Question

Identify the five broad categories of institutional participants that operate in the foreign exchange market. Discuss the role played by each one of them in the forex market.

Answer 1

Answer: Institutional participants in the foreign exchange market- Are as following:

Commercial bank- These are the major participants in forex market that provide core of market. Commercial banks serve the retail clients in making international investment in financial assets that need foreign exchange. Banks also maintain an inter bank market in foreign exchange directly or indirectly through specialized foreign exchange brokers.

Central bank- Central banks intervene in he forex market to maintain and stabilize the exchange rate of their countries and for smooth functioning within a specific range.

Foreign exchange brokers- They are the intermediaries who facilitate between the dealers of forex market. They monitor exchange rates offered by international banks through computerized system and also tries to find the opposite party for their clients and make the transaction to happen.

MNCs- MNCs have operations throughout the world, they are exposed to foreign exchange risk so they have to hedge that risk by entering into currency forward contracts. They also use currency rate swaps for hedging cash flows.

Small businesses- Small business and companies use forex market for facilitating the execution of commercial and investment transactions. They also use Forex market for hedging purrpose.