Unit 11. Foreign exchange market. Global financial markets

A. TEXT

TRADING IN THE FOREIGN EXCHANGE MARKET

 

Any one country's currency is a legal tender only within its national boundaries. To trade beyond these boundaries involves exchange of monies. Exchange of currencies is possible if national currencies are interchangeable. The terms on which one currency will exchange against another are referred to as rate of exchange. The rate of exchange is the value of one unit of the foreign currency expressed in the other currency concerned.

Currencies can be bought or sold in the Foreign Exchange Market. The Foreign Exchange Market is the oldest financial market in existence. It is also the largest international financial market in the world.

The Market performs two major functions: it facilitates the foreign exchange needs of exporters and importers, and it enables individuals, corporations and governments to obtain a desired currency mix of their portfolios.

Trading in the Market occurs 24 hours a day in various centres around the world. Deals are concluded bilaterally over telecommunications networks by different counterparties, some of whom serve as market makers or dealers.

The exchange market is global in character, it does not have one centralized location; trading is heavily concentrated in a handful of centres: London, New York, Tokyo, etc. The great majority of foreign exchange trading takes place in the interbank market between traders or market makers who represent large commercial banks or other financial institutions. Foreign exchange departments of large commercial banks are linked across the world through a sophisticated network of communication systems. The market consists of three major sectors: the spot market, the forward and futures markets and the currency options market.

Somewhat more than half of all transactions are spot deals. In other words, they are transactions which call for the delivery of the two currencies exchanged within two business days. The remainder of the deals can be classified as outright forwards, swaps, futures and options.

Such transactions are performed by customers who do not know when they will need foreign currency to overcome the growing exposure to currency risks in the conditions of foreign exchange rate volatility.

The cost of transacting in the wholesale market is reflected in the bid-ask (or bid-offer) spread. Prices in the market depend on the volume of transactions, exchange rate volatility, the availability of relevant information and the strength of competition in the Market.

As prices are different in different markets, professional dealers take advantage of it buying, say, US dollars for Yen in Singapore and selling them in London for sterling and then back into Yen in New York – all for a profit. The operation is called currency arbitrage.

The delivery of the individual currencies involved in a foreign exchange transaction typically takes place through the payment systems of the two countries whose currencies are traded.

The reliance on the domestic currency payment system of individual countries for the clearing and settlement of foreign exchange transactions means that the stability and integrity of the global foreign exchange market depends on both the soundness of the individual counterparties and the robustness of national payment systems.

B. DIALOGUE

CORNERSTONE OF THE GLOBAL FINANCIAL MARKET

Russian: As far as we know, the cornerstone of the global financial market is the Foreign Exchange Market. In this connection, how is it developing? What affects its development?

Foreigner. I would stress, first of all, that the FOREX is really an integral, fundamental sector of the global financial market. It reflects economic relations between parties to currency deals. The most noticeable factors affecting the market are trade and non-trading financial transactions between countries, like transportation, insurance, tourism, credits, foreign investment, etc.

R.: The market has no one centralized location, does it?

F.: No, the market is global in character. It is rather a network of dealing rooms connected by sophisticated communications systems, like telephones, telex machines and electronic dealing systems. Major trading activities are conducted in London, New York, Chicago, Tokyo, Singapore and others.

R.: The cities you've mentioned are located in different time zones. What are the trading hours then?

F.: Oh, trading occurs 24 hours a day. Dealing rooms span the globe and the market never really closes.

R.: How big is the market? How big is the volume of deals in the market?

F.: By the estimate of the Bank for International Settlements, about $1 trillion is exchanged every day.

R.: Who are the major participants in the market?

F.: Commercial and investment banks, central banks, governmental agencies, professional fund managers, corporations, brokers, investors, speculators.

R.: I think banks play the most important role in currency transactions.

F.: You are right. Bank dealers at their workplaces are in constant contact by telephones or computers with dealers in different banks. They sit analysing latest currency quotations they see on display. Banks buy or sell currency either for themselves or on behalf of their clients.

R.: What currencies can be bought and sold?

F.: Only convertible currencies.

R.: I know that currency operations are based on exchange rates. The exchange rate is the value of one unit of the foreign currency expressed in the other currency concerned. Banks involved in currency operations determine full quotations including the buying and selling rates and use them for their currency transactions. How are exchange rates determined?

F.: It's a very difficult question. Determination of the exchange rate at which foreign transactions will take place depends on the exchange rate policy adopted by the central bank of a country. At the present time countries are free to choose the method to determine the value of their currencies. Advanced industrial countries use floating rates depending on supply and demand. Other countries peg their currencies to one currency or a group of currencies.

R.: What factors affect the exchange rate?

F.: They are many. The exchange rate depends first of all on the Purchasing Power Parity, country's economic development, balance-of-payments position, inflation rate, money in circulation, confidence in the national currency on the world market, interest rates, the central bank policy, currency legislation, etc.

R.: The Central Bank of Russia is taking steps to liberalize currency legislation and to join the global financial community.

VOCABULARY LIST

A. foreign exchange market валютный рынок

legal tender законное платежное средство

national boundaries государственные границы

beyond prep за пределами

monies n pl денежные суммы

interchangeable adj взаимозаменяемый, обмениваемый

exchange v обмениваться); n обмен

rate of exchange обменный курс

unit of currency денежная единица

enable v позволять, давать возможность

currency mix структура денежной массы

occur v происходить

interbank market межбанковский рынок

foreign exchange department валютный отдел

spot market наличный рынок

forward market форвардный рынок

futures market фьючерский рынок

currency options market рынок валютных опционов

call for v (зд.) требовать, предусматривать

remainder n оставшаяся часть, остаток

outright adj (зд.) обычный

swap n своп

volatility n изменчивость, непостоянство

bid-ask (bid-offer) spread разница между ценами (курсами) продавца и покупателя

currency arbitrage валютный арбитраж

reliance n доверие, уверенность

clearing n (зд.) сравнение деталей финансовой сделки перед расчетом

robustness n прочность

B. cornerstone краеугольный камень

integral adj неотъемлемый

currency deal валютная сделка

dealing room дилерская комната

time zone часовой пояс

span v охватывать, перекрывать

latest currency quotations последние валютные котировки

convertible currency конвертируемая валюта

buying (selling) rate курс покупки (продажи)

value of currency стоимость валюты

floating rate плавающий курс

peg v «привязывать» (валютный курс)

purchasing power parity паритет покупательной силы валют

EXERCISES

Ex. 1. Answer these questions:

 

A. 1. Why is exchange of currencies necessary?

2. What makes exchange of currencies possible?

3. What is Rate of Exchange?

4. Where are currencies traded?

5. What major functions does the Foreign Exchange Market perform?

6. How does the Forex operate?

7. What are the major sectors of the Forex?

8. What deals are transacted in the market?

9. Why does the market depend on payment systems of individual countries?

B. 1. Is Russia making moves to enter the international financial markets?

2. How is the international foreign exchange market developing?

3. Who are the major participants?

4. What currencies can be bought and sold in the market?

5. How are exchange rates determined?

6. What factors affect the exchange rate?

Ex. 2. Give derivatives of:

 

national adj involve v refer v perform v

exporter n importer n trading n deal n

transaction v strength n reliance n purchase v

transfer v treasurer n expose v float v

lend v borrow v estimate v convert v

determine v

Ex. 3. Find English equivalents for the following Russian phrases from the text:

 

А. валютный рынок; быть законным платежным средством; в рамках национальных границ; обмен валюты; валюты могут быть обменены (одна на другую); выполнять функции; способствовать удовлетворению потребности в иностранной валюте; добиться желаемой структуры денежной массы своего инвестиционного портфеля; сделки заключаются с использованием телекоммуникационных систем; торговля сосредоточена в...; которые представляют большие коммерческие банки; наличный рынок; форвардный рынок; фьючерский рынок; большинство сделок являются сделками «спот»; сделка предусматривает поставку валюты в течение двух рабочих дней; отражать разницу между ценой продавца и ценой покупателя; валюты, задействованные в валютной сделке; расчет по финансовой сделке;

В. оказывать воздействие; неотъемлемый сектор рынка; наиболее заметный фактор; сеть дилерских комнат, связанных друг с другом современными коммуникационными системами; объем сделок; валютные котировки; курс продажи (покупки); плавающий курс; «привязывать» валютный курс; интеграция в мировой финансовый рынок.