Exercise 4. Replace Russian words by their English equivalents (used in the vocabulary of Reading 3)

(a) аккредитивand (b) вексель are the principal forms of commercial documents in most countries. The (b) вексель is an unconditional order in writing, signed and addressed by one person (c) получатель to another (d) плательщик, requiring the (d) трассат to pay on demand, or at a determinable or fixed future date, a specified sum of money to a third person (e) получатель платежа. The (e) получатель платежа is frequently the bearer of the bill. On accepting a bill of exchange, the (d) плательщик becomes the party primarily responsible for paying the bill.

Exercise 5. Find suitable Russian equivalents to the English words and collocations.

1) beneficiary	a) порядок расчетов
2) to fulfill/meet one’s obligations	b) доверенное лицо
3) air waybill	c) получение платежных поступлений
4) risk mitigation	d) колебание
5) creditworthiness	e) таможенная очистка
6) release documents	f) отгрузочные документы
7) tracking	g) валютный риск
8) customs clearance	h) бенефициар
9) convertible currency	i) безотзывный аккредитив
10) collection of payment proceeds	j) подтвержденный аккредитив
11) fiduciary	k) передавать документы
12) remit payment	l) выполнить обязательства
13) fluctuation	m) конвертируемая валюта
14) confirmed letter of credit	n) перевести платеж
15) method of settlement	o) отслеживание
16) foreign exchange risk	p) кредитоспособность
17) shipping documents	q) авианакладная
18) irrevocable letter of credit	r) снижение рисков

Exercise 6. Translate into Russian.

1. A buyer can receive shipping and other receiving documents from the bank, keeping the relevant bill of exchange, when he gives it the trade acceptance by writing "accepted" across the face of the note.

2. Bills of exchange must be paid immediately in the case of a sight draft, or at a specific date in the future in the case of a time draft.

3. If the buyer has accepted a bill of exchange, he must pay the stated amount to a third party, usually a bank, which then credits the seller`s account for the amount of the sale.

4. If the letter of credit is confirmed by the advising bank, the beneficiary will get paid even if the issuing bank fails to meet its obligations.

5. A confirmed irrevocable letter of credit is the most reliable guarantee that payment for the goods will be made on time and in full.

6. In fact, the letter of credit gives an order to the advising bank to pay money to the exporter (beneficiary).

7. To require the purchaser to open a letter of credit is the most secure way to solve the problem of unknown creditworthiness of buyers.

Exercise 7. Write a summary of one of the three texts in this unit, outlining the main points of the text.

UNIT VII

FOREIGN EXCHANGE

Warm up

Do you know denominations of the most

important currencies in circulation? Have

you ever changed rubles into any other currency?

Why is it important to follow the exchange rate of our currency?

Section A

Reading 1

Foreign Exchange Market

The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. FX determines the relative values of different currencies.

The currency market works through financial institutions, and it operates on several levels. Behind the scenes banks turn to a smaller number of financial firms known as “dealers”, who are actively involved in large quantities of foreign exchange trading. Behind–the–scenes market is sometimes called the “interbank market”, although a few insurance companies and other kinds of financial firms are involved. Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars.

Forex assists international trade and investments by enabling currency conversion. In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying for some quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions, when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system¹.

FX is unique because of the following characteristics:

· its huge trading volume;

· its geographical dispersion;

· its continuous operation: 24 hours a day except weekends, i.e. trading from 22:00 GMT² on Sunday (Sydney) until 22:00 GMT Friday (New York);

· the variety of factors that affect exchange rates;

· low margins of relative profit compared with other markets of fixed income.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks.

¹ The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states after WWII.

² GMT- Greenwich Mean Time-is the standard time in Great Britain which is used to calculate the time in the rest of the world (synonym: UTC-Universal Time Coordinated)

Discussion

Give answers to the questions. Use the following expressions to present your answers:

It is clear from … that … .

I can say that … .

Speaking about … .

I suppose / think / believe …

Judging by … I come to the conclusion that … .

1. Why is forex called a decentralized market?

2. What is interbank market?

3. What is forex necessary for?

4. What characteristic features of FX do you consider the most important?

5. Is forex a monopolist?

Reading 2

Market Participants

Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens as you go down the levels of access (for example from 0 to 1 pip¹ or to 2 pips for currencies such as the euro). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up forex are determined by the size of the “line” (the amount of money with which they are trading). The top-tier interbank market accounts for about 40% of all transactions. It is followed by smaller banks, large multinational corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail market makers. Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s. Central banks also participate in Forex to align currencies to their economic needs.

Commercial companies.An important part of the foreign exchange market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those banks or speculators, and their trades often have short term impact on market rates.

Central banks.National central banks play an important role in FX markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank “stabilizing speculation” is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

Hedge funds.About 70% to 90% of the foreign exchange transactions conducted are speculative. This means the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Since 1996, hedge funds have gained a reputation for aggressive currency speculation. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds’ favor.

Non-bank foreign exchange companiesoffer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but rather currency exchange with payments ( there is usually a physical delivery of currency to a bank account). These companies’ selling point is usually that they will offer better exchange rates or cheaper payments than the customer’s bank. These companies differ from Money Transfer / Remittance Companies in that they generally offer higher value services.

Money transfer / remittance companiesperform high-volume low-value transfers generally by economic migrants back to their home country. The largest and best known provider is Western Union with 345,000 agents globally.

Currency transfer companies provide low value foreign exchange services for travelers. These are typically located at airports and stations or at tourist locations and allow physical notes to be exchanged from one currency to another. They access the foreign exchange markets via banks or non- bank foreign exchange companies.

¹ point in percentage (in forex)

Discussion

Recount the situations in which the following phrases are used in the text under discussion:

1. The top of the foreign exchange market.

2. Levels of access in forex.

3. Participants in forex markets.

4. The role of commercial companies in FX.

5. The importance of national central banks in forex.

6. The reputation of hedge funds in FX transactions.

7. Difference between non-bank FX companies and remittance companies.

8. Low value change of currency by tourists while travelling abroad.

Reading 3

Currency Trading

There is no unified or centrally cleared market for the majority of trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are quite close due to arbitrage. Due to London’s dominance in the market, a particular currency’s quoted price is usually the London market price.

The main trading centers are New York and London, though Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.

Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP), inflation, interest rates, budget and trade deficits or surpluses, large cross-border merger and acquisition deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers’ order flow.

Currencies are traded against one another in pairs. As the dollar’s value eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD (Australian dollar), NZD (New Zealand dollar), CAD (Canadian dollar), have also increased.

Discussion

1. What does currency exchange rate depend on?

2. Why is the London market price of a particular currency considered a quoted price?

3. What are main currency trading centers?

4. When does currency trading happen?

5. Why do fluctuations in exchange rate occur?

6. Is the dollar the only reference currency?

Reading 4

Exchange Rate

Many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world’s currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value , are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology (trader perceptions).

Economic factors include: (a) economic policy, disseminated by government agencies and central banks; (b) economic conditions, generally revealed through economic reports, and other economic indicators.

Internal, regional, and international political conditions and events can have a profound effect on currency markets. All exchange rates are susceptible to political instability. Events in one country in a region may spur positive/negative interest in neighboring country and, in the process, affect its currency.

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways: flights to quality, long-term trends, economic numbers and technical trading considerations.

Discussion

1.Why does the price of one currency shift in relation to another?

2.What factors are supply and demand for any currency influenced by?

Reading 5

Lose-lose or Win-win?

The term “currency wars” has been bandied about ever since Guido Mantega, the Brazilian finance minister, used it in 2010. He was complaining that quantitative easing (QE) by the US was weakening the dollar, and prompting a response from other countries that did not want to lose export competitiveness. This time round, the dollar is strengthening, but the term is being used again.

Currency volatility is on the rise, albeit from a low base. And David Woo of BofAML thinks this is a bad thing. He argues that for many countries facing zero interest rates and binding fiscal constraints, the only policy tool left at their disposal to stimulate growth is weaker exchange rate.

So the ECB and the Bank of Japan’s QE programs are designed to weaken their currencies; after all, bond yields are already so low that it is hard to see borrowing costs as a constraint for the corporate sector.

Clearly, all currencies cannot decline, so it might be tempting to think this is a zero-sum game. But it is possible to argue that it is actually a win-win for the global economy; in attempting to depreciate their currencies, central banks reduce real interest rates and these lower real rates stimulate demand and investment.

But Mr. Woo argues instead that currency wars are a lose-lose. He writes that higher currency volatility will increase both the riskiness and the cost of cross border transactions, whether it is trade in goods or capital flows.

Specifically, higher FX volatility means it costs more for companies to hedge; that may cause them to focus more on their home markets than on exports, leading to a slowing in the growth of global trade (which has recently been sluggish for other reasons). Secondly, higher volatility will discourage foreign direct investment (the building of factories, etc.). This will make it more expensive for countries with a current account deficit to finance themselves. Economic growth will thus be more sluggish if the wars continue.

It is a hard case to prove, since the greatest FX volatility in the last 20 years occurred during the Asian/Russian crisis of the late 1990s and the debt crisis of 2008. But it was surely the crises that caused the volatility, not the other way round. Nevertheless, it is probably true that a global environment in which countries feel their neighbors are trying to steal a march on¹ them by devaluation is probably a world where co-operation is more difficult, and one where barriers to global trade are more likely to be erected. And that can’t be good.

¹ gain an advantage over (someone) by acting before they do

Discussion