Define hedging function of foreign exchange market

Dear student This is a very good question. It gives me an immense pleasure to answer this question, as normally students at Class-XII level are not concerned with such higher concepts. Though, if you pursue Economics (Hons.) in your graduation studies, you will learn a lot about this topic. However, as of now, I will just restrict myself to present a general answer for this question. Hedging acts as a protection in the forward markets where the transactions are to be honoured on a pre-determined future date. For example, let us suppose that Investor A have a bond and he promises Investor B to sell this bond after two months at Rs 2,000. Now after two months, if the price of the bond happens to be Rs 1,500 (or Rs 2,500), in the either cases, Investor A has to sell the bond at the pre-determined rate of Rs 2,000. Hedging, on one hand protected the Investor A from the loss in the future value of the bond (in case price falls to Rs 1,500) and on the other hand, restricted him from earning extra profit (in case price falls to Rs 2,500) . Usually, hedging is more popular in the share (stock) markets and foreign exchange markets (i.e. international money market), as these markets are highly volatile and are subjected to unexpected price fluctuations. The practice of Hedging protects the buyers from price (stock prices or exchange rate) hike and the sellers from reduction in price (stock prices or exchange rate). Regards