The forex market is a global platform. Here the exchange of currencies of various countries takes place amongst the various Forex Market Participants. In this market, one currency is traded for another. For example, a person willing to make a payment in any currency other than his home currency has to first buy that currency in exchange for his home currency. But the rate of these currencies does not remain constant. They keep fluctuating, dependent on various factors. These rates are usually market driven. We call these fluctuating rates the foreign exchange rates. Generally, in any transaction, there remains a buyer and a seller. But the question here is, “who can be a buyer and seller in a forex market transaction?” We are seeing a large number of coupled economies now with the dawn of globalization. All this is making this market grow, and hence one must know the various players or participants in this ever-growing forex market. We will discuss all these Forex Market Participants in this article.
Companies dealing internationally, i.e., who are importing or exporting goods, are involved in the forex market. As these companies trade internationally, they pay or receive a large amount of foreign currency. And to convert this foreign currency into home currency or any other currency for payment of their liabilities, they participate and become the participants of the forex market.
Retail Market Participants
Retail market participants include tourists, students, professionals, or patients who have traveled to other countries and need to pay for various expenses, fees, deposits, etc. These people contribute very little to the forex market because the amount they exchange is not huge, or several times it may be just a one-time need. Their presence or absence is insignificant or has very less impact on the forex market. Moreover, they have no importance in the market. But they can not be ignored as their trading volume in currencies may be small, but their number is large.
An MNC is a company whose business interest is spread over several countries. And it has its branches in different locations of the world. Being located in several countries, they have to deal with several currencies of those countries. So if a company needs to deal with its other branches for trading or services, the remittances are in the local currency of that country. Hence, these companies need to regularly buy foreign currency for settlement of inter-company or inter-branch liabilities. Besides, for asset purchase and surplus transfer, they need to buy foreign currencies. So these MNCs are very important participants in the Forex Market with a big volume and regular trades.
As the public deposits their amount with banks, banks accumulate huge funds. As part of treasury operations, each bank has a forex department, and it does trade in the forex market a part of these funds to earn profits for the bank. Secondly, they also trade and sometimes keep reserves of foreign currencies to meet the requirement of their clients. And these clients can be trading and service enterprises (exporter or importer) or retail individuals (tourists, students, company executives, etc.). These clients also approach these banks for their requirements of foreign currencies. The larger the client base of such entities and individuals, the larger the operation and trading of the bank in the forex market. And thus, all these commercial banks also play an important role in the Forex Market. Moreover, they also influence the trends in the forex market. Examples of commercial banks having larger participation in the forex market are Citi Bank, Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, HSBC, etc.
Central banks of every country participate in the forex market. Although they are not active every time, they enter the market when there is a significant impact on their domestic currency due to the fluctuation in the forex market. Most of the time, they allow the market to behave and decide the exchange rate of its currency as per the market dynamics. However, in some special situations, where the currency fluctuation is beyond a reasonable limit. Or when the currency is falling heavily. In such a situation, to give stability to the market and to restrict the fall of the domestic currency, these banks enter the market. Their entry with the above view is known as open market operations by the central bank of the country. Here the bank starts selling or buying foreign currency in bulk to increase its domestic currency value.
In the current world order, governments are also involved in various commercial and economic transactions. Such transactions can be between two or more governments, government and private enterprises, or government and government/semi-government undertakings. Besides, there can be subsidies, grants, loans, and financial support from various governments, international institutions, NGOs, foreign banks, and so on. And, of course, for such deals, the volumes are very high, and for the completion of the transactions, the currency exchange comes into play. Usually, the governments use their Central Bank and other Commercial Banks or International Banks to effect these transactions. However, with the ever-increasing volume and cross-country support, the activity is very huge, and these transactions do make an impact and influence on the Forex Market.
Brokers are individual or group, or Service Company that helps in buying and selling in the forex market on behalf of their clients. With their specialized skills, such brokers guide the investors to buy or sell foreign currency at the best available rates to maximize profits. They also help investors in getting the best quotation from different dealers of the forex market. Even big market players like banks and commercial companies approach a broker to make greater profits. An important point to note here is that the Forex Market works all day across the world. Hence, the timing, volume, and currency pair become very important to make the best deal.
Hedgers are the participants who enter the market to mitigate or minimize their exchange rate risk. The idea remains to take up opposite positions in two different markets to reduce the fluctuation risk. Thereby the loss in one market due to any change in the foreign exchange rate gets offset by the profits in the other market. These hedgers would use various strategies to protect their investment value. These strategies involve a forward contract, futures contract, currency options, etc. In these strategies, investors make a contract by fixing a specific foreign exchange rate. Since the rate is a fixed one, the exchange rate fluctuation in the market will not affect their position.
For example, suppose a person residing in Japan imports goods of US $10,000 from New York. And he agrees to pay the amount in US Dollars after a month. Let us assume the current exchange rate for US$1 to Yen is 137. So, a person in Japan will need to pay Yen 10,000 x 137 = 1370000 Yen for this import at the current rate.
Suppose, after a month, this exchange rate of US$ to Yen increase to 140. That would mean that the importer in Japan will need to pay more yen, which will be 1400000 Yen now. Here, the loss of importer will be 30000 Yen due to appreciation in US$. So to avoid such a situation, he enters into a contract with another participant. In this contract, the importer agrees to pay a fixed rate for buying the US$ after a month. And such a contract can be a future, forward, currency option, etc. This is how hedgers protect and reduce the risk of dealing with foreign currency.
These are people who trade in the market to earn their living or to just make profits from currency rate fluctuations. They just speculate on the market and trade in the currency pairs as per their perception of the change in the rates. They are not permanent in the market or do not hold any position for a long time.
These people take advantage of the price difference in the currency rates prevailing in different markets. Arbitrageurs purchase or sell the currencies from one market to another to make profits. As we know, market inefficiency sometimes leads to inconsistent prices in different markets. That means the price we are getting for one currency in one market might be different for the same currency in another market. So these people take benefit from this discrepancy and inefficiency of the market and make profits. Please note an important point that the Forex Market is quite dynamic and volatile with high volumes. These differences remain amongst various markets only for a very short time. And everything falls in sync afterward. Hence, these arbitrageurs need to be fast to buy and offload between different markets. Else they may incur losses as soon as the difference is over.