Four main categories of entities operate in the foreign exchange market:
banks and non-bank dealers trading in foreign currency; individuals and firms engaged in commercial and investment operations; arbitration officers and speculators; central banks and treasuries.
Banks and non-bank dealers trading in foreign currency “make the market” both in technical and organizational terms. They make a profit by buying foreign currency at its real price and reselling at a slightly higher price called the “sale price”.
Individuals and firms use the foreign exchange market to help the performance of their commercial and financial operations. This group consists of exporters, importers, investors of international funds, international firms and tourists. Their use of the foreign exchange market is a necessary element of their commercial and investment programs, however, it is episodic. Some of these participants use the market for “hedge” (avoiding the risk associated with currency exchange rates).
Speculators and arbitrators make a profit within the market itself. They operate only in their own interests, without serving customers and without ensuring the continuity of the market. For example, arbitration participants profit from price differences between different markets.
Central banks and treasuries use the market to acquire or get rid of foreign exchange reserves; affect the prices at which their own currency is traded. They seek to influence the exchange rate in such a way as to serve the interests of their country.
The subjects of the foreign exchange market operate in the foreign exchange market, the specific sector of which is the stock (currency) exchange. The main function of the stock (currency) exchange is to identify the real market price of the goods (currency rate), taking into account changes in supply and demand for it. In addition to the main pricing function, modern exchanges perform other functions:
comparing trade and actual supply and demand and identifying on this basis a real exchange rate. Exchange quotes show a consistent ratio of planned and actual supply and demand on the exchange, which allows you to take into account all factors affecting the market price; hedging. Heading in the futures markets is used to protect against adverse price fluctuations (currency rates); exchange rate forecasting. For forecasting, both fundamental (traditional) economic analysis is used, and a specific method used only on exchanges is the so-called technical (mechanical) analysis. In practice, a combination of these methods is usually used. The forecast of price changes using the fundamental method is based on the study of supply and demand factors. A fundamental analysis is based on the following principle: any economic factor that reduces supply or increases demand for currency leads to an increase in the exchange rate and, conversely, any factor that increases supply or reduces demand for currency, as a rule, leads to the accumulation of reserves and a decrease in the exchange rate. Technical analysis is called forecasting the market situation by studying the dynamics of the exchange rate in the future, using information about past exchange rates, interest rates and other commercial parameters; stabilizing function. The process that contributes to the establishment and stabilization of the exchange rate includes the public establishment of the exchange rate at the beginning and end of the exchange day (birgin quotation), the publicity of transactions, the limitation of daily exchange rate fluctuations outside, established exchange rules, providing exchange members with information about supply and demand for various currencies. Exchange speculation, which provides for the game of both raising and lowering the exchange rate, directly has a decisive influence on the stabilization function of the exchange.
Currently, speculation is interpreted as an element that is always present in any economy where economic decisions are made in conditions of uncertainty. Speculation in foreign exchange markets leads to a mitigation of price differences. For example, by purchasing currency at the low exchange rate, speculators help increase demand for it. Due to rising demand, the price of the currency rises. Conversely, selling currency at a high rate, speculators reduce high demand and, consequently, exchange rates. Therefore, speculative activity helps to mitigate sharp fluctuations in exchange rates. Thus, the presence on the exchange of constant supply and demand created through the mechanism of exchange speculation contributes to the stabilization of the market and the exchange rate.
The functioning of the modern exchange in a market economy is inextricably linked with the developed system of state regulation, the purpose of which is to create conditions for exchange activities, to provide certain guarantees, first of all, to small savings and medium enterprises.