Question

What is the foreign exchange market is used for and when do firms use the foreign exchange market?

Answer 1

Uses of foreign exchange market:

1. To transfer finance, purchasing power from one nation to another. Such transfer is affected through foreign bills or remittances made through telegraphic transfer. (Transfer Function).

2. To provide credit for international trade. (Credit Function).

3. To make provision for hedging facilities, i.e., to facilitate buying and selling spot or forward foreign exchange. (Hedging Function).

Foreign bills of exchange, telegraphic transfer, bank draft, letter of credit, etc., are the important foreign exchange instruments used in the foreign exchange market to carry out its functions.

Why firms use foreign exchange market:

There is a reason why forex is the largest market in the world: It empowers everyone from central banks to retail investors to potentially see profits from currency fluctuations related to the global economy. There are various strategies that can be used to trade and hedge currencies, such as the carry trade, which highlights how forex players impact the global economy.

The reasons for forex trading are varied. Speculative trades – executed by banks, financial institutions, hedge funds, and individual investors – are profit-motivated. Central banks move forex markets dramatically through monetary policy, exchange regime setting, and, in rare cases, currency intervention. Corporations trade currency for global business operations and to hedge risk.