The I-Iedging of Commercial Transactions Between and Canadian Residents: A Canadian View

The literature on the commercial uses of the foreign exchange market, such as it is, finds inspiration for its classifications in analyses of the effectiveness of that market for short and long-term financial operations. It starkly classifies the positions of traders as either open, and therefore speculative, or as covered by a forward transaction that entirely offsets their commercial position. It will be shown below that this simple classification obscures the real nature of an international trader’s business. Thus a trader who buys foreign goods today and pays with foreign exchange bought today is considered by the traditional classification not to have a speculative position. However, if he had bought spot or forward exchange earlier in the anticipation of this purchase of goods, or if he delayed purchasing t’oreign exchange until later, because of a view he held that those were the times at which the rate of exchange was lowest, the traditional view would consider that to be speculation. Yet the motives t’or the transactions and the type of risk assumed are the same in all three cases and reflect that the trader’s function is to buy and sell internationally traded goods on the most favourable terms. If he buys foretgn exchange today, yesterday or tomorrow, it is because he believes the rate to be particularly favourable then.