1.1. FX Market Purpose
The main purpose of the foreign exchange market is:
a. It facilitates the trade in goods and services.
b. FX market facilitates capital flows, either through foreign direct investment (FDI) or indirect taxes.
c. It helps in hedging forex risk.
d. One can also make speculative gains through FX markets.
1.2. FX Market Participants
Due to the abovementioned purposes solved, the following are the FX market participants:
a. Companies and individuals transact for the purpose of the international trade of goods and services.
b. Capital market participants transact for the purpose of moving funds into or out of foreign assets.
c. Hedgers, who have exposure to exchange rate risk, enter into positions to reduce this risk.
d. Speculators participate to profit from future movements in foreign exchange.
e. Funds, such as insurance, mutual funds, pension funds, endowment funds, ETFs, etc. having investments across the world also trade in the FX markets.
f. Government or quasi-government agencies and sovereign wealth funds.
g. Central banks deal in the FX markets to manage the foreign reserves and make currency interventions.
1.3. The Foreign Exchange Market Products
a. A spot exchange rate is an exchange rate for immediate delivery (that is, exchange) of currencies. The spot rates are available 24 hours a day on business days and are settled on T+2 bases.
b. A forward exchange rate is an exchange rate for the exchange of currencies at some specified, future point in time. These are usually the over-the-counter (OTC) rates.
c. The futures are the exchange-traded forwards, which have standardized terms of trade.
d. A foreign exchange swaps mean rolling an existing, but expiring forward contract, to a future date. It requires simultaneous spot transactions and a new forward agreement.
e. FX options, which are options to enter into an FX contract sometime in the future at a specified exchange rate.