Question

Who are the major participants in the foreign exchange markets? Provide a general and brief explanation. Of this list of participants, which group dominates in terms of participation?

Answer 1

Ans ) Foreign exchange market : The foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices.

Participants in foreign exchange market :

1 ) Commercial banks : these banks operate in the foreign exchange market at two levels. Retail level : they deal with the customer - corporation, exporter s . at the level of WHOLE SALE, bank maintain an inert bank market in foreign exchange either directly or through specialized foreign exchange brokers.bulk of activities in foreign exchange market is conducted in an inter bank wholesales market a network of large international bank and brocker . whenever abank buys a currency in foreign currency market,it's simultaneously selling another currency.

2 ) Foreign exchange brokers : they act as an agent who facilitate trading b/w dealers .they act as a match maker and do not put their money at risk as in case of banks.they actively and constantly monitor exchange rate offered by the major international banks through computerized systems as Reuters and are able to find quickly an opposite party for a client with out revealing the identity of either party until a transaction has been agreed upon .

3 ) Central Bank : central bank frequently intervene in the market to maintain the exchange rate of their currencies with in a desired range and to smooth fluctuations with in that range.the level of bank interventions depends on the exchange rate regime flowed by the given country central bank.

4 ) MNCs : MNCs often contract to either pay or receive fixed amount in foreign currency at future dates,so they are exposed to foreign currency risk .this is why they often hedge these future cash flow through the interbank forward exchange market.

Banks are the dominant participants in the foreign exchange market.banks control the funds transfer mechanism and therefore banks are essential to all foreign exchange transaction.