It has been estimated that forex trade top well over one $1 trillion per day. Unlike one might expect, the majority of that market volume does not come from exporters and importers, but from speculators, investors, banks, etc. who try to profit from market fluctuations.
There are several major classes of participants in the trade. However, these classes can be classified into two major classes with primarily different objectives in participating in forex trade:
2. Speculators, banks, arbitrageurs, investors etc.
Forex Trade – Importers/Exporters
The global trade usually happens in multiple currencies. Therefore, companies need to use the forex market to change one currency to another in order to pay for goods or services received from a foreign company.
Many of these same participants use derivatives markets to decrease market risk (hedge) from currency fluctuations. This is because the time of payment or receiving of the money usually happens at a future date instead of a cash transaction.
This category includes the millions of tourists annually, who have to change their home currency to a foreign currency for travel purposes.
Forex Trade – Speculators, Banks, Investors, Arbitrageurs, etc.
The major part of global FX trade does not involve actual selling or buying of goods or services. Instead, there are market participants that try to profit from their views on the forex market fluctuations by buying and selling currencies.
These market participants are essential to forex markets, because they create much of the liquidity of foreign exchange markets.
Also, this category includes investors, investment companies, insurance companies, and banks that manage currency transactions to increase returns on their investments. In many cases, the best returns are achievable by investing in foreign currency denominated assets.
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