchange Market

Consolidation & Fragmentation Of Fx Markets

2006 continues to provide dramatic evidence of the rapid transformation that is sweeping the vast and growing FX asset class that now exceeds $2 trillion in daily volume. Significant investments are being made on the part of banks, brokerages, exchanges and vendors -- individually and in joint ventures -- to automate, systematize and consolidate what has historically been a manual, fragmented and decentralized collection of trading venues. Combine this with the shifting ownership of the major FX trading exchanges, and one needs a scorecard to keep track of the players, their strategies and target markets. Fragmentation in markets results from competition based on business and technology innovations. As markets centralize or consolidate to gain scale, certain segments become underserved and are open to alternative trading venues that more specifically meet their trading needs.

           

Opportunities From Around the World

Over the last three decades the foreign exchange market has become the world's largest financial market, with over $2 trillion USD traded daily. Forex is part of the bank-to-bank currency market known as the 24-hour interbank market. The Interbank market literally follows the sun around the world, moving from major banking centres of the United States to Australia, New Zealand to the Far East, to Europe then back to the United States.

Functions of Foreign Exchange Market

            The foreign exchange market is a market in which foreign exchange transactions take place. In other words, it is a market in which national currencies are bought and sold against one another.

           

A foreign exchange market performs three important functions:

o   Transfer of Purchasing Power:

            The primary function of a foreign exchange market is the transfer of purchasing power from one country to another and from one currency to another. The international clearing function performed by foreign exchange markets plays a very important role in facilitating international trade and capital movements.

o   Provision of Credit:

            The credit function performed by foreign exchange markets also plays a very important role in the growth of foreign trade, for international trade depends to a great extent on credit facilities. Exporters may get pre-shipment and post-shipment credit. Credit facilities are available also for importers. The Euro-dollar market has emerged as a major international credit market.

o   Provision of Hedging Facilities:

            The other important function of the foreign exchange market is to provide hedging facilities. Hedging refers to covering of export risks, and it provides a mechanism to exporters and importers to guard themselves against losses arising from fluctuations in exchange rates.