COURSE: TREASURY & FUND MANAGEMENT

ASSIGNMENT # 1: MAJOR PLAYERS IN FOREX MARKET

Submitted By:

SADIA JABEEN

SEAT # (B16107050)

Submitted To:

MA’AM AQSA

KARACHI UNIVERSITY BUSINESS SCHOOL (K.U.B.S)

BBA – VIII (REGULAR--- MORNING)

Date of Submission:

12th November, 2020

TASK:

Find out the major players of the Foreign Exchange Market (Forex) &
precisely define their roles.

Foreign exchange market:

The foreign exchange market is a global decentralized or over-the-counter market for the trading
of currencies. This market determines foreign exchange rates for every currency. It includes all
aspects of buying, selling and exchanging currencies at current or determined prices. Because of
the worldwide reach of trade, commerce, and finance, forex markets tend to be the largest and
most liquid asset markets in the world.

MAJOR PLAYERS IN THE FOREIGN EXCHANGE MARKET:

Major players in this market who execute currency transactions tend to be financial institutions
like commercial banks, central banks, money managers and hedge funds, which are discussed
below:

❖ The Interbank Forex Market

The over the counter or OTC Interbank forex market consists of a loose and largely unregulated
group of financial institutions that deal currencies among themselves and make exchange rate
quotations to clients. The interbank network consists of a global network of financial institutions
that trade currencies between each other to manage exchange rate and interest rate risk. The
largest participants in this network are private banks. The greatest volume of currency is traded
in the interbank market. This is where banks of all sizes trade currency with each other and
through electronic networks. Big banks account for a large percentage of total currency volume
trades. Banks facilitate forex transactions for clients and conduct speculative trades from their
own trading desks.

The larger among these financial institutions typically act as market makers who provide forex
rate quotes to each other, Interbank brokers and clients. In contrast, the smaller financial
institutions, corporations, fund managers and high net worth individuals who participate in the
Interbank market tend to act as clients to the large market makers.

The Primary Interbank Currency Market Participants:

The main foreign exchange market participants operating in the Interbank forex market are as
follows:

• Interbank Market Makers – These are typically large commercial and investment
banks that make foreign exchange quotes to other market makers and to some bigger
clients through bid-ask spread. The banks take part in the currency markets to neutralize
 the foreign exchange risks of their own and that of their clients. Each bank has a dealing
desk responsible for order processing, market-making, and risk management. The dealing
desk plays a role in making profits by trading currency straight through hedging,
arbitrage, or a mixed array of financial strategies. Some of the largest names among these
big institutional forex market players include: Deutsche Bank in Germany, UBS,
Citigroup and JP Morgan Chase in the United States, Bank of America, Goldman Sachs
and HSBC.
• Interbank Forex Brokers – These act as intermediaries to arrange forex deals between
Interbank market makers. They buy and sell currencies on behalf of clients and earn
brokerage charges. They usually offer a phone service and a call box service where a
person provides a steady stream of verbal quotations for forex rates in the major currency
pairs.
• Interbank Electronic Forex Brokers – These include the Electronic Broking Services
or EBS and the Thomson Reuters web-based Dealing service. They both provide
electronic brokering platforms for Interbank counterparties to use. These Internet-based
trading platforms do the task of systematizing customer/order matching. These platforms
are responsible for being a direct access point to accumulate pools of liquidity.
• Central Banks – Central banks, which represent their nation's government, are extremely
important players in the forex market. These are the national financial institutions that
oversee and manage the currency of their respective countries. Central banks usually
attempt to influence the price of a currency by adjusting national interest rates, not by
making currency purchases. They maintain currency reserves, and can intervene in the
forex market to defend or weaken their national currency as they deem appropriate. Open
market operations and interest rate policies of central banks influence currency rates to a
very large extent. Examples are The Federal Reserve Bank, The Banks of England, Japan
and Canada, The Reserve Banks of Australia and New Zealand, the Swiss National Bank
and the European Central Bank. National governments participate in the forex market for
their operations, international trade payments, and handling their foreign exchange
reserves.
• Smaller Financial Institutions – These consist of smaller banks that might be trading
forex for themselves or executing deals on behalf of clients, as well as investment funds.
They each typically act as clients of the large market makers.
• Investment managers & Hedge Funds – Portfolio managers, pooled funds and hedge
funds make up the second-biggest collection of players in the forex market next to banks
and central banks. They are basically transnational and home-country’s money managers.
They may deal in hundreds of millions of dollars, as their portfolios of investment funds
are often quite large. These participants have investment charters and obligations to their
investors. The major aim of hedge funds is to make profits and grow their portfolios.
They want to achieve absolute returns from the Forex market and dilute their
risk. Investment managers trade currencies for large accounts such as pension funds,
foundations, and endowments. An investment manager with an international
portfolio will have to purchase and sell currencies to trade foreign securities. Investment
managers may also make speculative forex trades, while some hedge funds execute
speculative currency trades as part of their investment strategies. These funds employ
traders who actively speculate in the forex market and act as clients of large market
makers. Some hedge funds execute trades automatically on an algorithmic basis.
• Multinational Corporations. – Firms engaged in importing and exporting conduct forex
transactions to pay for goods and services. They do not have the power to set prices of the
currency as market makers. These ‘commercial traders’ just buy and sell currency
following the prevailing exchange rate. They are compelled by the nature of their
business - to receive or make payments for goods or services they may have rendered - to
engage in commercial or capital transactions that require them to either purchase or sell
foreign currency. They make up a substantial allotment of the volume being traded in the
market. These companies are not in the business of trading forex, but are typically
hedging and managing the currency risks that arise as a result of their fundamental
commercial activities.
• High Net Worth Individuals – These are personal currency traders who are
creditworthy enough and deal in large enough size that they can to execute trades with
the customer desks of market making institutions. Some of these people are hedging
personal currency risks that might arise from holdings abroad, while others like the
challenge of speculating in the forex market for profit.
• Money transfer / Remittance offices – Money transfer business, including remittance
offices, typically targets individuals and small companies that need to transfer money
from one country to another. In many cases, a currency conversion will take place, where
currency is transferred from the local currency of the sending office to the local currency
of the receiving office, although using a major currency such as USD or EUR in both
ends is also common. Even though each transfer is typically small, remittance businesses
and other money transfer companies can still be pretty significant players on the FX
market if their transaction volumes are large. Two examples of companies with huge
transaction volumes are Western Union and UAE Exchange.
• Retail Forex Traders – This portion of the forex market is made up of all of the retail
forex broker’s clientele, which include speculators and traders ranging from small to very
large. These traders tend to be speculators that bank on short-term movements in
currency pairs to make a profit. The number of speculators typically increases as market
volatility increases. Currency speculation is the act of buying and holding foreign
currency in the hopes of selling that currency at a higher exchange rate in the future. This
is in contrast to those who buy currencies to finance a foreign investment or to pay for
imported products or services. Speculators usually will attempt to make monetary gains
by taking advantage of fluctuations in the exchange rates rather than hedging against the
rates or exchanging currencies to fund their transactions.

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