What is the foreign exchange market and what are its functions?

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justaguide eNotes educator| Certified Educator

A foreign exchange or Forex market is one where currencies of different nations are traded. People can buy or sell any of the currencies that are being traded, using any other currency that they wish. The exchange rate between currencies in the Forex market is not constant. It varies constantly based on several factors, a few of which are the demand and supply of a currency, the interest rates prevailing in the country, inflation and political and economic stability.

The Forex market helps people who transact goods and services with other countries in trying to make the maximum profits they can. These markets are in this way used as a means to hedge against losses arising from sudden changes in the exchange rate between currencies. They are also used by speculators who try to estimate the future rates of exchange between currencies by analyzing the factors that later the exchange rates and use their forecasts to make a profit.

pohnpei397 eNotes educator| Certified Educator

Foreign exchange markets are the markets in which the currencies of various countries are traded.  It is through these markets (there are many of them and they are not controlled by any particular government or body) that firms buy the foreign currency that they need in order to conduct trade.

When firms wish to buy goods or services from a foreign country, they must obtain that country's currency.  In order to do so, they must buy that currency, using their own to pay for it.  It is through this mechanism that foreign exchange is traded and rates are set.