Answer:
Foreign exchange market performs the following functions: (i) Transfer Function This function implies the transfer of purchasing power in terms of foreign exchange across different countries of the world. It is performed through credit instruments like bills of foreign exhange, bank drafts and telephone transfers. (ii) Credit Function This function allows the provision of credit in terms of foreign exchange for the export and import of goods and services across different countries of world. In this function, bills of exchange with maturity period of 3 months are used for international payments. (ii) Hedging Function When exporters and importers enter into an agreement to sell and buy goods on some future date at a rate agreed upon today, it is called hedging. Through this function, exchange rate is locked for future supplies of foreign exchange which avoid losses that might occur due to changes in exchange rate.
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