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Primary functions of the foreign exchange market and global companies

What are the primary functions of the foreign exchange market? Who are the participants in the market? How do global companies use the foreign exchange market to hedge against foreign exchange risks?

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A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of one currency will be delivered for some other currency at a specified rate.

Primary functions of foreign exchange market:

The following are the three major functions of the foreign exchange market.

1. Transfer of Purchasing Power:

The FOREX market is the mechanism by which participants transfer purchasing power between countries, obtains or provides credit for international trade, and minimizes exposure to exchange rate risk. Transferring of purchasing power is necessary because international trade and capital transactions normally involve parties in countries with different currencies yet each party wishes to transact in their own currency.

2. Financing of Inventory in Transit:

Because the movement of goods between countries takes time, ...