Foreign exchange transactions take place in the foreign exchange markets. A foreign exchange market is the market in which individuals, firms and bands buy and sell foreign currencies or foreign exchange. The foreign exchange market for any currency, say the British pound, is composed of all the locations (such as London, Paris, Zurich, Frankfurt, Singapore. Hong Kong. Tokyo and New York) where pounds are bought and sold fore other currencies. These monetary centers are connected a telephone network and video screens and are in constant contact with another, thus forming a single international foreign exchange market.

A foreign exchange market performs the following functions:

•    Transfer of Funds. This is the principal function fo the foreign exchange markets. Funds need be transferred form one nation to another to meet, the payment liabilities arising out of truncations in goods, services and capital.

•    Credit Function. Credit is usually needed when goods are in transit and also to allow the buyer time to resell the goods and market the payment.

•    Hedging and Speculation. Foreign exchange markets provide facilities for hedging and speculation. These account by far the major part of foreign exchange trading today.

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