Unlike the stock market, investors usually trade with institutional investors(such as mutual funds) or other retail investors. The reasons of other participants in foreign exchange market trading are completely different from the stock market. Therefore, it is very important to identify and understand the functions and motivations of these male participants in the foreign exchange market.
The most influential participants in the foreign exchange market can be said to be the central bank and the federal government. In most countries, the central bank is an extension of the government, and its policies are consistent with the government. However, some governments believe that more independent central banks usually manage inflation that promotes economic growth more effectively and maintain the goal of low interest rates. Regardless of the degree of independence of the central bank, government representatives generally meet with the central bank representatives regularly to discuss monetary policy.
In order to achieve certain economic goals, the central bank often participates in the manipulation of foreign exchange reserves. For example, China buys US Treasuries worth millions of dollars, so that the RMB can maintain the RMB at the target foreign exchange rate(exchange rate) after the linkage between the RMB and the US dollar. The central bank is using the foreign exchange market to adjust its holdings. Because the data packet is very deep, it has a huge impact on the money market.
Like the central bank and the government, one of the largest participants in foreign exchange trading is banks. Most people who need foreign exchange for small-scale transactions, such as money needed for travel, trade with nearby banks. However, compared with the dollars traded between banks, private transactions appear insignificant, and the interbank market is more familiar. Banks conduct currency transactions through credit based electronic intermediary systems. Only banks with mutual credit relationship can conduct transactions. Large banks often have more credit relationships, and these banks can obtain better foreign exchange prices. The smaller the bank, the smaller the credit relationship, and the lower the priority of pricing scale.
Generally speaking, banks play the role of dealers in order to buy/sell currencies at the buy/sell price. One way for banks to make money in the foreign exchange market is to exchange money at a higher price than they pay. The foreign exchange market is a world market, so it is often seen that different banks have slightly different exchange rates for the same currency.
Some of the biggest customers of these banks are international enterprises. Whether selling to international customers or buying from international suppliers, enterprises inevitably have to cope with fluctuating currency fluctuations. For many multinational companies, it is a big problem that they must deal with foreign exchange risk. Because foreign exchange is uncertain.
One option to reduce the uncertainty of foreign exchange risk that enterprises can do is to enter the spot market for necessary foreign exchange transactions. Unfortunately, enterprises may not have enough cash to carry out such transactions in the spot market, or do not want to hold a large amount of foreign exchange for a long time. Therefore, enterprises often use hedging strategies to lock in future specific exchange rates, or simply eliminate all foreign exchange risks in transactions. For example, if a European company wants to steal from the United States, it must pay for the theft to the United States. If the price of the euro against the dollar falls before the transaction, European companies will eventually pay more euros than the official regulations. Therefore, this European company can enter the market, lock the current exchange rate and eliminate the risk of US transactions. These contracts can be term contracts or future contracts.
Other participants in foreign exchange trading are speculators. Speculators try to make money by using the floating exchange rate, rather than financing international transactions by weighing exchange rate changes or exchanging currencies.
The largest and most controversial speculators in the foreign exchange market are hedge funds. Such funds are essentially unregulated funds. They use unconventional, often high-risk investment strategies to obtain great returns. Think of them as steroid mutual funds.
Considering that they can have many positions, they may have a significant impact on a country’s currency and economy. Some critics blamed hedge funds for the Asian currency crisis in the late 1990s, while others targeted Asian central banks. In any case, speculators will have a huge impact on the foreign exchange market.
They are basic participants in the foreign exchange market and can now understand the history and knowledge of the foreign exchange market.
