Trade And Financial Flows

The foreign exchange market provides the liquidity for all these market participants to convert their trade and financial flows from the currency of one money centre to the currency of another. These participants buy and sell foreign exchange directly or indirectly from the interbank market, which comprises professional foreign exchange traders who operate in every financial centre of the world.

These flows and the products available to facilitate these conversions are shown in Figure 4.6. The products - the majority of which have been developed for the clients of the foreign exchange market rather than for professional traders - are also used to hedge or protect the values of cash flows, as these can be affected by the potential changes in the relationships of the currencies involved. The funds borrowed or invested in the money markets may also need to be hedged for the same reasons.

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