The financial derivatives market is a growing market, and various innovative financial instruments have been developed to meet market demands. In the financial market, there are a large number of traders. They have different purposes, some are for the appreciation and preservation of their own assets, some are for the safety of their own business, and some want to get their own money from the ever-changing market. ...It is these traders who promote the continuous development of the financial derivatives market.
Similarly, in the foreign exchange derivatives market, there are also traders with different purposes. Their trading motivations can be roughly divided into three types: hedging, speculation and arbitrage. Let’s take a closer look below.
The most basic: hedger
Many companies or individuals conduct foreign exchange transactions not for profit, but only to hedge the risks brought about by market fluctuations. Traders who use hedging to avoid risks are called hedgers. They are among the foreign exchange derivatives markets. , the most basic and broadest participant.
Hedging refers to the behavior that a trader sells (or buys) the same amount of futures contracts in the futures market as hedging while buying (or selling) a spot. In the foreign exchange market, it is the expected When a foreign exchange asset is to be paid or received at a certain time in the future, in order to avoid losses caused by exchange rate changes, the opposite position is held in the foreign exchange derivatives market to achieve the purpose of value preservation.
In the market, foreign currency asset investors, importers and exporters, and financial institutions with foreign exchange transactions may all have demand for foreign exchange hedging. As hedgers, they don't need to judge or predict the trend of the exchange rate. They mainly want to avoid the risk of exchange rate fluctuations to ensure their own income. opportunity for profit.
To give a simple example of foreign exchange hedging, a domestic company A received an order of 10 million US dollars, and it may take 3 months from receiving the order to delivery. Company A's estimated income at this time should be 67.3 million yuan, but assuming that the U.S. dollar falls to 6.5 in 3 months, company A's income will be reduced to 65 million yuan. In order to avoid this loss, company A can contact the bank Sign a forward contract of 10 million US dollars (that is, sell a forward contract of 10 million US dollars, you can also choose other foreign exchange derivatives, for example, some countries can buy foreign exchange futures), so that even if the exchange rate of the US dollar against the RMB falls after 3 months, the company It is also possible to pay the acquired USD 10 million and obtain the corresponding amount of RMB according to the forward exchange rate stipulated in the contract.
Hedging strategies for foreign exchange derivatives can be divided into three types, namely long hedging, short hedging and cross hedging. Long hedging refers to buying foreign exchange derivatives to prevent losses caused by exchange rate rises, which is common in importers or institutions that need to pay foreign exchange; short hedging is to prevent exchange rate falls by selling foreign exchange derivatives Losses are common in exporters or institutions that will receive foreign exchange; cross-hedging means that when there is no foreign exchange derivatives for a certain currency, the hedger turns to other foreign exchange derivatives that are highly related to the currency for hedging way of preservation.
However, since the assets in the spot market and the foreign exchange derivatives market may not be completely matched, hedging is not 100% risk-free. One of the reasons why the country continues to develop new derivative instruments is to provide more hedging options for companies and individuals.
Most Active: Speculators
Foreign exchange derivatives speculators refer to traders who use foreign exchange derivatives to obtain benefits by judging and predicting future exchange rate trends from the fluctuating market. The individual investors (retail investors) we usually know, as well as investment banks and hedge fund companies in the international market, are all speculators.
Speculators' foreign exchange trading is not for the actual needs of international receipts and payments, but only to earn price difference income from the rise and fall of the exchange rate. They are actively involved in foreign exchange risks, and their profits and losses depend on the accurate judgment of trends sex.
The position of speculators in the foreign exchange market is also very important, because many international traders, banks, institutions, etc. are not willing to bear the risks brought about by exchange rate fluctuations. The existence of speculators makes them have the possibility of transferring risks. It is because there are speculators in the market that hedging can be carried out smoothly. Speculators are the most active force in the foreign exchange market, which improves the liquidity in the foreign exchange market.
However, speculators also have a scary side. Excessive speculation can easily disrupt the order of the financial market. Some very famous masters in foreign exchange speculation are even called "vultures" in the financial market. This is really not a good thing title. This is all because foreign exchange speculators even dare to fight against the central banks of various countries. It is really frightening to destroy a country's currency and even affect its economy in a short period of time.
For these speculators, the benefits of shorting a country's currency are huge, and they generally choose economies with weak domestic economic structures, most of which are countries with fixed exchange rate systems. If short selling is successful, the relevant currencies will often depreciate sharply, and the capital market will also experience a sharp drop. In the sterling crisis in 1992 and the Asian crisis in 1997, speculators made a lot of money; However, if the original fixed exchange rate is maintained, speculators will not suffer too much loss. Capital is profit-seeking, and this high risk-return ratio makes speculators willing to take risks.
The characteristics of the large scale and sufficient liquidity of the foreign exchange market, as well as the high leverage of foreign exchange derivatives, make the foreign exchange market the best place for speculative transactions. In this market, there is no right or wrong, only the weak and the strong, and the winner is king.
Balancer: Arbitrageur
Arbitrage refers to a trading method in which traders can obtain income by buying low and selling high when there is a price difference between certain financial assets in related markets, varieties, contracts, etc. The most ideal way is risk-free arbitrage. In the foreign exchange derivatives market, there are many arbitrage opportunities.
For the same currency, arbitrageurs can carry out cross-market arbitrage, cross-term arbitrage, etc. Cross-market arbitrage is a relatively common arbitrage behavior. Or more than 2 markets, so it is also divided into two-corner arbitrage and multi-corner arbitrage. The simplest is that some hedge funds carry out arbitrage operations between the onshore and offshore markets of a certain currency. For example, when the overseas forward non-deliverable contract is higher than the domestic forward foreign exchange settlement and sales, they can sell US dollars to buy Arbitrage by importing RMB and selling RMB overseas to buy US dollars. Cross-term arbitrage is the arbitrage between foreign exchange derivatives of the same currency and different maturities. Continue to take the RMB onshore and offshore markets as an example. When the RMB is expected to fluctuate, through operations in the spot and forward markets Arbitrage is possible. Specifically, assuming that the renminbi is expected to appreciate, the stock of offshore renminbi in Hong Kong is limited, and the spot exchange rate rises relatively. Speculators can buy renminbi in the spot market and sell it in the forward market to realize arbitrage.
Arbitrage can also be formed between different currencies. Generally, they are related currencies. It is expected to move in the same or opposite direction in the future, but the magnitude of the change is different. For example, there is a strong positive correlation between the euro and the British pound, and a strong negative correlation between the euro and the Swiss franc. Arbitrageurs can buy or sell foreign exchange derivatives of these two related currencies and balance them at the same time. positions to achieve the purpose of arbitrage.
In addition, due to the different interest rates in different countries, arbitrage by buying high-interest currency and selling low-interest currency is also very common.
The existence of arbitrageurs enables asset prices in different markets, at different times, and between different varieties to be balanced, and it also makes the pricing of financial assets more effective and the market more transparent.
summary
All kinds of traders together form a foreign exchange market with high liquidity and transparent prices. The existence of various derivatives in the foreign exchange market also meets the different needs of traders. Risk-seekers can benefit from it, and risk-averse people can transfer their own risks. Everyone gets what they need, and the foreign exchange market can run healthily and smoothly.
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