Known as arguably the largest asset market in the world, the foreign exchange or forex market is more of a system or platform than a place where a large volume of foreign currencies is bought, sold, traded or exchanged. The list of buyers and sellers ranges from individuals and firms to brokers, commercial and central banks. This worldwide network of exchanges runs round the clock trading and is the tour de force behind the growth and sustenance of global commerce.
In the forex market, currencies are traded at prices that are mostly determined by the supply and demand and are often subjected to government interventions. The financial instruments used in trading include cheques, bank drafts, mails, bills of exchange, and wire transfers. The forex market helps businesses by providing credit for imports and acts as a hedge to shield entities from periodic exchange rate fluctuations.
Important functions of a foreign exchange market
#1. Transfer function: The primary function of a foreign exchange market is to transfer payment from one country to another or from one business entity to another. This is done by converting the value of one currency into another and helping countries to transfer capital. To cite an example, if a business from Georgia wants to import goods from a company based in France, then the forex market will help convert the Georgian currency into its equivalent value in Euro. This can be carried out through financial instruments such as bank drafts, bills of exchange or wire transfers.
#2. Credit function: Not every transaction worldwide is settled immediately, for many depend on availing credit facilities as well. The forex market helps companies such as a forex company in Georgia by providing a short term credit. This is done to facilitate the flow of goods and services between countries or business entities based in different countries. For example, should a Georgian business wants to import a piece of machinery from the USA, it can issue a bill of exchange in the forex market with a fixed maturity period to pay for the imported goods.
#3. Hedging function: Since the foreign exchange rates are not fixed but vary according to demand and supply not to speak of government interventions, businesses are often wary of the fluctuation in rates. For example, if a piece of goods is priced at $100, its equivalent Georgian Lari would be 262. However, if the forex rates fluctuate resulting in decreasing the value of the Georgian Lari, the Georgian business importing the goods would have to pay a lot more (in Georgian Lari) than what was needed to pay at the outset. This is where the hedging function of a forex market becomes important by allowing a forward contract. According to this, a company can pay for the goods at a later date (usually within three months) at a price agreed at an earlier date. So, while the contract is made, there is no exchange of money.
The forex market can be cited as the main force that drives the world economy. The functions of a forex market help businesses to streamline transactions through credit and hedging facilities. The functions can be leveraged to the optimum by setting up a forex company in Georgia.