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 smaller 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 ______ to currency risk.

Exercise 11. Fill in the gaps with words and word-combinations from the box. Two words are odd.

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. Check your knowledge of the foreign exchange market. Answer these questions:

1. What is the foreign exchange market?

2. Where is it located?

3. What is the difference between wholesale and 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? Characterize them.

Exercise 13. A. Match the terms with their definitions.

1.spot transaction	a) consists of two legs: a spot foreign exchange transaction, and a forward foreign exchange transaction thus having two value dates; thus one currency is swapped for another for a period of time, and then swapped back
2.currency option	b) is 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
3.put option	c) 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
4.outright forward spot transaction	d) 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
5.call option	e) 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
6.swap	f) is an option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract

B. Learn more about foreign exchange instruments. Fill in the gaps with the words and word -combinations from 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