principally arsing from the need to cover or hedge other financial or commercial operations,
although in practice it is sometimes difficult to draw a clear line between these categories. For
example, covering and hedging operations may well contain elements of speculation. Whatever
the nature of the transaction, they are initiated by the banks’ clients or by banks themselves
for their own account.
The following are examples of those types of transaction, undertaken by all categories of
market participants, which are commonplace in the foreign exchange market today.
Commercial Transactions
For commercial transactions, manufacturing companies who buy in raw materials from abroad
and export finished products undertake both purchases and sales of foreign exchange, always
dependent upon the companies’ domicile and the currency used for invoicing.
Importers of goods, whether acting as principles or intermediaries, will undertake purchases
of foreign currency. Contractors involved in overseas projects will be market participants
as both buyers and sellers of foreign currency. Also, international insurance, shipping, air
transport and travel companies have need of frequent involvement in the market, as do any
other individuals or companies offering services overseas.
Funding
Banks and multinational corporations require specific wholesale funding for their commercial
loan or other foreign investment portfolios, alongside day-to-day funding requirements of their
net currency cash flows.
Hedging
The hedging of any open currency exposure is frequently better handled through off-balancesheet
products, such as currency options, which ultimately will have an effect on the foreign
exchange market. Also, companies involved in direct commercial investment overseas,
the purchase and maintenance of plant and materials, or those financing operations of foreign
based subsidiaries, will be frequent participants in the market, as will property companies
or individuals involved in the purchase and sale of property overseas. They may seek
foreign currency financing or may convert local currency funding via the foreign exchange
market.
Portfolio Investment
Added to this group are banks and other entities involved in portfolio investment overseas,
or dealing in foreign securities, who will, for position establishment and profit realization
purposes, be both buyers and sellers of foreign currencies.
Personal
On the personal transaction front, tourists, immigrants and emigrants making outward and
inward remittances in foreign currency make up the bulk of the volume, if not the value, of
retail foreign exchange business transacted in the market. Royalties, commissions, patents and
copyrights from abroad will also be transacted in the market.
Source: A Foreign Exchange Primer
