What Are Commercial and Investment Banks?
Commercial and investment banks are major participants in the forex market. They actively trade currencies to support global financial flows, manage risk, and provide foreign exchange services for their clients.
These institutions play a key role in maintaining liquidity and stability across the currency market.
Commercial Banks
Commercial banks are one of the main liquidity providers in forex trading. They handle large volumes of currency transactions every day, which helps keep exchange rates competitive and markets efficient.
Their forex services are used by:
- Individual traders
- Small and medium-sized businesses
- Large international corporations
By constantly buying and selling currencies, commercial banks ensure that market participants can easily exchange money when needed.
Investment Banks
Investment banks operate mainly within the interbank market, where large-scale currency transactions take place between financial institutions.
They work closely with:
- Multinational corporations
- Institutional investors
- Hedge funds
In addition to forex trading, investment banks offer advanced financial services such as capital raising, mergers and acquisitions advisory, underwriting, and complex trading strategies involving currencies and other financial instruments.
Hedging and Risk Management
A key function of both commercial and investment banks in the forex market is providing hedging solutions.
Hedging helps businesses and investors reduce the risk caused by currency price fluctuations.
For example, a company that receives income in a foreign currency may face losses if exchange rates move unfavorably. To limit this risk, the company can lock in an exchange rate through a bank, protecting future cash flows from market volatility.
Why Banks Matter in the Forex Market
Without commercial and investment banks:
- Market liquidity would be lower
- Currency spreads would be wider
- Large international transactions would be harder to execute
Their continuous participation helps keep the forex market liquid, efficient, and accessible to traders worldwide.
