Forex market is the largest financial market in the world. Basically, Forex is an exchange rate is a price charged, in return for another currency. It’s that kind of exchange which drives the Forex market. Currency can be exchanged by spot transactions, forward transactions, swaps, and option contracts where a currency is the underlying instrument. Currency trade happens all over the world, 24 hours a day, five days a week.
Here are 5 types of institutions and traders in Forex market.
1. Commercial and Investment Banks
In the interbank market the largest volume of currency is exchanged. This is where banks of all sizes exchange currency among themselves and through electronic networks. Furthermore, big banks account for a significant percentage of overall volume trade in the currency. In addition, banks promote customer Forex sales and do speculative trades from their own trading desks.
2. Central Banks
A central bank is in charge of determining the price of its native currency on Forex. It is the system of exchange rates in which the currency can trade in the free market. To emphasize this point, exchange rate regimes are classified into categories that are floating, fixed, and pegged.
3. Investment Managers and Hedge Funds
An investment manager with an international portfolio would have to buy and sell foreign securities for the exchange. Investment managers can also do risky Forex trading, although some hedge funds do risky currency trading as part of their investment strategy.
4. Multinational Corporations
Businesses engaged in importing and exporting to pay for products and services. Companies are trading Forex to hedge the foreign currency exchange risks. The same German company can purchase American dollars on the spot market. In other words, it enters into a currency swap arrangement to obtain dollars in advance from the American company. In addition, it aims to purchase components to reduce the risk of foreign currency exposure.
5. Individual Investors
Compared to financial institutions and businesses, the number of Forex trades is extremely low in the retail investors. However, in popularity, it is rising rapidly. Retail investors base currency trading on a combination of basics. For instance, interest rate parity, inflation levels and monetary policy expectations. In addition, technical factors influence it. For examples, support, resistance, technical indicators, and demand patterns.
