Businesses that import and export goods and services need to exchange
currencies to receive or make payments for goods they may have bought or
services they may have rendered.
Investors and speculators require currencies to buy and sell investment
instruments such as shares, bonds, bank deposits or real estate.
Large commercial and investment banks are the 'price makers'. They are the
ones who buy and sell currencies at the bid-and-offer exchange rates that they
declare through their foreign exchange dealers.
Commercial banks deal with customers on one hand, and with the Interbank or
other banks, on the other hand. They profit by utilizing the bid-and-offer
spread. The bid price is the exchange rate that the buyer is willing to buy and
the offer price is the exchange rate at which the seller is willing to sell. The
difference is called the bid-offer spread. They also make profits from
speculating about whether the exchange rate will rise or fall.
Central banks participate in the foreign exchange market in their effective
duty as banks for their particular government. They trade currencies not for the
intention of making profits but rather to facilitate government monetary
policies and to help smoothen out the fluctuation of the value of their
economy's currency.
