Foreign Exchange Market

Definition: The foreign exchange market is a market where buyers and sellers participate in the sale and purchase of foreign currency. In other words, a market where the currencies of different countries are bought and sold is called the foreign exchange market.

The structure of the foreign exchange market includes central banks, commercial banks, brokers, exporters and importers, immigrants, investors and tourists. These are the main players in the foreign market. Their figure and position are shown in the figure below.
At the bottom of the pyramid are the actual buyers and sellers of foreign currencies - exporters, importers, tourists, investors and immigrants. They are real users of the currencies and they go to commercial banks to buy them.



The third layer of the pyramid is the currency brokers. These brokers function as a link between the central bank and the commercial banks and also between the actual buyers and the commercial banks. They are the main source of market information. It is these people who do not buy the foreign currency themselves, but instead conclude an agreement between the buyer and the seller for a commission.

The central bank of any country is the supreme organ of the organization of the foreign exchange market. They work as lender of last resort and custodian of the country's currencies. The central bank has the power to regulate and control the foreign exchange market to ensure its proper functioning.

One of the main functions of the central bank is to prevent, as the case may be, the aggressive fluctuations of the foreign exchange market by direct intervention. An intervention consisting in selling the currency when it is overvalued and buying it when it tends to be undervalued.