Final answer:
The question revolves around the practice of arbitrage in the interbank market, where a party buys a countertrade position using hard currency and sells it for a profit. This business strategy is common in international trade and is facilitated by financial institutions, helping align prices globally.
Step-by-step explanation:
The student's question pertains to a financial trading strategy involving the use of hard currency to buy a party's position in a countertrade and then sell it to another party. This strategy falls under the broader concept of arbitrage, which involves capitalizing on price differences in different markets by buying and selling goods or currencies.
This mechanism helps ensure that the price of internationally traded goods becomes similar across all countries over time. The process frequently occurs within the interbank market, where banks, acting as dealers, provide foreign exchange services to customers and trade foreign exchange among themselves.
Firms involved in international trade must navigate these markets as they deal with costs and revenues in different currencies. For example, a Chinese firm making sales in U.S. dollars must exchange those dollars for Chinese yuan to pay for local expenses.
This firm participates in the foreign exchange market as a supplier of U.S. dollars and demander of yuan. The foreign exchange market structure allows for these transactions to occur through financial institutions rather than direct trades between the ultimate suppliers and demanders of different currencies.