Hello every one, still on our educational lectures we will be talking about “who are the participants in the forex market”. Most people wonder who these people are in this forex market; fortunately, we are going to discussed about this today.
If you just stumbled upon this article from google search or any other link, then I suggest you take a look from the part one of this lecture, through our educational series.
Now back to today’s lesson.
The forex market is so big that it can not be controlled by just one person or entity but rather by different individuals and organizations, whose actions can influences the foreign exchange market.
Let me give an example, if the central bank of a country (let’s say the Federal Reserve of the United States) should publish their inflation figure for a month or simple increase their interest rate which favours the currency “USD”. This simple action will make other participants in the forex market to “buy” more of the United State Dollar. Therefore, we have seen how an action from an entity or individual has influence the foreign exchange market.
Keep in mind that, not every participant in the forex market can directly influence the movement of currencies, but they can aid in making the market liquid (that is, a stream of buying and selling).
Who are the participants in the forex market?
The central bank is the number one in everything that concern finance in a country. The central bank controls or has control over the monetary policies, interest rate decisions, publishing inflation, foreign exchange rate and keeping foreign reserve etc.
We see that, they really deserve the rank of number 1 because they indirectly and directly control the inflow and outflow of currencies within their territory.
Unlike the other participants in this forex market, the central banks are not after profits neither do they make profits. There main aim is to ensure the economic growth and strong adherence to the monetary policies it has set out.
You might be wondering, “How do they manage to pay their staffs and offset risks?” I cannot say all the measures they use, but they get a good inflow of capital through issuing out Treasury bills, bonds such as Federal government bonds, and there huge foreign reserve keeps them afloat, etc. Examples of some of the names for central banks in the world are Bank of Spain, Central Bank of The Gambia and Reserve Bank of India etc.
The second participants in this multi trillion dollar industries are banks, though we have various categories of banks such as commercial banks, retail banks etc. which we all classify as BANKS
These banks operate internationally, that is they may have branches or subsidiaries in other countries and may affiliate with other smaller banks in various part of the world thus creating an “INTER-BANK NETWORK”.
Let me give an example, most of the business firms’ especially small scale and medium scale enterprises needs to exchange their local currency for the United States Dollar or any other currencies in other to pay either for their goods or for services.
The banks does this on their behave either from their internal reserve, through the central bank or most times through there inter-bank market network so imagine the volume of transaction they might be able to pull off in a day.
If they is a lot of buying than selling that will indirectly create a demand for that particular currency thus, driving the price higher. Examples of some large banks in the world include Industrial and Commercial Bank of China, HSBC Holdings PLC, Royal Bank of Canada etc.
The third people in the forex market are multi-national companies unlike banks, these companies are not into financial services but sell products or services but mainly products example of such cooperation’s are Airbus, BMW, Dangote Group, Glaxo Smith Kline etc.
Let us say there a company called xyz that are into beverage drink production. Xyz is a South African company with branches around the world. Since they are into beverage brinks production one of their major ingredients is sugar. So they sought for sugar from Mexico, who is one of the major exporter of sugar.
Xyz needs 1,000 metric tons of sugar delivered to their warehouse every month, but because of the unstable nature of the Mexican Paso (Mexico currency), the South African Rand (South Africa currency) and sugar.
The company needs to get these large quantities of sugar at a relatively low rate; therefore, they hedge their positions on both currencies and on the sugar to limit their losses. What this means is respective of the currency fluctuation, they will still buy the commodity at the price it had been hedged against.
Remember not only xyz needs sugar, other companies and countries need this sugar. The continuous buying and selling of this commodity help moves the forex and commodity market up and down.
There are various members in the financial institutions and we will classify them into these category: Investment management firms, hedge funds, pension funds, lets discussed them:
Investment management firm
These are also called investment bank, and specializes in large and complex financial transactions example includes Barclays, Rothschild, Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, UBS, Credit Suisse and Citibank. What these banks do is to act as a financial advisors and management clients investments.
Hedges funds are a little different from investment banking in the sense that qualified individual’s funds are pooled together to invest or trade in a particular financial market examples of some hedge funds are George Soros of Quantum Group of Funds, Ray Dalio of Bridgewater Associates, Paul Tudor Jones II of Tudor Investment Corporation
Pension funds are a little similar to hedge funds expect they are for retirement purpose. let me explain a bit further, an employer make contributions into a pool of funds set aside for a worker’s future benefit. The pool of funds is invested on the employee’s behalf, and the earnings on the investments generate income to the worker upon retirement. Example of pension funds Federal Old-age and Survivors Insurance Trust Fund, Canada Pension Plan, National Social Security Fund etc.
We can see that these various forms or components in the financial market, in one way or the other involves “exchanging of different currencies” and these causes a steady demand and supply.
There are companies that aid in transferring money round the globe; let’s say a Chinese worker in the United States needs to remit some part of this monthly pay to his family in china it is done through a remittance company such as Western Union, MoneyGram etc. As this is a $430 billion industry, this gives us a clue of how many billions are transferred daily between different countries.
There are many entities that falls under this category such as brokers, bureau de change, market makers etc. What these guys do is to speculate the foreign exchange market and are after making profits.
We are the last in this “food chain” though we are also speculators we do not have the volume to make a major change in the market so we rely on our broker and market makers to aid us through leverage to trade in this multi trillion business.
We have come to a conclusion of this lesson, hope when next you engage in a discussion with your friends, you would be able to wow them with what you have learn today.