What are the two main functions fo the foreign exchange market?

The main functions of the foreign exchange market are the transfer of money through international currency conversion, the extension of short term credit, the opportunity for speculation, and the coordination of the forward market.

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The foreign exchange market is all about determining how much one country's currency is worth compared to other currencies and exchanging those currencies efficiently. Banks, dealers, investors, and investment management firms all participate in the foreign exchange market to make sure that trade and the money necessary for it flow...

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The foreign exchange market is all about determining how much one country's currency is worth compared to other currencies and exchanging those currencies efficiently. Banks, dealers, investors, and investment management firms all participate in the foreign exchange market to make sure that trade and the money necessary for it flow smoothly around the globe.

The foreign exchange market has several functions. First and foremost, it allows for the transfer of money by converting currency. This allows buyers and sellers to function internationally. For example, an American buyer would use the foreign exchange market when making a major purchase in Europe because the buyer would need to exchange US dollars for euros. The foreign exchange market would determine the current exchange rate between the two currencies (i.e., how many euros a dollar can purchase). The foreign exchange market would also transfer the funds as needed using bank drafts, wire transfers, or other methods.

The foreign exchange market also extends short term credit to importers trying to move their goods or services from one country to another. The importer is allowed to issue a bill of exchange so that his products can move freely and smoothly.

Furthermore, the foreign exchange market offers the opportunity for speculation. If a speculator thinks that the value of a foreign currency will go up, they will purchase more of it at its current rate, hoping that it can be sold for a higher price later on. The speculator would then make a profit off of the currency exchange.

Finally, the foreign exchange market coordinates the forward market that allows participants to purchase currency at a particular set rate in anticipation of needing to exchange currency in the future. Sometimes this allows the purchaser to get a deal, a lower rate than at the time of the actual exchange.

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