Why do we need a foreign exchange?

Foreign exchange is extremely important due to the following reasons:

a. The foreign exchange facilitates the conversion of one currency into another currency. It helps in the transfer of purchasing power between the two currencies.

b. This is done using various credit instruments that suggest Bank draft, telegraphic transfer, and foreign bill.

c. In this process, the foreign exchange market carries out payment internationally by clearing debt in both directions.

d. It provides credit to promote foreign trade both International Li and internationally.

e. It also provides the facility for hedging anticipated or actual liabilities through forwarding contracts in exchange.

f. Hedging is the avoidance of foreign exchange risk.

g. A forward contract is a contract to buy or sell foreign exchange against another currency at a fixed rate in the future at a price agreed upon now.