Class 12 Finance Chapter 8 Foreign Exchange Market

Class 12 Finance Chapter 8 Foreign Exchange Market Solutions English Medium As Per AHSEC New Syllabus to each chapter is provided in the list so that you can easily browse through different chapters ASSEB Class 12 Finance Chapter 8 Foreign Exchange Market Solutions in English and select need one. AHSEC Class 12 Finance Solutions Download PDF. HS 2nd Year Finance Textual Solutions.

Class 12 Finance Chapter 8 Foreign Exchange Market

Also, you can read the NCERT book online in these sections Solutions by Expert Teachers as per Central Board of Secondary Education (CBSE) Book guidelines. ASSEB Class 12 Banking Question Answer are part of All Subject Solutions. Here we have given HS 2nd Year Finance Textual Solutions English Medium for All Chapters, You can practice these here.

Foreign Exchange Market

Chapter: 8

Unit – 2: Money Market and Foreign Exchange Market

A. Very Short Questions Answer:

1. Write the full form of OTC market. 

Ans: OTC stands for Over-the-Counter Market. 

B. Short Answer Questions:

1. What is foreign exchange?

Ans: Foreign exchange means the currency of one country that is exchanged for the currency of another country. It is used in international trade and payments.

2. What is foreign exchange market?

Ans: The foreign exchange market is a market where different foreign currencies are bought and sold. It facilitates international trade and financial transactions.

3. Write two features of the foreign exchange market.

Ans: (i) It is a global market for buying and selling foreign currencies.

(ii) It operates continuously through banks and financial institutions.

4. State the transfer function performed by the foreign exchange market.

Ans: The transfer function helps in transferring purchasing power or funds from one country to another through foreign exchange transactions.

5. State the credit function performed by the foreign exchange market.

Ans: The credit function provides short-term credit facilities to importers and exporters, making international trade easier.

6. State the hedging function performed by the foreign exchange market.

Ans: The hedging function protects traders and investors from losses caused by fluctuations in foreign exchange rates.

7. Briefly write about any two participants of the foreign exchange market.

Ans: (i) Commercial Banks: They buy and sell foreign currencies and provide foreign exchange services to customers.

(ii) Central Bank: It regulates the foreign exchange market and maintains the stability of the country’s currency.

8. Briefly state the role of brokers in the foreign exchange market.

Ans: Brokers act as intermediaries between buyers and sellers of foreign exchange. They help in finding the best exchange rates and facilitate foreign exchange transactions.

C. Long Answer Questions (Type-I): 

1. State the Features of the Foreign Exchange Market. 

Ans: Features of the Foreign Exchange Market:

(i) Global Market: Buyers and sellers from different countries trade foreign currencies through global communication networks.

(ii) Operates 24 Hours: The market remains open 24 hours a day (except weekends), allowing continuous trading.

(iii) OTC (Over-the-Counter) Market: It has no fixed location and operates electronically across the world.

(iv) Largest Market: It is the largest financial market in terms of the volume of foreign exchange transactions.

(v) High Liquidity: Currencies can be bought and sold easily at any time due to continuous trading.

(vi) Market Transparency: Traders have easy access to market information and exchange rates, ensuring transparent transactions.

Conclusion:

The foreign exchange market is a global, highly liquid, and transparent market that operates continuously and plays an important role in facilitating international trade and finance.

2. Explain the Functions of the Foreign Exchange Market. 

Ans: Functions of the Foreign Exchange Market:

(i) Transfer Function: It transfers purchasing power or funds from one country to another for international transactions.

(ii) Credit Function: It provides short-term credit facilities to importers and exporters, promoting international trade.

(iii) Hedging Function: It protects traders and investors from losses caused by fluctuations in foreign exchange rates.

Conclusion:

The foreign exchange market facilitates international trade by transferring funds, providing credit, and reducing exchange rate risks.

3. State about Five Participants of the Foreign Exchange Market. 

Ans: Participants of the Foreign Exchange Market:

(i) Commercial Banks: Buy and sell foreign currencies and provide foreign exchange services to customers.

(ii) Central Bank: Regulates the foreign exchange market and maintains the stability of the country’s currency.

(iii) Foreign Exchange Brokers: Act as intermediaries between buyers and sellers and help in foreign exchange transactions.

(iv) Importers and Exporters: Exchange foreign currencies to make and receive payments for international trade.

(v) Multinational Companies (MNCs): Conduct foreign exchange transactions for their international business operations.

Conclusion:

The foreign exchange market functions efficiently with the participation of banks, brokers, businesses, and the central bank.

4. Briefly State the Types of the Foreign Exchange Market. 

Ans: Types of the Foreign Exchange Market:

(i) Retail Market: The retail market is a market where transactions take place between customers and commercial banks or Authorised Money Changers (AMCs). Individuals, tourists, and businesses buy or sell foreign currency, bank notes, travellers’ cheques, and drafts through banks or AMCs. The number of traders is large, but the volume of transactions is comparatively small.

(ii) Wholesale Market: The wholesale market mainly serves banks and financial institutions. It helps banks adjust their excess purchase or sale of foreign currencies. It is divided into two parts:

(a) Interbank Market: Banks buy and sell foreign currencies among themselves. Transactions are settled through bank accounts without the physical transfer of currency. It includes:

Direct Market: Banks deal directly with each other.

Indirect Market: Banks conduct transactions through foreign exchange brokers.

(b) Central Bank: The Central Bank (RBI) is also a part of the wholesale market. It regulates the foreign exchange market and deals with commercial banks rather than directly with the public.

Conclusion:

The foreign exchange market consists of the Retail Market and the Wholesale Market. While the retail market serves individual customers, the wholesale market facilitates large-scale transactions among banks and helps maintain stability in the foreign exchange system.

D. Long Answer Questions (Type-II): 

1. What is the Foreign Exchange Market? State the Participants of the Foreign Exchange Market.

Ans: Foreign Exchange Market:

The Foreign Exchange Market (FOREX) is a market where different foreign currencies are bought and sold. It facilitates international trade, investment, and the transfer of funds between countries.

Participants of the Foreign Exchange Market:

(i) Commercial Banks: Commercial banks are the major participants in the foreign exchange market. They buy and sell foreign currencies, issue bank drafts, make telegraphic transfers, and deal in foreign bills of exchange.

(ii) Central Bank: The Central Bank regulates and supervises the foreign exchange market. It helps maintain stability in exchange rates by buying and selling foreign currencies.

(iii) Brokers: Foreign exchange brokers act as intermediaries between buyers and sellers. They help banks complete foreign exchange transactions and receive commission for their services.

(iv) Non-Banking Financial Institutions (NBFIs): These institutions also deal in foreign exchange transactions along with their other financial activities.

(v) Acceptance Houses: Acceptance houses assist importers and exporters by accepting bills and facilitating foreign remittances.

(vi) Corporations: Multinational companies require foreign exchange to pay employees, make payments, and receive income from their overseas operations.

(vii) Individuals: Individuals participate in the foreign exchange market for purposes such as foreign travel, education, medical treatment, or business. However, their share in total foreign exchange transactions is relatively small.

Conclusion:

The foreign exchange market plays an important role in international trade and finance. The participation of commercial banks, the central bank, brokers, financial institutions, corporations, and individuals ensures the smooth functioning of the foreign exchange market.