Monday, August 17, 2009

Principal actors in the foreign market

The motivations for demanding or selling foreign exchange are based in the transactions related to the current and financial accounts. This action involves individuals and institutions of all kinds at the retail level and the banking system at the wholesale level. The major participants in the foreign exchange market are the large commercial banks, although multinational corporations whose day-to-day operations involves different currencies, large nonbank financial institutions such as insurance companies, and various government agencies including central banks such as the U.S. Federal reserve and the European Central Bank also play important roles. Not surprisingly, the large commercial banks play the central role since the buying and selling of currencies most often involves the debiting and crediting of various bank accounts at home or abroad. In fact, most foreign currency transactions take place through the debiting and crediting of bank accounts with no physical transfer of currencies across country borders. Consequently, the bulk of currency transactions takes place in the wholesale market in which these banks trade with each other, the interbank market. In this market a large percentage of these interbank transactions are conducted by foreign exchange brokers who receive a small commission for arranging traders between sellers and buyers. The buying and selling of foreign exchange brokers, but directly with other banks, is called interbank trading. While bank currency transactions are done to meet their various retail customers‘s needs (corporations and individuals alike),banks also enter the foreign exchange market to alter their own portfolio of currency assets.

No comments: