ABSTRACT
Given the existence of separate national currencies, there is an evident need for the conversion of domestic into foreign exchange when goods and services are traded internationally and when international capital transactions of all kinds occur. A basic justification of a foreign exchange market is therefore to permit the conversion and transfer of funds between nations in the most efficient way possible. Since there are many international transactions that do not require immediate settlement, a foreign exchange market must function also to facilitate the implementation of contractual arrangements for extension of credit and subsequent payments for the obligations involved. To the extent that exchange rates may vary through time and it is desired to avoid losses through unfavorable movements in the rates, this will involve the provision of facilities in the foreign exchange market for hedging against exchange risks. The major functions of the foreign exchange market can thus be characterized in terms of both space and time dimensions.
