Participants in Foreign Exchange market

9 Key excerpts on "Participants in Foreign Exchange market"

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  eBook - ePub

  Forex Made Simple

  A Beginner's Guide to Foreign Exchange Success

  • Kel Butcher(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Chapter 3: The foreign exchange markets and major participants

  Now that we have an insight into the major currencies and their economies, and the important role that central banks play within an economy and the foreign exchange, or forex, markets, we now need to deepen our understanding of the forex market before we begin forex trading.

  We need to understand who the major players in these markets are and the types of forex markets available. Forex market participants

  As well as the central banks and their role in and influence on the global foreign exchange market, many other participants are involved in the trading of foreign exchange. It is important to know who these other players are, where they fit in the market and the roles they play within the foreign exchange market.

  Tip The foreign exchange, or forex, market is divided into levels of access that are determined by the size of the line, or amount of money, being traded in each transaction. The inter-bank market

  After the central banks, the large global commercial banks and financial institutions are the major participants in the forex market, and together they form the inter-bank market. While central bank operations in the market may be sporadic, the large commercial banks are actively involved in foreign exchange trading every day. Their trading activities add massive liquidity and volume to the market daily and are the main cause of price movement in the markets. Major international banks deal either directly with each other or through two main electronic platforms, EBS and Reuters, which offer trading in the major currency pairs. The banks regularly undertake trades worth billions of dollars on behalf of clients or, more commonly, speculateing on their own accounts. They are responsible for the majority of forex trading volume.

  The inter-bank market is an unregulated and decentralised wholesale market that works around the world and around the clock. These banks effectively act as market makers in the spot forex market (discussed later in this chapter), as they are constantly quoting buy and sell prices in anticipation of movements in currency prices.

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  eBook - PDF

  A Foreign Exchange Primer

  • Shani Shamah(Author)
  • 2003(Publication Date)
  • Wiley

    (Publisher)

  34 A Foreign Exchange Primer by other market makers. Brokers are bound by confidentiality not to reveal the name of one client to another until after a deal has been completed.  Investors are usually managers of large investment funds and are a major force in moving exchange rates. They may engage in the market for hedging, investment and/or speculation.  Regulatory authorities, while not actually participants in the market, impact the market from time to time. Regulatory authorities include government and international bodies. Most of the market is self-regulated, with guidelines of conduct being established by groups such as the Bank for International Settlements (the BIS) and the International Monetary Fund (IMF). National governments can and do impose controls on foreign exchange by legislation or market intervention through the central banks.  Speculators seek excess profits as a reward for their activities. CONCLUDING REMARKS All of the above activities can be undertaken by a variety of market participants. For example, banks may be market makers most of the time, but for some of the time they can also be hedgers or speculators. 6 Purposes The participants in the foreign exchange markets effect transactions for various purposes, principally arsing from the need to cover or hedge other financial or commercial operations, although in practice it is sometimes difficult to draw a clear line between these categories. For example, covering and hedging operations may well contain elements of speculation. Whatever the nature of the transaction, they are initiated by the banks’ clients or by banks themselves for their own account. 6.1 TRANSACTIONS The following are examples of those types of transaction, undertaken by all categories of market participants, which are commonplace in the foreign exchange market today.

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  eBook - ePub

  FX Trading

  A Guide to Trading Foreign Exchange

  • Alex Douglas, Larry Lovrencic, Peter Pontikis(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Chapter 5: Who’s who at the FX marketplace

  Okay, by now you’re probably thinking that you understand the basic language, have a fair idea of the concept of free-floating currencies and you’re ready to take the plunge. But before this can happen, you need some idea of the playing field and just who the main players are.

  Why does foreign exchange trading exist?

  At the root of it all, international trade is the most obvious reason for the existence of the foreign exchange market. Importers buying goods in a foreign country need to sell their local currency and buy foreign currency to pay for the goods they have bought in the currency of the country in which they have bought them. On the other side of the trade equation, exporters will often receive payment for the goods they sell overseas in the currency of the country to which their goods have been sent. In the majority of cases, these exporters will then need to convert the foreign currency they have earned back to their local currency.

  As mentioned in chapter 2, the exchange of currencies from different countries and regions for the purpose of international trade can be traced back thousands of years to merchants travelling the Silk Road through Asia and trading in the bazaars of Mesopotamia. These days, with the advent of globalisation and the ever-growing cross-border trade in goods and services, international mergers and acquisitions, and 24-hour financial markets, FX transactions are even more prevalent.

  Three broad groups of participants

  Before looking too closely at exactly who is doing all the trading in the foreign exchange markets, it is helpful to have a broad view of the three major groups of participants. In very general terms, these are the inter-bank (or wholesale) entities, the clients of the wholesale entities (both retail and corporate), and the intermediaries that help bring these parties together and facilitate trade (the brokers). Although each participant in the foreign exchange market will fit within one of these groups, it is worth bearing in mind that there is also frequent interaction between these groups.

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  International Trade and Agriculture

  Theories and Practices

  • Won W. Koo, P. Lynn Kennedy(Authors)
  • 2008(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  Given a depreci- ation of a currency, foreigners find exports cheaper as residents find imports more expens- ive. Conversely, when a currency appreciates, it gains value relative to other currencies. Given an appreciation of a currency, foreigners find exports more expensive as residents find imports cheaper. There are a variety of participants in the currency exchange market. The major players are commercial banks, corporations, nonbank financial institutions, and central banks. Individuals can participate in this market, but their role is insignificant relative to that of the major players. Central banks use intervention to alter the amount of currency in circulation. Central bank transactions in the private market for foreign currency assets are known as official foreign exchange intervention. u - v u - - - - - - Y 208 -p--- - 10 With the advent of electronic trading via computer network systems, trades can occur in a matter of seconds. Given this, the integration of financial centers combined with the ability to trade electronically implies no major difference in prices around the world. This phenomenon of buying a currency cheap and selling it for profit is known as arbitrage. 11 A vehicle currency is a unit of exchange that is used to facilitate currency transactions between other currencies. The dollar, euro, and yen are widely used as vehicle currencies. 12 Regimes in which exchange rates are permitted to adjust to an equilibrium, market-clearing level are known as floating or flexible exchange rate systems. Fixed exchange rate systems are characterized by central banks determining the currency price and setting it at that level. 13 The spot market involves the trading of currencies for current or immediate delivery. The price of this transaction is called the spot exchange rate. 14 The futures market fills a niche for transactions to be executed at some specified time in the future.

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  eBook - PDF

  The Psychology of the Foreign Exchange Market

  • Thomas Oberlechner(Author)
  • 2005(Publication Date)
  • Wiley

    (Publisher)

  Furthermore, exchange-rate movements depend on what market participants believe that relationship to be, and this also adds weight to the importance of the role of communication between agents in the market.’’ 15 Only those determinants that are communicated strongly enough in the market are followed, because participants know they are also followed by other market participants. Since market rules are fluid, trading in the foreign exchange market is about understanding what is important at any given time. As a consequence of the ever-changing nature of market rules, the ability to adjust flexibly one’s own strategies to these changing rules is indispensable. ‘‘The basis for decision- making is going to change because the market will change . . . You have to adjust yourself,’’ in the words of one trader. Successful foreign exchange participants consequently are characterized by a constant openness to new constructions of the market and by the ability to form new theories about the market as rules change. These transformations in the rules regarding which determinants drive the foreign exchange market lead one to ask further questions about their genesis: Who forms these rules, and who is able to change them? Traders observe that 202 The Psychology of the Foreign Exchange Market these rules are generally constructed by market players themselves, and that more powerful market participants are also more influential in generating and changing them, as in the observation of one trader that governments are influential because they are able to create new perceptions in the market. However, what constitutes a powerful market participant has changed over the last decades. Some of the most important reasons for this change may be found in the fundamental regime change from fixed to floating exchange rates, and in the development of new information and trading technologies.

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  Derivatives of Currency, Interest Rate and Option Strategies in Finance

  • (Author)
  • 2014(Publication Date)
  • Research World

    (Publisher)

  ____________________ WORLD TECHNOLOGIES ____________________ Chapter-1 Foreign Exchange Market The foreign exchange market ( forex , FX , or currency market ) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The foreign exchange market is unique because of • its huge trading volume, leading to high liquidity; • its geographical dispersion; • its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; • the variety of factors that affect exchange rates; • the low margins of relative profit compared with other markets of fixed income; and • the use of leverage to enhance profit margins with respect to account size.

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  eBook - ePub

  Currencies, Capital Flows and Crises

  A post Keynesian analysis of exchange rate determination

  • John T. Harvey(Author)
  • 2009(Publication Date)
  • Routledge

    (Publisher)

  3 Psychology and decision-making in the foreign exchange market 1

  Here begins the process of building the Post Keynesian alternative, something that will continue through Chapter Five . By then, a formal model will have been developed whose features include equilibrium trade imbalances, less-than-full employment, endogenous money, exchange rates marked by volatility and bandwagon effects, and an explanation of market participants’ forecasts wherein expectations are guided by a mental model that is shaped by social forces. The goal of this chapter is to examine the institutional structure of global currency markets and the social and psychological factors affecting market participants’ forecasting and decision making. Among the phenomena explained will be volatility, bandwagon effects, and forecast-construction bias. Reference will be made to Institutionalism, Keynes’ General Theory , and the psychological research of Kahneman and Tversky.2

  THE INSTITUTION OF FOREIGN CURRENCY TRADING

  The first step in understanding the currency markets must be a review of their organization. Agents participating in the market for foreign exchange enter at one of three levels: wholesale (or market making), retail, or commercial. These are illustrated in Figure 3.1. Those acting in the top box are willing to make two-way offers on a continuous basis, such that they stand ready to buy and sell the currencies in which they offer wholesaling services. Agents operating at the wholesale or retail level may contact a wholesaler and request prices for a currency. Both a buy and sell rate will be quoted by the wholesaler before the caller reveals their intention. The caller then decides whether or not they will carry out their transaction at the price offered. The goal of the wholesaler is to “generate revenues from the spread

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  eBook - PDF

  Microeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 20 International Finance 459 20-3 Other Factors Influencing Foreign Exchange Markets So far, the market for foreign exchange has been presented just like any other market: Demand and supply come together to determine the equilibrium exchange rate, or price of foreign exchange. Simple enough, but the market for foreign exchange is complicated by the types of actors in this market and by the types of regulations and restrictions involved. In this section, we look at how these other factors shape this market. 20-3a Arbitrageurs and Speculators Exchange rates between two currencies are nearly identical at any given time in markets around the world. For example, the dollar price of a euro is usually the same in New York, Frankfurt, Tokyo, London, Zurich, Hong Kong, Istanbul, and other financial centers. Arbitrageurs —dealers who take advantage of tiny differences in exchange rates across markets by buying low and selling high—ensure this equality. For example, if one euro costs $1.09 in New York but $1.10 in Frankfurt, an arbitrageur could buy, say, $1,000,000 worth of euros in New York and at the same time sell them in Frankfurt for $1,009,174, thereby earning $9,174 minus the transaction costs of the trades. Because an arbitrageur buys and sells simultaneously, little risk is involved. In our example, the arbitrageur increased the demand for euros in New York and increased the supply of euros in Frankfurt. These actions increased the dollar price of euros in New York and decreased it in Frankfurt, thereby squeezing down the difference in exchange rates.

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  Introduction to International Economics

  • Dominick Salvatore(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  In general, exporters allow 90 days for the importer to pay. However, the exporter usually discounts the importer’s obligation to pay at his or her commercial bank. As a result, the exporter receives payment right away, and the bank will eventually collect the payment from the importer when due. Still another function of foreign exchange markets is to provide the facilities for hedging and speculation (discussed in Sections 11.9 and 11.10). Today, about 90 percent of foreign exchange trading reflects purely financial transactions and only about 10 percent trade financing. With electronic transfers, foreign exchange markets have become truly Concept Check What are functions of the foreign exchange market? global in the sense that currency transactions now require only a few seconds to execute and can take place 24 hours per day. As banks end their regular business day in San Francisco and Los Angeles, they open in Singapore, Hong Kong, Sydney, and Tokyo; by the time the latter banks wind down their regular business day, banks open in London, Zurich, Paris and Frankfurt; and before the latter close, New York and Chicago banks open. Case Study 11-1 examines the U.S. dollar as the dominant international currency, while Case 11-2 discusses the birth of the euro, which quickly became the second most important international currency. 11.3 EQUILIBRIUM EXCHANGE RATES In order to examine how exchange rates are determined, assume for simplicity Euro The common currency adopted at the beginning of 1999 by 11 of the 15 member countries of the European Union. that there are only two economies, the United States and the European Monetary Union (EMU), with the dollar ($) as the domestic currency and the euro (¤) as the foreign currency. The exchange rate between the dollar and the euro (R) is equal to the number of dollars needed to purchase one euro.

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