Market participants in the Forex market can be broadly classified into two categories viz. hedgers and speculators. Hedgers are those who use the foreign exchange market to protect themselves from unwanted currency risks, whereas speculators are those who trade currencies purely with the aim of making profits.
There are also other types of market participants such as central banks, commercial banks, and retail investors. Central banks are those who control a country's monetary policy and regulate the supply of money in the economy. They use the foreign exchange market to intervene in the currency markets in order to achieve certain economic objectives. Commercial banks are the traditional intermediaries in the foreign exchange market. They play an important role in providing the market with liquidity and in making foreign exchange rates more efficient. Retail investors are those who trade currencies for speculative purposes in the over-the-counter (OTC) market without the assistance of a broker.
Hedgers in Forex Market
Hedgers are market participants who use the foreign exchange market to protect themselves from unwanted currency risks. There are two types of hedgers: commercial hedgers and financial hedgers.They use the foreign exchange market to protect themselves from any adverse changes in
The most important drivers of global trade are large multinational companies involved in shipping goods from one country to another. These companies have to exchange the currency of the importing country in order to pay for their raw materials and inventory, whereas they earn revenue in terms of the exporting countries' currency. The price fluctuations of these currencies result in changes in the profits earned by these companies. As a result, they take positions on either side of the foreign exchange market in order to protect themselves from any adverse movements in the currency prices.
Financial hedgers are companies and institutions that use the foreign exchange market to hedge their financial risks. For example, a company may have taken a loan denominated in a foreign currency. If the value of that currency falls against the domestic currency, the company will have to pay a high amount of money to get its hands on the same amount of domestic currency as it got during initial days. As a result, the company will go short in the foreign exchange market to compensate for this loss.
Speculators in Forex Market
Speculators are those who trade currencies purely with the aim of making profits. They are also known as 'traders'. Speculators can be further subcategorized into four different groups:
The rationale behind the speculative activities of these market participants is different. Some speculate about the future value of currencies, whereas others take advantage of price discrepancies. The third group consists of those speculators who believe that the market is undervalued or overvalued and attempt to benefit from it.
Central Banks in Forex Market
Central banks are the most important institutions in the foreign exchange market. They are responsible for formulating and implementing the country's monetary policy. In order to achieve certain economic objectives, central banks use the foreign exchange market to intervene in the currency markets. For example, if a country's exports are decreasing, the central bank may sell its currency in the foreign exchange market in order to make it cheaper for other countries to buy. This will make the country's exports more competitive in the global market.
Central banks use the same market mechanisms as any other market participant. They can either take positions on either side of the forex market to achieve their objectives, i.e., they can decide to go long or short in order to influence prices. The only difference is that central banks are able to impact the demand and supply situation of currencies due to their size and stature.
Forex Market Players
There are three types of market participants in the foreign exchange market: hedgers, speculators, and central banks.
Hedgers are companies that use the foreign exchange market to protect themselves from adverse currency movements. They use the foreign exchange market to protect themselves from any adverse changes in the price of currencies. Financial hedgers are companies and institutions that use the foreign exchange market to hedge their financial risks.