Volatility (n)

Volatile (adj)

1. The Exchange rate ________ measures the degree to which the exchange rate fluctuates or varies over a period of time. 2. Exchange rate is said to be more ____________if there are more frequent ups and downs or less ________ if there are lesser changes in it over a period of time.

fluctuate (v) -

fluctuation (n)

1. It is important to note that currency  ________may appear as both upward and downward movements. 2. A currency with a floating exchange rate may undergo currency appreciation or currency depreciation, depending on market  ________ 3. One of the uncertainties of international trade involves  _________exchange rates . 4. _________currencies increase foreign investment risk. 5. The exchange rate between any two currencies ________from day to day and throughout the day

expose(v)

exposure (n)

1. A hedging strategy helps you reduce currency ________and the risk associated with currency movement. 2.  Active currency hedge is designed to manage currency risk _________with the objective of protecting the investor from depreciating foreign currencies. 3. The recent rise in volatility in the euro currency reminds us that when invested in ETFs, we can be exposed ______to currency risk.

Exercise 7

Fill in the gaps with words from the box.

trader	value date	trading
spot	fluctuating	foreign exchange markets
risk exposure	forward	currency rate

Knowledge of how the (1)________ work and the way in which (2) ___________ can be reduced is indispensable for business managers today. Of course, the problem of (3) ______________ currency values is not so serious if payment must be made right away. (4) ___________ market prices of foreign currencies normally change little from day to day. However, if payment must be made weeks or months in the future, there is considerable uncertainty as to what spot (5) ______________ will be on any given future date. When substantial sums of money are involved, the rational commercial (6) ___________will try to guarantee the future price at which currency can be purchased. This is the function of the (7)______________ exchange market – to reduce the risk associated with the future purchase and delivery of foreign currency by agreeing upon a price in advance.

Exercise 8.

Answer the following questions:

1. What is the foreign exchange market?

2. Where is it located?

3. What is the difference between a wholesale and a retail FX markets?

4. Enumerate the FX market participants.

5. What are foreign exchange dealers engaged in? What do they profit from?

6. Why do various participants in commercial and investment transactions use the FX market?

7. Is the FX market helpful to central banks and treasuries? In what way?

8. What is the role of the foreign exchange brokers? What do they profit from?

9. Do foreign exchange traders take large amounts of cash from one place to another? What is the exchange of deposits?

10. Define the foreign exchange rate. How is it quoted?

11. When does the arbitrage opportunity occur?

12. What is the difference between spot and forward transactions?

13. Why is so much attention paid to hedging? What hedging instruments are used?