The foreign exchange can be likened to a game where there are different players. Forex market players are those who participate in the forex market, directly or indirectly.
For more detailed information on the forex market, read our introduction to forex.
The Forex Market Players and their roles
The following are those who take part in the forex market. They are:
- The central banks and governments
- The commercial and investment banks
- Large corporations
- Hedge funds
- Retail traders
The Central Banks and Governments
These players are in the market primarily as regulators. Central banks represent the nation’s government and are responsible for policy making. An example is the setting of interest rate which greatly impacts the value of the currency.
To learn how interest rates affect the value of a nation’s currency click here.
The central bank of nation is also responsible for setting the value of its currency. They also intervene in the forex market by increasing or decreasing the value of the nations currency. This is done through cutting or increasing supply respectively.
Finally, central banks primarily participate in the forex market to stabilize or increase the competitiveness of the nation’s economy.
Commercial and Investment Banks
Commercial banks play in the forex market to make a profit. Although their involvement is service oriented, they still make huge profits from participating in the forex market. The commercial and investment banks are the largest forex players. Therefore, they have influence over the exchange rate.
Commercial banks quote prices for their clients and they buy from or sell currencies to them.
Large corporations have international trade ties and participate actively in international trade. As a result of this, they are exposed to differences in currency exchange rate. And they can suffer adversely if the currency of the country where they sell their products suddenly depreciates.
To mitigate this, they participate in the forex market. They are involved in the forex market majorly to reduce their risk. This is known as hedging.
To learn more about hedging, click here.
Hedge funds and investment managers are also players in the forex market. Their involvement in the forex market is profit-driven. They are majorly speculators and what differentiates them from retail traders is their volume. They operate on an institutional scale.
Due to the large volume of trading by investment funds, they also have an impact on the prices of currencies. An example is that of “Black Wednesday“.
Retail traders are individuals who speculate on prices in the forex market. These players are also involved in the forex market to make a profit. The difference between hedge funds and retail traders is primarily the volume traded.
In conclusion, a synergy exists between all the players in the forex market. This culminates into the gargantuan daily $5.1 trillion traded on the market.
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