Explain the statement: 'There are many reasons for participating in foreign exchange including facilitating commercial transactions, corporations converting their profits, or hedging against future price drops.'

While there are many reasons for participating in foreign exchange including facilitating commercial transactions, corporations converting its profits, or hedging against future price drops, more and more people are getting involved in the market for the purpose of speculation. Various foreign exchange participants have different objectives for participating in foreign exchange which are mentioned below: Exporting and Importing Companies : Large multinational corporations influence the foreign exchange market as they purchase and sell goods and materials between different countries. Importing companies affect the demand of a currency as well. For example, an American retailer features Japanese furnishings and pays its suppliers in Japanese yen. If consumers like these products then they will indirectly contribute to an increase in demand for the yen as the American retailer will have to buy more merchandise from Japan. As the retailer purchases the yen and sells the dollar on the exchange market, the yen appreciates. Foreign Investment Flows : Foreign investment has many aspects, having to do with goods, services, stocks, bonds, or property. Suppose a Canadian company wants to open a factory in America. In order to cover the costs of the land, labour and capital the firm will need dollars. Suppose the company holds most of its reserves in Canadian dollars. It must sell some of its Canadian dollars to buy US dollars. The supply of Canadian dollars on the foreign exchange market will increase and the supply of US dollars will decrease, which causes the US dollar to appreciate against the Canadian dollar. On the other side, foreign investors are also increasing or decreasing the demand for the currency of the country in which they are interested in investing. Banks : For a long time the foreign exchange market has been associated with the term 'interbank' market. This term was employed to capture the nature of the foreign exchange market when it predominantly dealt with banks. Banks include central bank, investment banks and commercial banks. Speculators : Investment Management Firms, Hedge funds, and Retail Traders: Many financial institutions use currency exchange as a method to generate income. There are also many individuals who try to do the same thing. The currency markets move in one direction only when many investors act together. An individual investor cannot move the exchange rate of a currency but many traders, investment funds, and banks may collectively move it.