The functions of forex market serves two main functions: converting currencies and reducing risk.
There are four major reasons firms need to convert currencies.
First, the payments firms receive from exports, foreign investments, foreign profits, or licensing agreements may all be in a foreign currency. In order to use these funds in its home country, an international firm has to convert funds from foreign to domestic currencies.
Second, a firm may purchase supplies from firms in foreign countries, and pay these suppliers in their domestic currency.
Third, a firm may want to invest in a different country from that in which it currently holds underused funds.
Fourth, a firm may want to speculate on exchange rate movements, and earn profits on the changes it expects. If it expects a foreign currency to appreciate relative to its domestic currency.
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