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Chapter 3, Part II. Participants, participants… Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 14, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Another type of large participants are Commercial companies and multi-national corporations. Their task on FX market is usually twofold. First, they make foreign exchanges to pay for goods or services or to pay employees in different countries. Second, they need to hedge their currency risks, if for example, the revenue of a company is earned in another currency, outside the region of domiciliation, i.e. so-called export companies. Excellent examples of such companies are almost the whole Japanese economy. What is a currency risk? For example, Toyota Motors sells cars in US for US Dollars, and during the year the Yen becomes more expensive compared to US Dollar (the yen’s rate becomes higher). It means that when they will convert revenues that they’ve received from US sales in USD into Yen – the revenue will be lower, because the rate of yen becomes higher and Toyota will receive less Yen for each US Dollar of revenues. At the same time, many expenditures stay the same, because Toyota pays Japanese employees in yen. It leads to lower net profits for the company in yen. That is a currency rate risk.

    But it’s worth saying here, that companies trade much smaller amounts of currency compare to banks and speculators. At the same time trade flows could have a significant short term impact on currency rates, such as when large multi-national corporations close or open positions that are unexpected by other market participants.



    Central banks, such as the ECB, Bank of Japan or Fed Reserve, can also actively take part in the FOREX market for their own purposes. It could be, for example, international government payments, foreign reserves transactions or other processes. The major event that strongly influences the FX market is changing the interest rate by some national bank. They do this to try to control inflation and to stimulate economic growth. By doing this, central banks can affect the national currency valuation. Due to having official or non-official target rates for their currencies, Central banks can intervene as directly as verbally, if their assessment of national currency rate to other ones seems too high or too low. Usually such kind of interventions or its announcement can lead to a strong move in the market, but only in a very short term period. As we’ve said earlier even Central Banks can’t struggle with combined resources of other participants in the long term.
     
    #1 Sive Morten, Dec 14, 2013
    Lasted edited by : Feb 6, 2016
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