Major foreign exchange participants include commercial investment and central banks. Other participants include corporations, hedge funds, and millions of retail traders around the world. The top 8 banks, which provide liquidity in this market are Bank of America, Credit Suisse, First Boston, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Dean Witter, and UBS Warburg. Policies that are implemented by governments and central banks can play a major role in the forex market. Central banks can play an important part in controlling the country’s money supply to ensure financial stability.
Second tier consists of National banks, hedge funds, and corporation banks. Large banks literally trade billions of dollars daily. This can take the form of a service to their customers or they themselves as they speculate in the foreign exchange. market. We know that the forex market can be extremely liquid, which is why it is so desirable to trade. Hedge funds have increasingly allocated portions of their portfolios to speculate on the forex market.
Another advantage of hedge fund is that they can utilize as much a higher degree of leverage than would typically be found in the equities market. Many companies have to import and export goods to different countries all around the world. Payment for these goods and services may be made and received in different currencies. Many billions of dollars are exchanged daily to facilitate trade. The timing of those transactions can dramatically affect a company’s balance sheet.
Third tier consists of speculators and investors. We shall differentiate speculators from investors here only with the definition that has an investor had a much longer time horizon, in which he expects his investment to yield a profit. Regardless of the difference, both speculators and investors will approach the forex market with the intent to exploit the difference or the movement in currency pairs. They both will have their reason for believing a particular currency will perform better or worse as the case may be and will buy or sell accordingly.
They may decide that the euro will appreciate against the US dollar and take what is called a long position on the euro. If the euro gain ground against the US dollar, they will have made a profit.
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