Discuss And Explain The Functions Of The Foreign Exchange Market (Essay Sample)

Student’s Name:
Instructor:
Subject:
Date:
Functions of the Foreign Market Exchange
There is the provision of both institutional and physical structure by the foreign exchange market. This structure provides a platform through which money there is the exchange of money from one country to the other. Foreign exchange also determines the exchange rates between different currencies as well as make sure physical exchange of foreign currencies is completed. Foreign exchange transactions are agreements between sellers and buyers regarding the amount one currency would fetch if bought or sold using another currency.
An economy’s strength affects the supply and demand of foreign currency. If an economy is strong and fast growing it has the tendency of attracting foreign currency. As a result, its currency becomes strong. Also, an outflow of foreign exchange happens where the economy has weaknesses in its economy. The flow of income in nations that are net exporters tends to outflow further than the outflow of expenditures of the same economy. Some of these nations, for example, China have strong currencies and economies. Politics also plays a very significant role towards influencing exchange rates. Many currencies across the world have a tradition of behaving is some certain manner. For instance, the haven currency also known as the Swiss francs tends to remain stable when the political tension any place globally unlike the dollar, which tends to shift in case of such calamities. The rates of exchange can additionally fluctuate when governmental regimes change. Additionally, other external factors and war result to changes in the exchange rates as well.
There are various institutions that deal with the forex market. The most essential among them are the banks (Shamah n.p.). These financial institutions that manage forex trading have branches with significant balances in various nations they have branches. Through their correspondence and the branches, the services provided by these banks become accessible to everyone globally. These banks are usually known as exchange banks. These banks rebate and offer foreign exchange bills, impact telegraphic exchanges, issue bank drafts as well as other credit instruments. Also, the banks gather and discount sums for such records.
Different merchants in forex trade deal with the brokerage of bills and they are responsible for helping sellers and purchasers who have the foreign bills to eventually get together. They are middle people, and dissimilar to financial institutions are not direct merchants (Shamah n.p.). There is another class of merchants who deal with foreign exchange known as Acceptance houses. This group assists foreign remittances with the help of accepting bills in place of their clients. A country's national bank and treasury are likewise merchants in foreign exchange trade. Both may mediate in the market every so often (Shamah n.p.). Today, nonetheless, those authorities oversee trade rates and actualize trade controls in different ways. There are countries that have strict exchange control systems, for instance, India where is no such thing as a foreign exchange market.
One function of the FOREX market is the transfer function. One of the most visible and fundamental functions of the forex market is the movement of funds, in the form of foreign currency, from one nation to another for the purpose of settling pending payments (Shamah n.p.). The transfer function incorporates the transfer of one currency to a different currency, whereas, in the role of forex, it is to transfer the power of purchase from one nation to another nation. For instance, if the exporter of commodities from America imports goods to the UK and the total amount of payments required are to done in the form of Euros, then the FOREX will facilitate this transaction, which incorporates the conversion of the dollar to become euros (Shamah n.p.). There are ways of effecting handover of purchasing power with the help of credit instruments, for example, foreign bills, bank drafts and telegraphic transfers of currencies. When executing the transfer functions, the forex market handles payments internationally through debt clearing mechanisms for both the domestic and analogous earnings made. These payments are conducted simultaneously.
Foreign exchange markets function as credit facilities. They provide credit on a short-term basis to importers to make sure the flow of services and goods is smooth and well-coordinated from one nation to the other (Shamah n.p.). For instance, an American company that wants to purchase goods in Australia. The company can pay for the purchase with the help of providing bills of exchange provided for in the foreign exchange market. These bills essentially have a maturity period of three months.
The hedging function is the other foreign exchange market function. The parties that are involved in this type of foreign exchange are, in most cases, afraid of the fluctuations that take place within the exchange rates (Clark and Ghosh 89). For example, the price of one currency may fluctuate with respect to that of a different currency. The changes in the rates of exchange results in either a loss or gain for the concerned part...