3Ackgr0und: foreign exchange

Some key dates and facts in the development of foreign exchange are given in Reading 1, but here are some -riore details:

1944 The Bretton Woods agreement created a system offixed exchange rotes. The values of many major currencies were pegged (or fixed) to the value of the US dollar, which was fixed at 1/ЗБ of an ounce of gold. The American central bank, the US Federal Reserve (or the Fed), guaranteed that it could exchange an ounce of gold for S3S.

1944-1921 The values of currencies were only rarely changed [devalued or revalued), with the agreement of the International Monetary Fund.

19? 1 The system of gold convertibility ended, because, due to inflation, the Federal Reserve no longer had enough gold to back the dollar.

1923 Most industrialized countries switched to a system of floating rates. This meant that the rates fluctuated according to market forces: the supply of and the demand for different currencies in international markets. However, buying or selling by speculators could cause currencies to appreciate or depreciate by several percent in a very short time. Consequently, governments and central banks occasionally attempted to influence exchange rates by intervening in the markets: selling huge amounts of their currency to lower its price, or using their foreign currency reserves to buy it. So there was a system of managed floating exchange rates. September 1992 The Bank of England lost over £5 billion in one day attempting to protect the value of the pound sterling. Speculators were trading so much currency that it was impossible for intervention by a central bank to change a floating exchange rate.

After 1992 Governments and central banks

intervened much less, so there was almost a freely floating system.

January 2002 Twelve states of the European Union introduced a single currency, the euro, to replace their national currencies.

Lead in

Give learners a time limit of one minute and see which learner, or pair of learners, knows the most currency names. You could also ask them to include the currencies abolished with the introduction of the euro. The answer to the second question is given in the Reading text below, which also gives the recent history of many major currencies. The short answer is that, these days, the value of most currencies is determined by market forces - supply and demand.

If the learners know about their currency, and its history in terms of convertibility, fixed and floating exchange rates, etc., you could elicit and discuss the recent history of exchange rates now, before reading the text.

Reading 1: Exchange rates

ANSWERS

1944-с 1921 -e 1923-a 1992-b 2002-d

Listening: Freely floating exchange rates

As this is a challenging listening text, allow learners to

listen more than once.

QKDtapescript

Peter Sinclair: I think a lot of people would say that there's been an important trend towards more flexibility in exchange rates. So, for example, the pound now floats freely in terms of other currencies, the central bank doesn’t intervene

• only very, very rarely - and that’s true for an increasing number of countries.

... the market system is now doing, say in the case of sterling, what central banks and finance ministries used to do in the past, which is trying to pick and stick to an appropriate level for the currency. But there are problems with the markets: markets are not perfect. One problem is that nobody knows the future and if there is an unexpected piece of nev/s about a country, say you discover a vast amount of oil or the government suddenly falls and is likely to be replaced by one which has a very different financial, tax, or monetary policy, then everybody will suddenly wake up and say, ‘Hey this is a country whose currency we must buy lots of or‘This is now really unsafe, we must get out.' And the swings in exchange rates can be absolutely enormous, you can see a currency go up or down by one, two, three percent maybe in a day, in response to certain news.

... a lot of the people who are operating in foreign exchange markets don't tend to think so much about the long run and what the currency really ought to be worth in order for its goods to be priced at the right level in foreign markets and so on. They’re trying to guess very short-term trends, and they're trying to guess the hunches of other traders. They tend to say, 'Oh, let's see, if something is going up today it will probably go up tomorrow.' They just go in one direction and you often get huge exchange rate swings, going on for maybe even years, certainly for weeks and months, which are pushing the currency away from what it really ought to be. This is a source of worry and it’s undoubtedly happening and it's due to the fact that people don't have perfect information and often tend to say, 'Well, if he’s doing this then he must know something

1. don't, I'd better copy him', and that can be a

recipe for real trouble.

ANSWERS

1. 1 Towards more flexibility, with a freely

floating system and only very rare government intervention.

2. A lot of oil is discovered in a country, or the government suddenly changes.

3. There can be ‘absolutely enormous' swings in exchange rates -1,2, or 3% in one day.

4. Because traders think about the short term, try to guess what other traders are going to do, and do the same thing (buy or sell).

2. 1 the long run

2. worth

3. priced

4. foreign markets

5. short-term trends

6. hunches

? exchange rate swings

8. worry

9. perfect information 10 recipe

3. 6 Hunches are intuitions; ideas based on

feelings.

10 If something is о recipe for trouble it is very likely to lead to trouble.

Discussion

You can usually find a recent exchange rate graph in financial newspapers. Explaining why exchange rates have changed will require some knowledge of recent events which your learners should be able to help you with. If your learners are already working, or are interested in this area, they could also give you some forecasts about the future.

How you could profit from exchange rate changes would depend on what currencies you currently possessed. For example, if you thought your currency would fall in value against another one, you could sell it, wait for it to fall, and buy it back again, makinga profit. If you thought your currency would rise, you'd have to buy it with a foreign currency, wait for it to rise, and then sell it again for the foreign currency, so that jou'd end up with more of the foreign currency. But this strategy requires possessing the other currency to start with, and buying it back later.

Reading 2: Currency trading

'his text, by Frederic Madore, is widely available on the nternet. The figure of'well over US$1 trillion’a day is significantly lower than before the introduction of the euro in 2002: in the late 1990s, the estimated daily

• gure was $1.5 trillion. One thingthis text does not ‘■nention is that a large proportion of currency trading nvolves forward transactions, options, currency swaps and other derivatives. These are considered in Unit 19.

ANSWERS

1. 1 Companies and governments that buy

products and services in a foreign country usually need to do so in a foreign currency. Sellers have to convert profits made in foreign currencies into their domestic currency. People need foreign exchange for travel. But most currency trading (95%) is speculative: the traders are hoping to make a profit.

2. The seven major currencies (listed in the Reading text) are the US dollar, the euro, the Japanese yen, the pound sterling/ British pound, the Swiss franc, the Australian dollar and the Canadian dollar.

POSSIBLE ANSWERS

2. a Only 5% of all foreign exchange (Forex)

trading is related to trade or business, b The volume of foreign currency

transactions is 30 times more than the volume of trading in US stocks, с Eighty-five percent of Forex trading is in seven major currencies, d All Forex transactions involve two counterparts (a buyer and a seller), e On average, more than a trillion US dollars worth of currency is traded every day. f Forex trading can be done 24 hours a day. g Ninety-five percent of Forex transactions are speculative.

ANSWERS
3 1 turnover	4 speculators
2 equity	5 liquid
3 domestic	6 fluctuations

Language focus: Describing trends and graphs

A good way to demonstrate this type of language is to bring in (or ask your learners to bring in) some graphs from annual reports, a financial newspaper or the internet.

Many of the verbs in the table can also be nouns and vice versa. Also many of the adjectives can be made into adverbs by adding -ly. If learners are having difficulty thinking of other words, they could see how many of these verbs they could make into nouns, and how many of the adjectives into adverbs.

Notice that the vertical axis of the f/$ exchange rate graph goes down to $1 and not zero.

VOCABULARY NOTES

Irregular verbs: rise - rose - risen-, grow - grew - grown-, foil - fell -fallen.

The words given to describe graphs do not include verbs for huge changes [rocket, soar, go through the roof, crash, plummet, plunge, etc.). However, many of these appear in the Language focus of Unit 15, which looks at verbs to describe changes in stock prices.

You may want to discuss with learners how hit bottom and peaked are different to the other verbs in the table for upward and downward movement.

ANSWERS

2. Answers to Question 1 are in italics - the other (possible) answers are for Question 2.

			-*		Speed	Size
Verbs	increase rise climb grow* improve* get better*	decrease fall drop decline deteriorate* get worse*	level off remain stable remain constant stabilize stay at the same level	Adjectives	dramatic gradual rapid sudden sharp steady quick slow	slight moderate considerable substantial sigrificant growth rise climb
Nouns	growth rise climb	decline drop		Adverbs	sharply gradually dramatically abruptly suddenly rapidly quickly steadily slowly	sigrificantly substantially moderately slightly considerably

• grow, improve and get better are used where upward movement is positive; deteriorate and get worse are used where downward movement is negative.

2. 1 declined steadily 4 hit bottom

2. rising sharply 5 peaked

3. rapid fall 6 climbed significantly

Practice

You can either tell the learners about this in advance, and ask them to come to this lesson equipped with a graph and an explanation, or they could prepare it for the next lesson.

An alternative would be to ask the learners to imagine that they are reporting back to their boss on one of the suggested topics. The topics which are suggested should appeal to a wide range of both in-work and pre-work learners, but if your learners have other interests which can be explained with the use of graphs, they can certainly choose those.

Writing reports 1

T

14

CO

o learn how to: structure reports; separate facts and opinions; give findings, recommendations and examples; use connectors To practise: writing a report on online trade finance

'his unit returns to the (imaginary) MGS Bank, and •.heir plans regarding the future of their retail branches, .vhich featured in Units 3 and 10.

Lead in

.earners who are still studying may not have much experience of reports. Learners working in finance may already have to read and / or write them. If they are critical of some of the reports they have to read so much the better: they should then have some thoughts about what makes a good or bad report.

Some learners may be aware of the differences in style and tone among reports written for different audiences: colleagues, superiors, the board of directors, investors, the media, the general public, and so on. Reports for colleagues might be less formal than those written for superiors. Reports for an audience outside the company (investors, the media, the general public) are likely to be more polished (i.e. more work will be put into the style), to have a more positive tone (if at all possible), and to include less detail and more emphasis on what is new, good, better and potentially advantageous.

Discussion

ANSWERS

The normal order would be: