Each country has its currency, with names such as dollar, pound, mark, peso, lira, peseta, krona, franc, and so on. Deciding the rate for the international exchange of money is one of the most complex and, to many observers, one of the most fascinating aspects of international banking.
Centuries ago, when gold coins exclusively were used as the money of nations and city-states, the comparative value of each nation’s money was determined by the ratio of the gold content of each coin. Now national money is printed on paper.
Each major currency has a par value that is usually defined, officially, in terms of gold. In practice, however, little or no trading occurs at this rate.
Until a few years ago, countries were required to maintain the rate of exchange of their currencies within a few percentage points of the par value. They have since adopted floating rates. The rates of exchange are determined by market trading based on demand for specific currencies. As demand fluctuates, the rate fluctuates too – rising when demand is greater than supply and declining when supply exceeds demand.
The state of a nation’s trade balance of payments helps determine the rate of exchange for its currency. When a nation’s trade balance of payments is in deficit, its imports exceed its exports and therefore do not earn enough foreign exchange from its exports to pay for its import.
Many people participate in the foreign exchange market. It is an international market with no central trading place, a market in which business is conducted by foreign exchange traders around the world linked by telephones and cables. The trading day never ends. It begins in Europe when the business day opens and follows the sun westward as each country’s business day in turn begins and ends. The major activity is centered in the money centers of Europe, London, Frankfurt, Zurich, as well as in Japan and Hong Kong. In the United States, the trading is concentrated in New York, but it does occur elsewhere.
The participants in the market include the major international banks (trading primarily for the accounts of their customers); brokers, central banks, and large corporations with international activities (trading usually to protect their currency from short-term fluctuations); and individuals (trading as speculators and investors).
A trade occurs when a buyer and seller agree on the price for exchanging two currencies. For example, a United States manufacturer sells a piece of machinery to a company in Great Britain and receives pounds sterling in payment. At the same time, another United States company plans to invest money to build a new plant in Great Britain, and it requires pounds sterling for capital. The first company sells the pounds sterling that it received for the machinery to the second company at a mutually agreed upon price: £100,000 for $185,000. In this transaction, the rate of exchange was £1 = $1.85.
While any of the above participants can trade directly with each other, it is often more convenient to use a broker. The broker brings both sides of the transaction quickly together by telephoning the buyer and seller and arriving at a mutually acceptable rate. The two sides make the final settlement arrangements while paying the broker his commission. The broker rarely trades for his own account because he usually lacks the capital to do so. The broker is also a useful source of market information to the various participants, since he has a clear picture of the supply and demand fluctuations of currencies during the trading day. Any bank or company with money to sell or a need to buy may contact a broker.
Rates fluctuate constantly during a trading day. A foreign exchange trader must make quick decisions based on rapid mathematical calculations. Because so much trading is effected over the telephone, the trader is bound by his word and must therefore honour his verbal commitments.
The foreign exchange trading market traditionally deals in large quantities of a currency, such as 100,000 pounds or 1,000,000 Japanese yen. Small decimal changes in the exchange rate are important, because each trader wishes to buy another currency at as low a cost as possible and sell it for the maximum amount at any given moment.
Trading for prompt delivery is called spot trading or spot, which means that settlement occurs in two business days. At that time, the seller of a foreign currency delivers it to the bank account of the buyer, who at the same time pays for it by crediting the bank account of the seller.
Trading may also occur for settlement on delivery at any future date. This transaction results in a futures or forward contract. A businessman who knows he will be paid for the sale of machinery within thirty days can arrange with his banker today to settle the rate of exchange at which the bank will buy the foreign currency when it is delivered.
The prudent businessman who signs a contract for the future delivery of machinery or an investment commitment may wish to settle his cost in his own currency immediately by signing a futures contract with his bank. He is then said to have hedged his position. He knows that no matter what happens to the daily fluctuations in the foreign exchange rate between now and his settlement date, his rate of exchange is set.
The bank’s trader must always be alert for opportunities to make a quick profit by arbitrage when the cross-rates are favourable. The trader might discover that the rate being quoted in London for Italian Lira is such that he can buy pounds in New York, simultaneously sell these pounds in London for lira, sell the lira in Zurich for dollars, and end up with more dollars than he began with. This action must, of course, be effected very quickly before rates fluctuate again.
In addition to trading in large quantities of a currency by means of cablegram and the telephone, a bank’s foreign exchange trader also buys and sells the actual banknotes and coins. This service is usually offered to accommodate visitors. The rate of exchange for such paper money and coins is less favourable to the customer than the rate of exchange for cable transfers of a large quantity. This is because of the expense involved in handling and storage (since this foreign money is in the form of cash).
Assignments
I. Answer the questions.
1. What was the comparative value of each nation’s money determined by, when gold coins exclusively were used as the money of nations and city-states?
2. What does the state of a nation’s trade balance of payments help determine?
3. What are the rates of exchange determined by?
4. What is the foreign exchange market?
5. Why does the trading day in the foreign exchange market never end?
6. What do the participants in the foreign exchange market include?
7. When does trading occur?
II. Translate the following sentences into Ukrainian. Put questions to any two of them.
1. Until a few years ago, countries were required to maintain the rate of exchange of their currencies within a few percentage points of the par value.
2. As demand fluctuates, the rate fluctuates too – rising when demand is greater than supply and declining when supply exceeds demand.
3. The participants in the market include the major international banks (trading primarily for the accounts of their customers); brokers, central banks, and large corporations with international activities (trading usually to protect their currency from short-term fluctuations); and individuals (trading as speculators and investors).
4. A businessman who knows he will be paid for the sale of machinery within thirty days can arrange with his banker today to settle the rate of exchange at which the bank will buy the foreign currency when it is delivered.
III. Translate the following sentences into English.
1. Кожна країна має свою валюту з такими назвами, як долар, фунт, марка, песо, ліра, песета, крона, франк тощо.
2. Кожна основна валюта має номінальну вартість, яка зазвичай офіційно визначається відносно вартості золота.
3. Торгівельний день ніколи не закінчується: він починається у Європі з початком ділового дня і прямує за сонцем на захід, як, у свою чергу, починається і закінчується діловий день кожної країни.
4. Брокер є корисним джерелмо інформації про ринок для різних його учасників, оскільки він володіє картиною коливань у попиті та пропозиції різних валют протягом торгівельного дня.
5. Торговець валют повинен приймати швидкі рішення, які базуються на математичних підрахунках.
IV. Name the following definitions:
A.1. Value, which is usually defined, officially, in terms of gold. In practice, however, little or no trading occurs at this rate.
2. It is an international market with no central trading place, a market in which business is conducted by foreign exchange traders around the world linked by telephones and cables.
3. The person, who brings both sides of the transaction quickly together by telephoning the buyer and seller and arriving at a mutually acceptable rate.
4. Trading for prompt delivery.
B. 1. Simultaneous purchase and sale of foreign currency in different markets to profit from rate differentials.
2. The exchange rate between each of three or more currencies.
3. The delivery of and payment for foreign exchange.
4. The trading of foreign exchange for settlement in two business days.
5. Purchasing and selling commodities, articles of trade or commerce, for future receipt or delivery.
V. State the main problems presented in this text.
VI. Find in the text and translate all sentences with Infinitives; define functions of the Infinitives (a subject, attribute, object, adverbial modifier, part of a predicate).
VII. Sum up what the text says about the foreign exchange market.
Text 2
