Different Functions and Kinds of Foreign Exchange Market

Foreign Exchange Market

It is the market in which national currencies are traded with one another

It has 3 major Participants:

1. Commercial Banks
2. Foreign Exchange Brokers and Authorized Dealer
3. Monetary Authority (RBI in India)

Suppose a Person wants to exchange his Rupees with Dollar, he will approach his Bank/Money Exchange Agent

Similarly, RBI also holds foreign currency and purchases and sells it regularly

Functions of Foreign Exchange Market

It has 3 main functions:

1. Transfer Function - It transfers purchasing power between the countries involved in the transaction
2. Credit Function - It provides credit for foreign trade. Bills of Exchange with a maturity period of 3 months are often used in foreign trade.
3. Hedging Function - When 2 parties enter an agreement to sell or buy each others goods on a future date at current prices and exchange rate, it is called hedging. Its purpose is to avoid any losses that might occur due to exchange rate variations in the future.

Kinds of Foreign Exchange Market

They are of 2 types:

1. Spot Market
   It refers to a market in which the receipts and payments are made immediately.
   
   
2. Forward Market
   This refers to a market in which all the transactions of sale and purchase of foreign currencies is settled on a specified future date at a rate agreed upon today.

NCERT Questions

No questions in this part

Other Books

Question 1

In the following questions, select the correct answers:

Which of this is not a function of Foreign Exchange market?

1. Hedging Function
2. Credit Function
3. Speculative Function
4. Transfer Function

Question 2

Forward Market is a type of Foreign Exchange market were:

A. All the transactions of sale and purchase of foreign currencies are done at lower than market prices.

B. All the transactions of sale and purchase of foreign currencies are done on current price

C. All the transactions of sale and purchase of foreign currencies is settled on a specified future date at a rate agreed upon today.

D. Either B or C

Oswaal Questions

Question 1

Read the news report given below and answer the questions that follow with respect to the same:

NEW DELHI: India's Foreign Direct Investment (FDI) saw a significant jump in November 2020.

FDI data released by the Commerce Ministry shows that total FDI in the month of November 2020 grew by a whopping 81% to $10.15 billion against $5.6 billion in November 2019.

FDI equity has also jumped to $8.5 billion as against $2.8 billion in November 2019, registering a growth of 70%.

India has attracted total FDI inflow of $58.37 billion during April to November 2020.

It is the highest ever for the first eight months of a financial year (F.Y.) and 22% higher as compared to the first eight months of 2019-20 ($47.67 billion).

FDI equity inflow received during F.Y. 2020-21 (April to November 2020) is $43.85 billion.

It is also the highest ever for the first eight months of a financial year and 37% more compared to the first eight months of 2019-20 ($32.11 billion), the data revealed.

FDI is a major driver of economic growth and an important source of non-debt finance for the economic development of India.

It has been the endeavour of the government to put in place an enabling and investor-friendly FDI policy, the Commerce Ministry said.

The intent all this while has been to make the FDI policy more investor-friendly and remove the policy bottlenecks that have been hindering the investment inflows into the country.

The steps taken in this direction have borne fruit, as is evident from the ever-increasing volumes of FDI inflows being received into the country, it said.

Measures taken by the Government on the FDI policy reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows into the country.

The following trends in India's Foreign Direct Investment are an endorsement of its status as a preferred investment destination amongst global investors. - "India's foreign direct investment inflows grew by 81 percent in November 2020 to $10 billion" - The Economic Times - January 28, 2021

Question 1

What effect will the increase in foreign direct investment will have on the economy?

A. Increase in the Forex Reserve

B. Increase in the supply of Foreign Currency

C. Decrease in the Exchange Rate

D. All of the above

Question 2

Why does the country foster for a higher Foreign Direct investment?

A. FDI is a major driver of the Economic Growth.

B. FDI helps in getting better foreign exchange returns.

C. FDI helps the government to control foreign exchange rate.

D. All of the above.

Question 3

There has been an increase in the FDI. How has the government helped it?

A. FDI policy reforms

B. Ease of doing business

C. Both (A) and (B)

D. Neither (A) nor (B)

Ans

C. Both (A) and (B)

Explanation

Measures taken by the Government on the FDI policy reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows into the country.

Question 4

When the FDI increases, the _________________ of foreign currency increases.

A. Demand

B. Supply

C. Either (A) or (B)

D. Neither (A) nor (B)