Foreign Exchange Market: Participants, Terms and Operations

Participants in the Currency Market

The main participants in the currency market are companies, institutional investors, individuals, private banks, central banks and brokers (dealers).

Companies and individuals are the majority. Companies make imports and exports and receive or make payments. Individuals use currency transactions, for example when traveling.

Private banks carry out currency operations and seek arbitrage profits.

Central banks intervene in the market by buying or selling currencies in order to stabilize the exchange rate, acting through monetary and exchange rate policy.

Brokers act as intermediaries, bringing together buyers, sellers, banks and others. Their commissions are charged exclusively on the buying and selling of currencies.

Key International Financial Concepts

In the international market, the following concepts apply:

• Offer (ask): the selling position. It is the price at which an intermediary sells the first currency.
• Bid: the buying position. It is the price at which an intermediary buys the first currency.
• Option forward contract: applies when the exchange rate is not fixed in advance.
• Forward: an agreement to exchange currencies at a predetermined future date, with terms of 1, 2, 3 and 6 months.
• Swap: the simultaneous purchase of one currency and sale of another, allowing operations with credit and foreign exchange. Terms are usually short (maximum 6 months). All quotes for these terms are known as the swap rate.
• Outright: forward purchase and sale contracts, known as outright, which are settled at a future date at the exchange rate agreed upon.
• Spot: an agreement to exchange one currency for another at the current exchange rate. The exchange must take place within 48 hours after the transaction.
• Overnight: the interest paid or received for keeping an open position overnight.
• Forex: the financial market with the greatest liquidity in the world and one of the most attractive and profitable.
• Arbitrage: operations carried out simultaneously, mainly buying and selling, that take advantage of price differences between markets. Arbitrage yields profit without taking on risk.
• Quotes in terms of percentage: this method makes it easier to compare prices plus or minus discounts in the term market, with interest rate differentials. The premium or discount depends on these differences.