Foreign Exchange Market The term market has been interpreted in Economics as the place where both the

buyers as well as the sellers meet and they buy and or sell goods. The foreign exchange market is a place where the transactions in foreign exchange are conducted. In practical world the external transaction requires the use of foreign purchasing power i.e. foreign currency. The foreign exchange market facilitates such transactions by performing number of functions. Definitions of Foreign Exchange Market According to Paul Einzig, "The foreign exchange market is the system in which the conversion of one national currency in to another takes place with transferring money from one country to another." According to Kindleberger, "It is place where foreign moneys are bought and sold." In simple words, the foreign exchange market is a market in which national currencies are bought and sold against one another. There are large numbers of foreign transactions such as buying goods abroad, visiting foreign country for any purpose. Corresponding nation in whose currency the transaction is to be fulfilled. The foreign exchange market provides the foreign currency against any national currency. However, it is to be understood that unlike other markets, this market is not restricted to any particular country or any geographic area. There are large numbers of dealers' instruments such as exchange bills, bank drafts, telegraphic transfers (TT), etc. There are certain other dealers such as brokers, acceptance houses as well as the central bank and treasury of the nation.

The foreign exchange market is unique because of the following characteristics:

Foreign Exchange market is not restricted to single place its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York); its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion;

the low margins of relative profit compared with other markets of fixed income; and its huge trading volume representing the largest asset class in the world leading to high liquidity;

the variety of factors that affect exchange rates;

Functions of Foreign Exchange Market (A) Transfer Function : As mentioned above, the foreign exchange markets are exchange markets engaged in transferring the purchasing power between two nations and two currencies. It is prime function of this market. In simple terms, it is conversion of one currency into another such as converting Indian Rs. into U.S. $ and vice versa at some rate. Various instruments like bank drafts, exchange bills, are used for transferring the purchasing power. In this regard international clearing to both the direction is important to because it simplifies the conduct of international trade as well as capital movements from one country to another. (B) Credit Function : Under this function the foreign exchange market provides credit to the traders such as exporters and importers. Exporters can get credit such as reshipment and postshipment credit. Recently started Euro-Dollar market is a leading credit market at international level. This function of making credit available plays a crucial role in growth and expansion of the international trade. (C) Hedging : Hedging is a specific function. Under this function the foreign exchange market tries to protect the interest of the persons dealing in the market from any unforeseen changes in the exchange rate. The exchange rates (price of one currency expressed in another currency) under free market situation can go up and down. This can either bring gains or losses to the concerned parties. Foreign exchange market guards the interest of both exports as well as importers, against any changes in the exchange rate. Thus, these are various functions performed by the foreign exchange market. To perform above functions it uses the following instruments.

Instruments of Foreign Exchange Market The instruments, with the help of which the international payments are effected. They are, 1) Cheques and Bank Drafts : Persons dealing with foreign exchanges can use bank cheques as well as bank drafts in order to make payments. The cheque is drawn on particular bank instead of a person. 2) Bills of Exchange : It is also called as foreign bill of exchange which is an unconditional order in writing addressed by one person to another. It mentions the person to whom a certain sum is to be paid either on demand or on specific date. 3) Mail Transfer (MT) : Under this, funds are transferred from one account of a destination to the another destination in the nation by mail. For international payments air-mail is used. 4) Telegraphic Transfers (TT) : By this method a sum can be transferred from one place to another place in the world by cable or telex. This is the quickest method of transferring fund from one place to another.