Global Financial Market Players – MNCs, Banks, Investors
The Forex market is the largest market in the world (Turnover > $6 Trillion/day). Who are the people trading in this market?
1. Classification of Participants
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2. Roles Explained
A. Commercial Banks (The Backbone)
- Role: Act as intermediaries.
- Activity: Offer "Bid" (Buy) and "Ask" (Sell) rates to clients.
- Interbank Market: Banks also trade with each other to manage their own inventory of currencies.
B. Multi-National Corporations (The Clients)
- Role: Create demand for foreign currency.
- Example: Apple needs Chinese Yuan to pay workers. Tata Steel needs Euros to buy machinery.
- Goal: Hedging (Protection), not Speculation.
C. Central Banks (The Boss)
- Role: Manage the country's Foreign Exchange Reserves.
- Example: RBI buys Dollars when Rupee gets too strong (to help exporters) and sells Dollars when Rupee crashes (to control inflation).
D. Speculators & Arbitrageurs
- Speculator: Takes risk hoping for price change. (e.g., George Soros).
- Arbitrageur: Takes NO risk. Buys low in London and sells high in New York instantly to pocket the difference.
3. Comparison of Motives
| Participant | Primary Motive | Risk Appetite |
|---|---|---|
| MNCs | Trade / Hedging | Low |
| Banks | Service / Market Making | Medium |
| Speculators | Profit from fluctuation | High |
| Central Banks | Economic Stability | Risk Adverse |
4. Exam Notes: Writing the Answer
Question: "Who are the major participants in the Foreign Exchange Market?" (5 Marks)
Key Points:
- Banks: Mention "Market Makers".
- Corporates: Mention "Importers/Exporters".
- Central Banks: Mention "Intervention".
- Brokers: Intermediaries who match buyers and sellers.
Summary
- Size: The market is huge because of the volume generated by Speculators (90% volume) vs Trade (10% volume).
- Liquidity: Because there are so many players, you can buy/sell major currencies instantly.
Quiz Time! 🎯
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