Banks and the Foreign Exchange Market

The banks are the natural intermediary between foreign exchange supply and demand. The.main task of a bank's foreign exchange department is to enable its commercial or financial customers to convert assets held in one cvirrency into funds of another currency. This conversion can take the form of a spot transaction or a forward operation. Banking activities in the foreign exchange field tend inevitably to es­tablish a uniform price range for a particular currency

101

throughout the financial centres of the world. If at a given moment the market rate in one centre deviates too far from the average, a balance will soon be restored by "arbitrage", which is the process of taking advantage of price differences in different places. It can be seen that foreign exchange busi­ness acts as a very important regulator in a free monetary system.

Only the big banks and a number of local banks specializ­ing in this kind of business have a foreign exchange depart­ment with qualified dealers. Banks which merely carry out their customers' instructions and do no business on their own account do not really require the services of a foreign exchange expert. For these it will be sufficient to have some­one with a general knowledge of the subject because his role in practice will be that of an intermediary between the cus­tomer and a bank professionally in the market.

A foreign exchange dealer acquires his professional skill largely through experience. Here we should point out how important close cooperation is among a team of dealers. The group can work together smoothly only if each member is able to shed his individuality. We must not forget that, al­most incessantly, all the dealers are doing business simulta­neously on different telephones and when large transactions are completed the rates may change, whereupon the other dealers must be brought up-to-date immediately. It is essen­tial for a dealer to have the knack of doing two things at once so that he can do business on the telephone and at the same time take note of the new prices announced by his colleagues.

Professional foreign exchange dealing requires advanced technical equipment. Business is done by telephone (with many direct lines to important names) and teleprinter de­pending on distance and convenience. Spot and forward rates of the most important currencies and money market rates are displayed on a big rate board, remote-controlled by the chief dealers. Electronic data processing equipment is em-

ployed to keep track instantly of the exchange positions and for the administrative handling of the business done. Cross rates are figured out with the help of electronic table calcu­lators.

I -----------------

Using the words in brackets as a guide, explain the mean­ing of the following terms and phrases: j

1. foreign exchange supply (the total amount of, available,
at a given price) •

2. foreign exchange demand (the total amount of, required)

3. foreign exchange (foreign bank notes, placed without re­
strictions, to the credit of, abroad)

4. spot transaction (are traded, goods or securities, for im­
mediate delivery)

5. forward transaction (in the future, at fixed dates, at fixed
prices, to supply currencies)

6. market rate (a fixed ratio between)

.
Find the proper answer: ^v.

1. "to convert into":

a) to supply,

b) to carry out,

c) to change into.

2. "to establish a uniform price range '^r:

a) to set the limits within which the price varies,

b) to take advantage of price differences,

c) to differentiate prices.

3. "to deviate from the market rate":

a) to announce new market rates,

b) to turn away from the market rate,

c) to differ from the market rate.

 

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4. "to restore a balance":

a) to bring back into a former position,

b) to take advantage of price differences,

c) to rebuild the economy.

5. "to do business on your own account":

a) not to cooperate with a team of dealers,

b) to settle accounts on your own,

c) to do business for one's own profit or advantage.

6J "dealers must be brought up-to-date":

a) acquainted with the recent methods of marketing,

b) notified immediately about any changes in market rales,

c) alarmed by any changes in market rales.

7. "to have a knack of doing Iwo Ihings al a lime":

a) lo be able to do two Ihings simultaneously,

b) lo conducl Iransaclion by lelephone or cable,

c) lo get in touch with two people at a time.

8. "tokeeplrackof":

a) lo use advanced lechnical equipmenl,

b) lo keep in louch with,

c) lo figure oul cross rales.

HI

Say ivhal is true and what is false. Correct the false sen­tences:

1. One of Ihe main objectives of banking aclivilies in foreign
exchange markets is lo prevenl loo high markcl rale de­
viations from Ihe average.

2. The conversion of assels held in one currency inlo funds of
another currency lakes Ihe form of forward Iransaclions.

3. All banks have foreign exchange department and employ
foreign exchange dealers.

4. If one wants lo become a foreign exchange dealer he must
be able lo do Iwo Ihings al Ihe same time.

5. If Ihe market rate changes, dealers all over the world must

be notified at once, b'. Spot rales of the mosl important currencies are revealed

while forward rates are kept secret.

iv у

Answer the following questions: \

1. What is the lask of a bank's foreign (exchange department?

2. What types of transactions are concluded al foreign ex­
change markels? /

?). VVhal are banking aclivilies in foreign exchange dealings aimed al?

4. Whal sleps are taken when the market rale of a currency
in one foreign exchange market deviates too far from the
average?

5. Which banks employ foreign exchange dealers?

6. What fealures of character should a foreign exchange
dealer possess? /

7. What modern technical devices are foreign exchange mar­
kets equipped wilh? How are Ihey used?

V'

Show the relationship between pairs of the. following sen­tences by using a pronoun instead of a noun phrase which is repealed in the second sentence.

Ex. The banks arc the natural intermediary between foreign ex­change supply and demand.

The banks enable their commercial or financial customers to con­vert assets hold in one currency inlo funds of another currency. The banks are the natural intermediary between foreign exchange supply and demand. They enable their commercial or financial customers lo convert assels held in one currency inlo funds of another.

 

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105

1. Banking activities in the foreign exchange field tend to
establish a uniform price range for a particular centres of
the world.

A uniform price range for any currency is achieved by means of arbitrage.

2. Only the big banks have a foreign exchange department
with qualified dealers.

Local banks do not usually employ qualified foreign ex­change dealers.

3. A foreign exchange dealer acquires his professional skill
largely through experience.

A foreign exchange dealer works in close cooperation with other dealers.

4. When large transactions are completed the rates may
change.

VI

Find the nouns which are qualified in the text by the phrase foreign exchange. Write them down.

VII

Combine the words listed below into meaningful two or
three word expressions as possible. Some are used in the
text (e.g.: forward market operation):
forward operation spot

market price system

monetary. range transaction

money rate

 

3. Only the banks dealing in foreign exchange employ....

4. Transactions in which the amount due is paid on the de­
livery of goods are called....

5. Transactions in which the sum due is to be remitted in the
agreed period of time are called.....

 

6. Electronic data processing equipment facilitates....

7. Foreign exchange supply and demand dictate....

8. Arbitrage in foreign exchange dealings takes advantage of

\

VIII

Complete the following sentences:

1. Banks specializing in foreign exchange dealings act as an
intermediary in the conversion of.....

2. A balance in market rates at foreign exchange markets
may be restored by......

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107

Unit Eleven

The Global Money Market

Active Vocabulary balance of payments conversion value devalue, devaluate exchange rale explode (v) fix (v) float a currency (v) fluctuation outstanding parity profit margin rate spread revert to (v)

- платежный баланс

- конверсионная стоимость

- девальвировать

- обменный курс

- взрывать

- устанавливать, фиксировать

- 1) вводить плавающий курс
2) размещать валюту

- колебания курса

- 1) выпущенный в обращении
2) не предъявленный к платежу

- паритет, равенство

- размер прибыли

- процент разницы между цепами

- возвращался в прежнее
положение

The Global Money Market

Foreign exchange trading in Britain is centered wholly in London. The London foreign exchange market is a telephonic market consisting of 3 groups: authorized banks, 11 foreign exchange brokers and the Bank of England. British opera-lions arc lo some degree over-seen and controlled by the

Bank of England, which limits outstanding positions and calls
regular returns. Sterling is thereby protected against unde­
sirable speculations. This control has never prevented the
involvement in world money operations necessary to
strengthen the commercial base, and in fact it has provided
protection against the vicious losses reported by some banks
overseas during the past few/years. "

Continuous eontacl between dealers in banks in many cit­ies around the world is, in essence, the international mar­ket. They fix the inlernational conversion value of one cur­rency against another and conflicting opinions are swiftly ironed out by the movement of funds. At any one moment of lime, the value of sterling against the American dollar is the same, whelher yon deal in London, Germany, Tokyo or San Francisco.

The major conlrolling factors that affect exchange rates are speculation, interest rates and the balance of payments. In the past, speculalion against the dollar in favour of other currencies has led to the sale of dbllars and the consequent purchase of other currencies. Interest rates dictate the flow of money from one foreign centre to another as money seeks higher yields and Ihe conditions in local money markets plus window dressing operations at Ihe ends of mqnlhs, quarters and the year, react on money flows. So the impact.of a bal­ance of payments surplus or deficit is quite apparent. 11 fol­lows lhal Ihe currency of a country with a constant surplus will always be in demand. But other things quite apart from financial factors affect the foreign exchange market. Political events can move the market quite significantly.

At one point exchange rates were controlled and moni-lored by the central banks under the Brellon Woods Agree-menl. This affected member countries of Ihe International Monetary Fund, which meant simply that all such countries would have a parity for their currency against the American dollar, itself lied to gold, and Iheir currency would be pro-

 

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109

tected against the dollar to a maximum spread of 3/4 per cent either side of this parity. All comme'rcial companies work­ing on a wider commercial profit margin could rely on the rate movement staying within agreed boundaries.

I

Using the words in brackets as a guide, explain the mean- \ ing of the following terms and phrases:

1. speculation (profiting from, buying, selling, fluctuating]
prices, in the hope of)

2. balance of payments (all economic transactions, a system-1
atic record of, completed, resident)

3. exchange rate (in different countries, the relation, used,|
between the money, in value)

4. balance of payments surplus (merchandise, services, for-|
eign sales of, the total receipts from, higher than)

5. balance of payments deficit (purchased abroad, merchan­
dise and services, the total payments for, higher than)

6. parity (equality of, between two convertible currencies,
at a legally fixed ratio, purchasing power, at par)

7. revaluation (a new value to, to give, currency)

8. devaluation (in a crisis, a currency, the legal value of, to
lower)

9. floating currency (not fixed, the rate of exchange)

10. spread (to differ, put and call price, in which, an option)

II

Choose the word or phrase in brackets that would best sub­stitute for the word or phrase in bold print in the following sentences:

1. The Bank of England limits outstanding positions at the London Foreign Exchange, (unpaid, easily noticed, well-known)

2. This control has never prevented the involvement in world

money operations.

(support, participation, spontaneity)

3. They fix the international conversion value of one cur­
rency against another.

(put in order, justify, settle)

4. The factors that affect exchange rates mostly are specula-

tion, interest rates and the balance of payments, (cause a change of, increase, decrease)

5. The Bank of England will promote a protection to hold
the pound within the agreed rate spread.

(keep a promise, announce, give support to)

6. British export proceeds were invariably received in ster­
ling.

(debts, earnings, credits) (usually, rarely, frequently)

7. The devaluation of sterling accentuated the switch away

from the pound. V (selling, buying, a move-from)

8. After sterling had been devalued, rates of exchange were
relatively stable.

(changeable, unchangeable, flexible)

9. During that period the pound rose against the dollar.

(its value increased, stayed at the same level, fell)

10. The EEC is bent on removing fluctuations between their
own currencies.

(opposed to, indifferent to, determined to)

III

Say what is true and what is false. Correct the false sen­tences:

1. British operations at foreign exchange markets are free of any control.

 

HI

upper vicious

2. The global money market means continuous contact be­
tween dealers in banks all over the world.

3. The value of sterling against the American dollar is higher

if you deal in London.

4. The balance of payments surplus or deficit has no affect
upon exchange rates.

5. Interest rates dictate the flow of money from one foreign
centre to another.

6. The currency of a country with a constant deficit is rarely
in demand.

7. Political events have little significance for foreign exchange

markets.

IV

Vocabulary. Opposite». Find pairs ofopposites in the fol­lowing lists:

a) deficit b) minimum spread c) lower limit d) devaluation e) floating rate f) import proceeds g) face value h) local money market i) demand

1. export proceeds

2. fixed rate

3. international money market

4. maximum spread

5. revaluation

6. surplus

7. supply

8. true value

9. upper limit

Collocation. Find the nouns which are qualified in the
textЪy these adjectives and write one noun to each adjec­
tives

continuous regular

constant telephonic

central true

financial undesirable

floating maximum

VI

operation point profit rate spread trading value world

Combine the words listed below into meaningful two or
three word expressions: _t

broker bank central commercial conversion country demand exchange export foreign

interest

intervention

international

local

London

margin

market

member

money

movement

VII

Using information from the text, write a short summary.

i

VIII /

Demonstrate the meaning of each of the following expres­sions in sentences of your own:

1. to protect against undesirable speculations

2. to fix the international conversion value

3. the value of a currency against the American dollar

4. to affect exchange rates

5. to t>e in demand

6. to fix a parity for a currency against the dollar

7. to hold a currency within a rate spread of

8. the devaluation of a currency

9. stable rales of exchange

10. the pound rose against the dollar from..... up lo.....

 

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113

Unit Twelve \, Covering Clients ih an Exchange Contract

IX

In the sentences of this test every seventh word has been left out. Write in the word that Jits best:

The International Monetary Fund was set by the

Bretton Woods Agreement of... The Fund was established

to encourage.... cooperation in the monetary field and.'....

removal of foreign exchange restrictions, to.... exchange

rates and to facilitate a. payments system between mem­
ber countries. Under.... IMF's articles of agreement, mem­
ber countries..... required to observe an exchange rate.....

in which should be confined to... per cent of its par value

.... member was required to consult with..... IMF before

devaluing or revaluing its........ Members in deficit were

obliged by..... terms of the agreement to consult...... the

IMF on the procedures being..... to improve their balance

of payments.... was agreed that it was essential....... hold

discussions to consider the reform...... the international

monetary system over.... long term.

Active Vocabulary:

be entitled to (v) capital goods commitment contractual cover (v)

enter into a contract (v)

entrepreneur

exchange control

firm

forward exchange cover

liquidate (v) option penalty playground rule (v)

rule out (v) ruling thin market undervalue (v) whereby

 

— иметь право

— средства производства

— обязательства
— контрактный

— покрывать, обеспечивать,
страховать

— заключать контракт

— предприниматель

— валютный контроль

— фирма

— форвардное покрытие
валютного риска

— ликвидировать, погашать

— опцион

— штраф

— площадка

— поставлять, устанавливать,
управлять

— исключать

— господствующий, правящий

— вялый, "узкий" рынок

— недооценивать

— посредством чего-либо

 

114