B. Dialogue cornerstone of the global financial market

Russian: As far as we know, the cornerstone of the global financial market is the Foreign Exchange Market. In this connection, how is it developing? What affects its development?

Foreigner. I would stress, first of all, that the FOREX is really an integral, fundamental sector of the global financial market. It reflects economic relations between parties to currency deals. The most noticeable factors affecting the market are trade and non-trading financial transactions between countries, like transportation, insurance, tourism, credits, foreign investment, etc.

R.: The market has no one centralized location, does it?

F.: No, the market is global in character. It is rather a network of dealing rooms connected by sophisticated communications systems, like telephones, telex machines and electronic dealing systems. Major trading activities are conducted in London, New York, Chicago, Tokyo, Singapore and others.

R.: The cities you've mentioned are located in different time zones. What are the trading hours then?

F.: Oh, trading occurs 24 hours a day. Dealing rooms span the globe and the market never really closes.

R.: How big is the market? How big is the volume of deals in the market?

F.: By the estimate of the Bank for International Settlements, about $1 trillion is exchanged every day.

R.: Who are the major participants in the market?

F.: Commercial and investment banks, central banks, governmental agencies, professional fund managers, corporations, brokers, investors, speculators.

R.: I think banks play the most important role in currency transactions.

F.: You are right. Bank dealers at their workplaces are in constant contact by telephones or computers with dealers in different banks. They sit analysing latest currency quotations they see on display. Banks buy or sell currency either for themselves or on behalf of their clients.

R.: What currencies can be bought and sold?

F.: Only convertible currencies.

R.: I know that currency operations are based on exchange rates. The exchange rate is the value of one unit of the foreign currency expressed in the other currency concerned. Banks involved in currency operations determine full quotations including the buying and selling rates and use them for their currency transactions. How are exchange rates determined?

F.: It's a very difficult question. Determination of the exchange rate at which foreign transactions will take place depends on the exchange rate policy adopted by the central bank of a country. At the present time countries are free to choose the method to determine the value of their currencies. Advanced industrial countries use floating rates depending on supply and demand. Other countries peg their currencies to one currency or a group of currencies.

R.: What factors affect the exchange rate?

F.: They are many. The exchange rate depends first of all on the Purchasing Power Parity, country's economic development, balance-of-payments position, inflation rate, money in circulation, confidence in the national currency on the world market, interest rates, the central bank policy, currency legislation, etc.

R.: The Central Bank of Russia is taking steps to liberalize currency legislation and to join the global financial community.