Structure of Foreign Exchange Market


Meaning of Foreign Exchange Market

Foreign Exchange market is a market where foreign currencies are bought and sold. It is simply a virtual place where buyers and sellers meet for purchasing, selling and exchanging currencies of different countries with one another.

This market is also termed as Forex market or currency market. Foreign exchange market is an international decentralized market which does not have any physical existence. This market determines the exchange rate for every currency. Forex market is the largest and highly liquid market in the world where trillions of dollars’ changes hand each day.

The market is open for 24 hours a day and 5 days in a week excluding holidays. It is one of the key financial market that facilitates the international payments system. Forex market has 2 tiers: – Interbank market and over the counter market. Interbank market is one where large banks exchange currencies with each other whereas over the counter market is one where individuals and companies trade. This global market is highly risky in nature as it is not regulated by any central body. Spot market, Future market, Forward market, Option market and Swap market are major types of foreign exchange market.

Structure of Foreign Exchange Market

The structure of foreign exchange market is composed of different participants who are the main players and occupies different positions. These participants are commercial banks, central banks, immigrants, importers, exporters, tourists and investors. Role played by these participants in forex market is discussed in detail below: –

Commercial Bank

Commercial banks are important organs of foreign exchange market which are termed as “market makers”. These banks trade in foreign currencies for themselves and also for their clients. Commercial banks quote the foreign exchange rate on a daily basis for purchasing and selling of foreign currencies. They act as a clearing house by facilitating the carrying off of differences in between the demand and supply of these currencies. Currencies are purchased from broker by commercial banks for selling them to buyers.

Central Bank

Central bank is the apex body in foreign exchange market which has power to regulate operations related to trading of foreign currency. It directly intervenes in the functioning of forex market to avoids aggressive fluctuations. For controlling fluctuations, currency is sell off when it is overvalued and purchased in case it is undervalued. Central bank ensure that an exchange rate is at optimum that fulfills the needs of national economy.  

Foreign Exchange Brokers

Broker in foreign exchange market work as an intermediary in between the commercial bank and central bank and also in between the commercial banks and buyers. These persons carry a large source of information about market. Brokers only facilitate the currency trade but do not get themselves involved in market transactions. They work on a commission basis where do the task of striking the deal in-between the seller and buyer.

Buyers and seller

These are real buyers and sellers of foreign currencies who trade in foreign exchange market with the help of brokers. They approach commercial banks for purchasing and selling off currencies. Importer, exporters, tourist, immigrants and investors are some of these peoples.