There are three main functions of the FX market, those being:
1) Transfer functions: converting one currency into another.
2) Credit functions: Provides a line of credit to international and national organisations.
3) Hedging function: used so as to undertake a lesser amount of risk, by speculating and defining a pre-determined rate of exchange, despite what the future may hold.
Participants
In a way everyone competes in the FX markets, however the main participants are seen as follows;
Governments and central banks
Probably the most influential participants within the FX markets are the very central banks and Governments that transact the wealth of nations on a constant and daily basis. Central Banks usually are involved in maintaining foreign reserve volumes so as to meet specific, economic goals. Government heads usually conduct meetings with Central Banks so as to discuss monetary policy.
Financial institutions
On par with the central banks, banks and other financial institutions such as JP Morgan and Goldman Sachs and HSBC. These participants make currency transactions via electronic mediums which are based primarily on credit. These participants are usually the main entities who transact currencies at large, however not all are on the same level, as some hold much more power and influence than others, ergo creating different rates.
Hedgers
Dealing with fluctuating markets generates a tremendous amount of risk, thus hedgers are used so as to ensure a specific and pre-determined rates of exchange.
Speculators
Speculators use the situation to their advantage and exchange currencies to generate a profit, so as to fund transactions. The largest type of speculators are known as hedge funds; which is essentially a risky strategy in an attempt to generate high returns.
Who leads the Fx market today?
In terms of size the U.K is by far in the lead with over 30% of the global trading volume. This being followed by the U.S with 17% and the Singapore financial exchange with 7 %. The U.K has held this position for several years.
FX +Geography
In terms of a geographic location, there is none. Granted there are such things as the Wall Street and London Stock exchange, however practically all currency transactions today are done online and on a 24/7 basis. What is meant by this is that when one market closes, another opens. In-fact, it is for these very reasons, that most companies trade on the FX markets using complex algorithms that pre-empts when is the best time to buy /sell a currency over another.
The Fx Currency composition
In terms of which currency is the most dominant, it is apparent from figures taken on the 6th Of December 2015 that currently the Dollar is not exactly the most in popular currency, but is the third.
The highest and thereby wealthiest currency, is in-fact the Kuwaiti Dinar, however in terms of which currency is in highest demand, and which holds the most strength; it is hands down, the U.S dollar. This proven by a statistic taken by Harvard business school; where it states that as of 2015, 89% of global transactions trade with the Dollar as it is the most stable, and most predictable currency on the market, for the current time.
This article was issued by Steve Diacono, for Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.