Foreign exchange market.

UNIT 10

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 fo national boundaries. To trade beyond these boundaries involve 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 centra 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 ШП commercial banks are linked across the world through a sophisticated network of communication systems. The market consists of Ш major sectors: the spot market, the forward and futures markets 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.

^{1 lts} The cost of transacting in the wholesale market is reflected in the

^Ves! bid-ask (or bid-offer) spread. Prices in the market depend on the»naj! _voiume of transactions, exchange rate volatility, the availability of WlJ j relevant information and the strength of competition in the Market. ^ate As prices are different in different markets, professional dealers

^Je<* j 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. ^m The delivery of the individual currencies involved in a foreign

^le exchange transaction typically takes place through the payment

systems of the two countries whose currencies are traded. ^Q The reliance on the domestic currency payment system of

j individual countries for the clearing and settlement of foreign ' j exchange transactions means that the stability and integrity of the

I 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 ail, 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.

JR.: 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 [.Н:дэ1 'tends] законное платежное средство

national boundaries [.пае/эпэ1 'baudariz] государственные границы

beyond [bi 'jond] prep за пределами

monies [ 'шлпн] n pi денежные суммы

interchangeable adj взаимозаменяемый, обмениваемый

exchange [iks 'tjeind3] v обменивать(ся); n обмен

rate of exchange обменный курс

unit of currency [ 'клгэгш] денежная единица

enable [i 'neibal] v позволять, давать возможность

currency mix структура денежной массы

occur [э 'кэ:] v происходить

interbank market межбанковский рынок

foreign exchange department валютный отдел

spot market наличный рынок

forward [ 'forwad] market форвардный рынок

futures market [ 'fju:tjaz,ma:kit] фьючерский рынок

currency options market рынок валютных опционов

call for v (зд.) требовать, предусматривать

remainder [п 'meinda] п оставшаяся часть, остаток

outright [ 'autrait] adj (зд.) обычный

swap [swop] п своп

volatility [ I vols 'tiliti] n изменчивость, непостоянство

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

currency arbitrage ['a:bitra:3] валютный арбитраж reliance [п' laians] п доверие, уверенность

clearing [ ■кЬэгщ) п (зд.) сравнение деталей финансовой сделки перед расчетом robustness [гэ 'bAStms] л прочность

В. cornerstone [ 'ko.nastoun] краеугольный камень integral [ 'intigral] adj неотъемлемый currency deal валютная сделка dealing room дилерская комната time zone часовой пояс

span v охватывать, перекрывать

latest currency quotations последние шипотиме кигипопнп

convertible [kan 'vaitibsl] currency коtиицпиpy ом»я нпшою

buying (selling) rate курс покупки (продажи)

value ['vaelju:] of currency стоимость валюты

floating [ 'flout!*)] rate плавающий куре

peg v «привязывать» (валютный курс)

purchasing [-part/asio] power parity [ 'p;t>nuj mrpiuvt покупй'ггиьиой СИЛЫ ми лют

EXERCISES

Ex. 1. Answer these questions:

A. I. Why is exchange of currencics necessary?

2. What makes exchange of currencies possible?

3. What is Rate of Exchange?

4. Where are currencies traded?

5. What major functions docs 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.I. Is Russia making moves to enter the international financial markets?

2. How is the international foreign exchange nun ket developing?

3. Who are the major participants?

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

5. How are exchange rates determined?

6. What factors affect the exchange rate?

Ex. 2. Give derivatives of:

national^' involve v refer г perform V

exporter n importer n trading n deal»

transaction v strength n reliance n purchase v

transferv treasurern expose»¹ float t>

lend v borrow v estimate v COO vert V determine v

Ex. 3. Find English equivalents for the following Hiw»i*n р)№АШ1 hom (It. (i sI

А. валютный рынок; быть чикоииым ича годным средством, | рамках национальных границ; обмен aaanvrw; валюты могут бМТЬ

обменены (одна на другую); выполнять функции; способствовать удовлетворению потребности в иностранной валюте; добиться делаемой 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 „алюты 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.

Ex. 4. Say in a few words what the main text is about. Use the opening phrases from Ex. 4 (Unit 1).

Ex. 5. Sum up the content of the dialogue. Use the phrases from Ex. 5 (Unit 1). Ex. 6. Read the dialogue, translate the Russian remarks into English and act it out:

British economist: Your participation in the world financial markets is

increasing. How is your foreign exchange market performing? Polish economist: Экономические реформы в нашей стране привели к возникновению у нас рынка иностранной валюты, связанно­го с глобальными финансовыми рынками. Вт. ее.: You've made tremendous progress. Ten years back your

currency was not convertible. ^ ее.: Да, наша валюта достаточно быстро стала свободнокон­вертируемой. И сейчас она является единственным законным платежным средством в нашей стране.

ее.: It goes to the credit of your government and the central bank, doesn't it?

£ ее.: Да, и сегодня наш центральный банк поддерживает ста­бильность нашей валюты, ее обменный курс. ее.: How is your foreign exchange market organized? ec.: Наш рынок состоит из нескольких валютных бирж, на ко­торых осуществляются различные сделки, включая спотовые, фьючерсные и форвардные операции. Успешной работе рынки способствует недавно модернизированная платежная система. Вг. ее.: The basic idea of foreign exchange dealing is making profit on

selling and buying currencies. P. ее.: Валютный арбитраж безусловно существует. Но главная цель нашего рынка - обеспечить потребности в иностранной валюте наших экспортеров и импортеров.

Ex. 7. Work on vocabulary and grammar.

a) Study the key words of the unit in the dictionary at the back of thin book: option, rate, transaction, currency, quotation;

b) Think of the verbs that are most commonly used with:

currency, deals, trading, price, trading activities, restrictions, operations, quotations, financial flows;

c) Think of the nouns that are most often used with:

to exchange, to sell, to buy, to express, to obtain, to deliver, to trade, to clear, to settle, to set, to convert, to determine, to express, to hedge, to shift;

d) Make your own sentences with any five word combinations from (b) and (c).

e) Match the verbs from (a) with the nouns from (b) below:

a) to facilitate b) needs

to perform trade

to fix legislation

to enhance functions

to identify opportunities

to seek negotiations

to join profits

to liberalize financial community

to hold exchange rate

Ex. 8. a) Supply the articles where necessary.

b) Write down 3-5 questions about the text.

c) Say what exchange rate policies are practised by different countries.

In... late 19th century... major trading nations fixed thcii currencies in terms of gold. Exchange rates were therefore fixed and these countries had essentially one common currency.

i

222Щ In July 1944_> international negotiations were held at... Bretton

Woods, New Hampshire, USA, to identify... basis of the new >n monetary system. The participants envisaged... international

monetary system that would determine exchange rate parities on the basis of consultations.

The postwar system was designed to be one of... fixed but adjustable exchange rates. Member nations of... IMF were expected to "peg" their currencies within... narrow band of internationally agreed parities. The US pegged... dollar in terms of gold and all other nations pegged their currencies in terms of the US dollar.

The breakdown of... Bretton Woods system began when convertibility of the US dollar into gold ended in... August 1971. In December 1971, the Smithsonian Agreement resulted in... major devaluation of the US dollar, and multilateral adjustments in the major exchange rate parities. The US dollar crises of 1973 finally finished off Bretton Woods, when the major countries abandoned... adjustable peg and floated their currencies against the US dollar. _t Since then many countries have adopted... wide range of exchange

rate practices, including independent floats, group floating, pegging against a major currency, and pegging against... "basket" of currencies such as the SDR (Special Drawing Rights), c). Many countries, particularly less developed countries (LDCs) have

chosen to peg their currencies to either... single currency, to specially weighted "baskets" of currencies, or to the basket of currencies used by the IMF to calculate... value of its SDRs. One benefit of the latter approach is that the IMF provides national exchange authorities with daily information on the value of... SDR basket.

Words you may need:

band n (зд.) полоса, диапазон

breakdown n (зд.) падение, развал

multilateral adjustments многосторонние корректировки

abandon v отказываться (от чего-л.)

Ь, 9. a) Supply the prepositions where necessary.

b) Write down 3-5 questions about the text.

c) Describe the components of the global financial markets.

Global Financial Markets The global murkct for finance encompasses a complex web of financial instruments and institutions. Its structure and functioning are affected in fundamental ways... the macroeconomic environment (in particular, patterns of interest rates and exchange rates), the regulatory and technological environment, and fundamentals driving the real sector of the international economy.

The cash and derivative instruments that comprise global financial markets rest... four cornerstones: 1) foreign exchange market, 2) the Eurocurrency market, 3) the market of intermediated credit facilities and debt instruments and 4) the equities market.

Foreign exchange (Forex) market stands... the core of the global financial market. It encompasses spot as well as forward interbank and customer transactions, as well as Forex futures and options, traded... various organized exchanges around the world.

Motivations for Forex transactions range... short-term positioning (speculation) to hedging... commercial or investment transactions via outright forwards, forex swaps, futures or options.

Forex Market is a structure upon which most other segments... the global financial markets are built.

A second cornerstone is the Eurocurrency Market. Eurocurrency financial items are claims that are created in one country but denominated... the currency of another. The Eurocurrency system comprises the markets within which these claims are created and traded. This activity originated... Europe but now takes place... the world. Three broad classes of financial items are involved:

1) bank deposits and credits, for example, dollar deposits held... European banks;

2) primary securities in the form of Eurobonds and Euronotes; and

3) derivative securities such as foreign currency options or futures on Eurodollar instruments.

Initially, Eurocurrency financial items were denominated primarily... dollars. Today, there are many currencies of denomination, with the Deutchemark and Yen playing an increasingly important role. As in the foreign exchange market, the core of this market consists... major dealing banks that consistently quote bid and offered prices in active interbank trading. The Bank of England samples these interest rates daily for a group of reference banks and publishes an average of the two sides of the market as the London interbank bid (LIBID) and offered (LIBOR) rates. LIBOR has become the most important floating-rate pricing benchmark for loans and debt instruments... the global financial markets.

International lending and issuance of debt securities represents the third major segment of the global financial market,

Perhaps the most long-standing form of international lending ^le involves trade financing, whereby a foreign buyer agrees to pay... ¹⁸ imported merchandise after a period of time.

A corporation or government requiring general international bank financing can borrow... foreign-based financial intermediaries under a ^le variety of structures ranging from revolving credit facilities, term loans _and project financing, to various kinds of secured credits.

An alternative... bank financing available... many corporate and ^ governmental borrowers is to issue debt securities (like commercial

paper or government bills). ^s' The fourth cornerstone of the global financial market involves

equities, that is, common and preferred shares. Corporations seeking to raise equity capital may issue shares in the domestic market through the underwriting channels and simultaneously distribute them... foreign investors.

Words you may need;

^СУ web n паутина

Ut regulatory environment правовое поле

:m fundamentals n pi основы

nd drive v приводить в движение

derivative instruments производные инструменты Eurocurrency market евровалютный рынок credit facilities кредиты, источники кредитования core n сердцевина, ядро positioning n установление позиции nd hedging n хеджирование

_res claim n требование

primary securities первичные ценные бумаги Euronote я евронота (1-6-месячный вексель) "У sample v отбирать (образцы)

the reference banks банки, чьи процентные ставки используются при расчете ЛИБОР

in и др. ставок-ориентиров

j_or London interbank bid rate (L1BID) ставка покупателя на лондонском межбанков-

ive ^ском Р^ынке депозитов (ЛИБИД)

London interbank offered rate (LIBOR) ставка продавца (предложения) на лондон- ites ском межбанковском рынке депозитов (Л И БОР)

the debt security ценная бумага, представляющая собой долговое свидетельство

Hid long-standing ad(j давнишний, давний „Л^, fade financing финансирование торговли. merchandise и товары

foreign-based acfj расположенный за рубежом 'evolving credit facilities револьверный кредит the term loan срочная ссуда

¹ jam гаШ^^НК

project financing финансирование проектов

secured credit ломбардный кредит (кредит под обеспечение легко реализуемыми

ценными бумагами) commercial paper «коммерческие бумаги», векселя

Ex. 10. a) Open the brackets putting the verbs in the correct form.

b) Explain what are hedging techniques mentioned in the text.

Managing Exchange Rate Risk. Hedging

In general, hedging is a technique of insurance against loss from future price movements. For instance, in Britain in 1970s, when inflation was rampant, people (to buy) property because they thought that it (to keep) its value even if notes and coins did not. Their property was a hedge against future inflation.

Hedging is widely applied in commodity and financial markets, as well as in international trade. Exchange rates between currencies (to fluctuate) over time and companies engaged in international business (to expose) to exchange rate risk.

International companies can lower exchange rate risk exposure by hedging.

As to companies involved in international trade, i.e. purchasing goods from a foreign supplier, they can use two basic hedging techniques to protect themselves against transaction exposure:

a) Execute a contract in the forward exchange market, or in the foreign exchange futures market.

Currency contracts for future delivery (to trade) on many organized futures exchanges. Futures contracts (to standardize) with respect to the amount of a foreign currency to be delivered to the buyer from the seller and with respect to the time of delivery. In contrast, forward contracts can be set for any specific amount and any future time of delivery, although they normally are set for 30,60 or 90 days in the future.

b) Borrow funds and invest in interest-bearing securities.

This technic is called a money market hedge. In that case a firm purchasing some goods (to borrow) the funds from its bank, M exchange) them for the needed currency at the spot rate, and invests it in interest-bearing securities of the Supplier's country. By investing Щ securities that mature on the same date as the payment is due to the Supplier, the purchaser (to have) the necessary amount of currency available to pay for the goods.

Firms with direct investment in foreign subsidiaries also (to face) exchange rate risk in the form of translation exposure. Changes in the exchange rate (to affect) the value of the subsidiary's assets and liabilities and, ultimately, the income of the multinational parent company. A company can hedge against translation exposure by financing its foreign assets with debt denominated in the same currency.

A multinational company can also minimize its exchange rate risk by developing a portfolio of foreign investments. The firm should spread its foreign investments among a number of different countries, thus limiting the risk of losses in one country.

Words you may needs:

to manage the risk управлять риском

rampant adj безудержный, быстро расширяющийся

over time со временем

interest-bearing securities процентные ценные бумаги mature v подлежать оплате, подлежать погашению hedge (against) v хеджировать

Ex. 11. a) Fill each gap with a suitable word from the box.

b) Sum up the text in 5-7 sentences. Present your sentences to the class.

c) Describe the basic functions of the Eurocurrency markets.

function	conducted	restrictions
try	need	organized
borrow	offer	perform
deal	leading	client
bank	borrowers	operating

The Eurocurrency Market

One of the most well-developed sectors of the Global Financial Market is the Eurocurrency Market. The Market refers to funds channelled via financial intermediaries from international lenders to

international. The large multinational banks dominate this

business and have played a role in the development and

growth of these "offshore" markets.

The Eurocurrency markets J the short to medium term

debt required by banks, corporate customers, and government

borrowers. The sources of these funds are domestic

deposits whose ownership is transferred to banks outside the controlled domestic monetary systems.

The Eurocurrency market is therefore and sustained

by the large international banks and operates at two levels. Firstly,

there is the very competitive wholesale market in London,

in which these banks sell their funds to each other at the London

interbank offering rate (LIBOR). This business is mainly

via telephone, and thus only the highest quality banks can jj

in the wholesale market. Secondly, smaller banks, corporate borrowers, national governments (in the late 1970s from Eastern Europe or developing countries and now primarily the Western

industrialized countries) can loans from this market. In

this large-scale "retail" loan market the large international banks only lend the offshore deposits after detailed credit investigation of the

The Eurocurrency markets three basic functions.

Firstly, they are extensively used for foreign exchange hedging

purposes as the banks to balance out their foreign assets

and liabilities. The banks therefore take positions in the Eurocurrency market to cover the forward commitments they have made with their customers. Secondly, Eurocurrency markets can at times bypass domestic channels of financial intermediation, especially when

governments impose tight credit. For example, US

corporations can acquire Eurodollars in London. These deposits may be US domestic dollar deposits that have been transferred abroad,

during a US domestic credit squeeze. The third is the full

international intermediation role of channelling surplus liquid resources from, say, OPEC countries to those countries or corporations who to borrow.

Words you may need:

via через, посредством to take position устанавливать позшшо at times no временам, время от времени bypass v обходить

credit squeeze «сжатие кредита» {мверотриштя государства по ограничено» кредита потребителям)

DISCUSSION

Ex. 12. a) Read the text and ац^е смС its main facts, b) Present tbem in a short review.

C) Discuss the |и obk ■ raised ■ At text, offer your solution to the problem.

Tougher Measures Needed to Counter Macroeconomic Effects of

Money Laundering

The globalization of the world economy and the growing efficiency of capital markets allow individuals and firms to shift vast amounts of money relatively freely between domestic financial markets and from one country to another. The efficiency of capital markets and their freedom from restrictions on capital movements have also provided criminal elements with an easy means to launder internationally money acquired from illegal activities in particular countries. Although difficult to measure, the magnitude of the sums involved and the extent of the criminal activities that generate this "income" have implications for both the domestic and the international allocation of resources and macroeconomic stability.

Money laundering and measures to counter it have therefore become the focus of intense international attention in recent years.

Money laundering is, by definition, a concealed activity. The "dirty" money that is cycled through the international capital "laundromats" is generated by criminal activities that take place far from the eyes of the authorities. These activities include, in particular, the production and distribution of illegal drugs, as well as theft and embezzlement, insider trading, traffic in nuclear materials, usury, and prostitution. Although it is impossible to measure directly the size of the net financial gains that accrue annually to those who engage in these activities worldwide, the value of the total stock of laundered money is probably much larger than the GDP of many countries.

The concentration of vast sums of money in laundering operations has generated progressively more sophisticated attempts to launder the assets. Laundering transactions now involve a broad range of financial instruments, including derivatives. And the intermediaries have increasingly included such traditional financial institutions as banks and near-banks, brokers and dealers in securities, and foreign exchange dealers, as well as unconventional and parallel financial markets.

This huge money stream may exert an impact on macroeconomy.

At the national level, large financial flows related to money laundering could influence variables such as exchange rates and interest rates. At the international level, capital movements originating ^{m 0}J\^{C ccn}*er can easily spread to others, thus transforming a national problem into a systemic one.

The transparency and soundness of financial markets are key dements in the effective functioning of economies, and money laundering can threaten both. Criminally obtained money can corrupt financial market officials, and the damage can be long-lasting, because the credibility of markets, though quickly lost, takes a long time to be rebuilt.

Although domestic money laundering can often be fought at the national level, an effective solution to the international money laundering problem is only possible at the international level.

VMjm mey meed:

яопеу hwieriwg отмывание денег

counter v противостоять

magnitude л размср(ы), масштаб(ы)

implication л подтекст, смысл

concealed activity тайная деятельность

drags я наркотики

М л кража

embankment л растрата

traffic (in) (к).) торговля (чем-л.)

usury я ростовщичество

accrue v увеличиваться, расти, (к).) поступать

dwiiallm л pi производные ценные бумаги

to exert an impact оказывать воздействие

Ел. 13. Read the dialogue, sum up its content and act it out:

Russian: I know that since January 1999 the new European currency - the Euro - has been traded in the foreign exchange markets. How has the introduction of the Euro affected the member states of the European Union?

Foreigner: First of all it is an important step towards European integra­tion. The Member States have introduced a unique monetary regime and established a new central banking system, the core of which is the European Central Bank (ECB). R.: Has the ECB taken over from national central banks in implementing monetary policy?

F.: The ECB's legal mandate is to pursue monetary policy with a view to the whole of the European Monetary Union area and without favour­ing one country over another. It uses usual financial instruments, such as interest rates, open-market operations, reserve requirements, etc. R.: Who has benefited from the Euro?

F. All member states, particularly business. Business has got wider possi­bilities because a new financial and investment market has been creat­ed which will soon embrace almost all Europe. By introducing the sin­gle currency member states have got rid of currency fluctuations inside the union, have reduced the cost of financial transactions.

ft: What do you think of the UK's position regarding the Euro? So far the UK has refused to enter the Euro zone.

f_m: You know that after a 3-year transition period in July 2002 national currencies ceased to exist. The British see in it the first step towards the situation which might deprive them of their right to administer their own taxes, to run their own country. They wonder how they will control their economy if interest rates are set by the ECB? 1 think that the "one interest rate for all" strategy creates problems which will put the Euro to test and will cause disputes.

F.: I'm afraid, 1 can't agree with you. I'm confident that the economic benefits will outweigh disputes and disagreements.

Ex. 14. Give extensive answers to these discussion questions:

1. Do rates of exchange influence the external trade of a country?

2. What are the meaning and purpose of Forward Exchange?

3. What are the objectives and methods of Exchange Control?

4. What is "convertibility" as applied to a currency?

In order to get prepared for participation in the class discussion of the questions,

write several short paragraphs about:

a) The composition of the exchange market.

b) The structure of the global financial market.

Ex. 15. Prepare a short talk on the following:

a) The major participants of the foreign exchange markets.

b) What is the rate of exchange determined by?

c) Instruments and transactions made in the currency markets (spot trading, futures and forward contracts, swaps, options).

d) Explain the global character of the exchange market.

c) What is arbitrage?

0 Russia's efforts to fight money laundering.

Ex. 16. Find a table of foreign exchange rates in a daily paper. Which currencies have я higher value relative to the Rouble? How does it affect the situation?

READING PRA CTICE

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Ex. 17. Read the text quickly to find the types of most widely used swaps:Swaps are transactions in which two parties swap financial assets by linking a foreign exchange transaction in cash to nil opposite futures business in the same currency.

Foreign Exchange Swap Markets have developed since the early 1980s. The oldest type of swap is the conventional foreign exchange deal whereby one currency is simultaneously bought spot and sold forward against another - meaning an immediate exchange of cash followed by a further reverse exchange at a specified date In the Allure,

The idea of swapping has now spread further. By far the largest business volume amongst swaps occurs in the so-called "vanilla interest rate swap". A "plain vanilla", or fixed-to-fixed foreign exchange, or currency swap is an exchange of the principal and interest payments associated with a fixed-rate loan in one currency for the principal and interest payments on a similar loan in a second currency. The first such swap between IBM and the World Bank was done in 1981. Since then the swap market has grown to over $ I billion and, in the process, has evolved several additional types of currency swaps.

Words you may meed:

Foreign Exchange Swap валютный «своп» Id buy spot купить на условиях «спот» followed by за которых следует... vanilla interest rate swap «своп» процентный plain vanilla простой процентный «своп» evolve v развиваться, эволюционировать

Ex. IS. a) Read the text quickly to find answers to the following questions!

What does the price of я foreign exchange option dtprnd out Whet ere the prospects for the option markets f

Foreign Exchange Options

Options as a financial instrument have a reasonably short history in financial markets, with the first option contracts being traded In Chicago in 1973. In foreign exchange, a call option on the US dollar is the right to buy the US dollar, and a put option Is the right to sell the US dollar. To purchase an option, the buyer has to pay и pmuiunt To write an option, the seller receives a premium.

There are three different types of users of foreign •xchnnjtf options: the corporate treasury, the fUnd nmni_tn. nml th* commercial bank trading room. For example, in the currency option markets, the corporate treasury can buy the right, but not the obligation, to sell or buy currency forward, if required. This option, to decide whether to buy or sell currency, is particularly important when the firm is unsure about the timing or size of foreign currency receipts or payment.

International banks, in their turn, use currency options for their customers and for their own trading. In the past few years, nearly all dealing rooms have seen a large growth in the use of currency options and banks have started employing traders purely to trade currency options for the bank's own account.

Options are also sold "over the counter" (OTC) in a manner similar to currency forward contracts. OTC contracts have very flexible terms arranged by negotiation between the (normal bank) supplier and corporate buyer. Thus the currencies to be bought and sold can vary according to the corporate customer's needs and do not have to correspond to exchange market conventions. Amounts, duration of the option, and price can all be negotiated and matched to the corporate customers' exposure.

The volume of trading on the OTC market between banks is even higher than on the listed options market. There is no public secondary market in OTC currency options but trading is conducted by telephone using prices available on screen systems provided by large international (commercial and investment) banks. MNCs are major users of OTC options and are key participants in the screen markets. These OTC markets are closely linked to spot and forward markets in currency in which the banks and MNCs also play central roles.

The organised currency option exchanges provide an important public pricing mechanism for the MNC treasurer and may also provide a suitable currency option contract for foreign cash flows of known size but uncertain likelihood of occurrence.

The price of a foreign exchange option depends on: the length of a period desired to be covered by the option; the underlying volatility of the foreign exchange market; the relationship between the spot exchange rate and the desired price or the desired strike price; option premium; foreign interest rate.

Moreover, the type of currency option that financial institutions, corporations and the like can trade in vary from the extremely simple to the very sophisticated. It is possible to design tailor-made foreign exchange options to suit requirements, as essentially a foreign exchange option is akin to an insurance premium on the foreign exchange market. All this makes this instrument very attractive.

Within the past fifteen years the use of options has grown in all financial markets. It seems quite likely that foreign exchange options will grow further in coming years.

Words you may need:

call option опцион «колл»

put option опцион «пут»

to write an option исполнить опцион

corporate treasury подразделение в корпорации, занимающееся управлением ее

свободными средствами to sell (buy) forward продать (купить) на срок convention п конвенция, соглашение strike price цена исполнения and the like и тому подобное tailor-made adj с учетом потребностей заказчика to be akin (to) быть сродни, быть близким (чему-л.)

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