Exercise 9 a. Read the following text to learn about foreign exchange instruments. Fill in the gaps with the words and phrases in the box.

forward	foreign exchange swap	maturity	agreement
an exchange	trade date	underlying currency	foreign exchange risk
obligation	traders	forward exchange rates	forward transaction
value date	re-exchange	price	risk

Foreign exchange instruments

A spot transaction is a straightforward (or “outright”) exchange of one currency for another. The spot rate is the current market price. By convention, the settlement date, or “___________,” is the second business day after the “deal date” (or “__________”) on which the transaction is agreed to by the two ______________.

One way to deal with the foreign exchange __________is to engage in a forward transaction________________. A forward transaction requires delivery at a future value date of a specified amount of one currency for a specified amount of another currency. The exchange rate to prevail at the value date is established at the time of the agreement, but payment and delivery are not required until __________. _____________are normally quoted for value dates of one, two, three, six, and twelve months. Dealers use the term “outright forward” to make clear that it is a single purchase or sale on a future date, and not part of an “FX swap”.

The most common type of forward transaction is the swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date creating an exchange and _________. These are not standardized contracts and are not traded through an exchange. The most common type of a _______________, forex swap, or FX swap  is a spot against _________, where the dealer buys a currency in the spot market and simultaneously sells the same amount back to the same back in the forward market. Since this agreement is executed as a single transaction, the dealer is less exposed to unexpected _______________________.

A foreign exchange futures contract is an ___________ between two parties to buy/sell a particular (non-U.S. dollar) currency at a particular price on a particular future date. Futures are standardized forward contracts and are usually traded on ____________created for this purpose.

A foreign exchange or currency option contract gives the buyer the right, but not the obligation, to buy (or sell) a specified amount of one currency for another at a specified ________ on (in some cases, on or before) a specified date. Options are unique in that the right to execute will be exercised only if it is in the holder’s interest to do so. A call option is the right, but not the _____________, to buy the underlying currency, and a put option is the right, but not the obligation, to sell the _________

1. swap  consists of two legs: a spot foreign exchange transaction, and a forward foreign exchange transaction thus having two value dates

2. FX swap market, one currency is swapped for another for a period of time, and then swapped back.

3. spot transaction is a straightforward single purchase/sale of one currency for another settled, or delivered, on a value date no later than two business days after the deal date.

4. outright forward spot transaction is a straightforward single purchase/sale of one currency for another settled on any pre-agreed date three or more business days after the deal date

5. currency option is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date

6. put option an option contract that gives the holder the right to sell a certain quantity of an underlying security to the writer of the option, at a specified price (strike price) up to a specified date

Exercise 10

A.Read the following dialogue in which an experienced broker explains to a financial newspaper reporter how to read foreign exchange quotes correctly.

R.- You know, reading FOREX quotes very often confuses our readers, especially those new to the currency market. Can you throw some light on this? USD/CAD 1.2000.Can you tell us what this means?

B.- Well, this shows the current foreign exchange rate between the US dollar and the Canadian dollar. In our case the U.S. dollar is the base (transaction) currency. The base currency always comes first, and the counter (quote) currency , the Canadian dollar, is always expressed in terms of how many units equal one unit of the base currency. As I have mentioned, in our example, the U.S. dollar is the base currency, and it always is except when being compared to the “Queen’s currencies” (the Great Britain pound, the Australian dollar, and the New Zealand dollar), and the Euro. For example, the Euro-U.S. dollar currency pair is represented as EUR/USD.

R.- I see. But what does the figure stand for?

B.- It shows that to buy one unit of the US Dollar you’ll have to sell 1.200 units of the Canadian dollar. Is that clear enough?

R.- Oh, yeah. It seems a piece of cake!

B.- Yeah, it’s really easy. But you should mind one more thing. Brokers get paid for their work through the "bid/ask spread." If we add our bid/ask spread to our example, it looks like this: USD/CAD 1.2000/05 . This currency-pair quote of USD/CAD 1.2000/05 means there is a $1.2000 CAD bid price and a $1.2005 CAD ask price for the U.S. dollar-Canadian dollar currency pair. In other words, you can obtain $1.20 Canadian for every $1 USD (bid price), or, alternatively, you have to pay $1.2005 Canadian for every $1 USD. The spread in this case is five pips.

B. Read the following currency quotes.

E.g. EUR/USD 1.3645/49. € 1.3645 USD is   bid price and € 1.3649 USD is ask price for the Euro - U.S. dollar currency pair This means that you can obtain $1.3645 for one Euro; or, alternatively, you have to pay $1.3649 for one Euro. In this case, the spread is of four pips.

USD/CAD 12232/37

EUR/USD = 1.2500/03

GBP/EUR 12702/06

USD/JPY 116.09/13 

Exercise 11

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 12

A. Read the text about FX trading. Match the headings (a- f) with the paragraphs (1-5). There is one extra heading which you don’t need to use.

1. The most traded currency pairs in the world.

2. The notion of foreign exchange.

c) Functions of the foreign exchange market.

4. The size of the foreign exchange market.

5. The location of the foreign exchange market.

f) Foreign exchange market hours.

1._______________________________

Foreign exchange market is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/Us Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

2_________________________________

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products or services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.

3__________________________________

For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called “the Majors”. Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

4.__________________________________

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur – day or night.

5.___________________________________

The FX market is considered an Over The Counter (OTC) or “interbank”, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.

B. Write five statements about the following figures.

5%	2
85%	24
95%

C. Find the words in the text that mean the following:

1.the system of money that a country uses.

2.the total amount of money spent in a market.

3.belonging to one’s own country

4.people who buy and sell things in the hope of making a profit

5.easy to sell (to convert into cash)

6.price changes

D. Answer the following questions:

1. What is foreign exchange?

2. Why do people buy and sell currencies?

3. What are the world’s seven major currencies are?

4. Where and why does the forex trading begin each day?

5. What enables the investors to respond to currency fluctuations promptly?

E. Work in pairs. Take turns asking answering questions in D.

Exercise 13.

1. З погляду окремого споживача або інвестора, валютні курси можна використати для обміну однієї валюти на іншу. Коли ви їдете закордон, ви повинні обміняти гривні на долари США, євро, британські фунти стерлінгів або інші валюти, залежно від країни призначення. Якщо гривня збільшує свою вартість, ви можете купити більше валюти для подорожі, що дасть вам можливість посмакувати доброю стравою або привезти більше сувенірів.

2. Ринкові сили визначають валютний курс, який визначається споживачами та інвесторами. Іноземними валютами торгують на валютних ринках по всьому світові. Валютні ринки - це не центральні, а позабіржові ринки; тобто не існує єдиного фізичного місця, де торговці збираються для обміну валют, як це відбувається для багатьох внутрішніх акцій і облігацій. Комп’ютерні мережі пов’язують торговців у комерційних банках у багатьох країнах.

3. З денним оборотом у трильйони доларів валютний ринок світового масштабу є одним з найбільших фінансових ринків у світі. Головними учасниками ринку є імпортери та експортери, банки, менеджери портфельних інвестицій та центральні банки.

4. На валютних ринках відбуваються два типи валютних операцій. У ринкових операціях спот валюти або банківські депозити обмінюються негайно (об’єкт для дводенної угоди). Спот курс це поточний валютний курс. В операціях форвард (строкові операції) валюти або банківські депозити повинні обмінюватися за встановленої датою у майбутньому. Тобто інвестори підписують контракт сьогодні на певну суму валюти і за певним валютним курсом. На певну майбутню дату відбудеться фактичний обмін валютами за курсом, відомим як форвардний курс.

Exercise 14

Look at the timeline below, showing key dates in the development of exchange rate systems around the world. Match the dates with the events (A-E) below.

1944 1971 1973 1992 2002

1. Most industrialized countries switched to a system of floating rates. However , governments and central banks occasionally attempted to influence exchange rates by intervening in the markets. So there was a system of managed floating exchange rates.

2. The Bank of England lost over £5 billion in one day attempting to protect the value of the pound sterling. After this, governments and central banks intervened much less, so there was almost a freely floating system.

3. A fixed exchange rate system was started. The values of many major currencies were pegged (fixed) to the value of the US dollar. The American central bank, the Federal Reserve, guaranteed that it could exchange an ounce of gold for $35.

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

5. Gold convertibility ended because the Federal Reserve no longer had enough gold to back the dollar due to inflation.