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Forex market players – corporates

The final group of players in the $orex marketof course the corporates, or the multinational companies which in many ways form the backbone of the the forex markets. Until the dramatic growth of the retail side of fx trading, with small speculators trading through market makers and brokers, the forex world was a minor market used by specialist banks and companies as an additional service for their larger clients. Ten or fifteen years ago, the forex dealing desk in a bank would have been a few terminals used exclusively for its clients, either to exchange large currency sums for international trading operations, or for hedging of currency risk for international corporation purchases of supplies and materials. Indeed this activity is still a large part of corporate market, with large companies such as the airlines and transport companies hedging their currency exposure to the future oil price which is priced in US dollars. European corporates will constantly hedge their purchasing of materials overseas against the euro, where a rise in the value of the euro can have a significant impact on the bottom line when purchasing large quantities of materials in overseas currencies such as the yen.

Corporate clients are far removed from the speculative world of the futures market, and whilst they may well trade in this market, their actions are purely motivated by hedging their risk and exposure against the future purchases of real products and services by buying forward contracts to fix a future price in the currency market, or alternatively in direct cash transactions through their bank. For them, trading real cash is the classic way of dealing in currencies with two banks trading on behalf of their clients. For example if Citibank trades 10 million euro dollars with Deutsche Bank at an exchange rate of 1.20, then Citibank is bound to transfer 12 million US dollars to Deutsche Bank. In return Citibank receives 10 million euros from Deutsche Bank. The other major transactions undertaken by corporate accounts, is that of buying currency futures, often called forwards. Forward contracts involve delivery dates that can be months or years in the future, and although the amounts and exchange rates are traded and agreed at the time of the contract, the actual transfer of the currency takes place at a future point as laid out under the terms of the contract. In this way, using forward contracts, corporates and large multinationals can hedge risk for future supplies, by fixing the existing currency rates against a future purchase.

These then are all the players in the forex market and now that we have an understanding of all those involved in the fx market, let’s look more closely at the various types of $orex broker we understand how the forex market is structured.