An Assignment

On
The Participants of Foreign Exchange Market

Submitted to
Mr. Badrul Alam Sir
Course instructor,
International Financial Management
FIN-409

Submitted by
Jnandip Paul
ID-1900
IBA-JU
25th Batch

Date of Submission
25th April, 2019

Institute of Business Administration

Jahangirnagar University
What is Foreign Exchange Market

The foreign exchange market is the place where money denominated in one currency is bought
and sold with money denominated in another currency. It provides the physical and institutional
structure through which the currency of one country is exchanged for that of another country, the
rate of exchange between currencies is determined, and foreign exchange transactions are
physically completed.

The primary purpose of this market is to permit transfer of purchasing power denominated in one
currency to another. For example, a Japanese exporter sells automobiles to a U.S. dealer for
dollars, and a U.S. manufacturer sells instruments to a Japanese Company for yen. The U.S.
Company will like to receive payment in dollar, while the Japanese exporter will want yen.

It would be inconvenient for individual buyers and sellers of foreign exchange to seek out one
another. So a foreign exchange market has developed to act as an intermediary. It is the largest
financial market in the world with prices moving and currencies trading somewhere every hour
of every business day.

Over 90% of the total volume of the transactions is represented by inter-bank transactions and
the remaining 10% by transactions between banks and their non-bank customers. It is worth
noting that central bank intervention involving buying or selling in the market is often
indistinguishable from the foreign exchange dealings of commercial banks or of other
participants.

The foreign exchange is similar to the over-the counter market in securities. It has no centralized
physical market place (except for a few places in Europe and the futures market of the
International Monetary Market of the Chicago Mercantile Exchange) and no fixed opening and
closing time.

The trading in foreign exchange is done over the telephone, telexes, computer terminals and
other electronic means of communication. The currencies and the extent of participation of each
currency in this market depend on local regulations that vary from country to country.
Types of Foreign Exchange Market

Foreign exchange market is of two types, viz.; retail market and wholesale market, also termed
as the inter-bank market. In retail market, travelers and tourists exchange one currency for
another. The total turnover in this market is very small.

Wholesale market comprises of large commercial banks, foreign exchange brokers in the inter-
bank market, commercial customers, primarily MNCs and Central banks which intervene in the
market from time to time to smooth exchange rate fluctuations or to maintain target exchange
rates.

Participants in Foreign Exchange Market

Participants in Foreign exchange market can be categorized into five major groups, viz.;
commercial banks, Foreign exchange brokers, Central bank, MNCs and Individuals and Small
businesses.

These are the main groups:

 Commercial banks and investment banks; which generally act on their own behalf or
based on the needs and interests of their clients.
 Brokers; who act as intermediaries between financial institutions or as links with private
individuals, in exchange for a fee.
 Central banks and supranational entities (BIS – Bank for International Settlements,
IMF – International Monetary Fund, EIB – European Investment Bank); central banks are
responsible for issuing their respective country’s currency and managing and controlling
the money supply. Central Banks therefore intervene in currency markets – individually
or in a coordinated way – to keep the value of their currencies within the limits defined
by their monetary policies in pursuance of explicit commitments (such as in the case of
 fixed exchange rates) or otherwise, using their foreign currency reserves. Supranational
entities, have mandates in supervisory, market analysis, investment aid, etc.
 Sovereign funds (Norway-Government Pension Fund, China Investment Corporation,
ADIA-Abu Dhabi Investment Authority, etc …); public investment funds that invest
proceeds from business privatizations, natural resources (oil, gas), etc… in foreign
currency assets.

 Funds and investment entities; which intervene in foreign exchange markets with
speculative purposes or to obtain returns. Speculators are a class of traders that have no
genuine requirement for foreign currency. They only buy and sell these currencies with
the hope of making a profit from it. The number of speculators increases a lot when the
market sentiment is high and everyone seems to be making money in the Forex markets.
Speculators usually do not maintain open positions in any currency for a very long time.
Their positions are transient and are only meant to make a short term profit

 Non-financial entities, including companies (multinationals, large corporations and

SMEs) or institutional investors (such as insurance companies or asset managers) that
engage in exchange markets for commercial or investment purposes.

 Individuals; who operate in the foreign exchange market for transactional or speculative
purposes.

 Hedgers: There are many businesses which end up creating an asset or a liability priced
in foreign currency in the regular course of their business. For instance, importers and
exporters engaged in foreign trade may have open positions in several foreign currencies.
They may therefore be impacted if there is a fluctuation in the value of foreign currency.
As a result, to protect themselves against these losses, hedgers take opposite positions in
the market. Therefore if there is an unfavorable movement in their original position, it is
offset by an opposite movement in their hedged positions. Their profits and losses and
therefore nullified and they get stability in the operations of their business.