Participant in the forex market

Participant in the forex market

 There are many participants in forex market than any other market, ranging from government via the central bank, banks and financial institution, hedgers and speculators.

 The major participant in forex market are government and central banks, though the two are dependent on each other, most central bank operate based on government policy they work with federal or central government to keep the country currency at a certain value, some government prefer an independent central government, they function to maintain interest rate, keeping inflation rate at beeriest minimum level. They function to maintain a county’s foreign reserve at a certain amount to attain some goals. Some government works hand and hand with their central bank to maintain their currency value.

 Commercial banks also participate in forex market either between one bank and the other   or between banks and individuals  who need foreign currency  for  travelling,  commercial banks can carry out inter-bank  forex transaction  between  each order through electronic brokerage system, but this is done  on credit with banks that have credit relationship with each other,  larger banks with deeper  pocket will have better  pricing than the other. The smaller a bank is the less trading possibilities it can get.

 Most banks act as dealers and they are ready to buy or sell currency at the bid or ask price, they do so by selling currency at higher prices than they obtain it thereby making money in the process and therefore it is possible to see different banks with different exchange rate for same currency.

Hedgers: they are investors who try to avoid the fluctuating nature of the foreign currency, this happen in international business. In an international business an investor need foreign currency for selling to his client or buying from another business man.  This is where hedging come into play. An international business man from Nigeria who wants to buy electronics from a US based company has to pay the price of the goods in the US dollar, and must change his naira to the US dollar to pay the US based company.  Hedging come into play when it is a future contract. If the US dollar gains value over the Nigerian naira, the business man from Nigeria will have to pay more than the original amount. This is unwelcomed to most business managers and the best that they could do is to buy the US dollar and keep it to pay for the future contract. But it is not economical to do so. Therefore the Nigerian business has to apply hedging strategy to enter into a contract to lock in the exchange rate for that transaction.

Speculators: they are investors that take advantage of the fluctuating nature of the exchange rate to make money.  Speculators uses risky and uncommon strategies to make money from forex market, notable among them are the speculators is George Soros who took advantage of the fall in pound sterling and made a roughly profit around $1 billion in just a month, another speculator is nick leeso a trader with England’s    Baring Bank who on the other hand makes a speculation on the yen and led him loose $1.4 billion dollar.