The Foreign Exchange Market

The foreign exchange market enables companies, fund managers, banks and others to buy and sell foreign currencies, if necessary in large amounts. Capital flows arising from trade in goods and services, international investment and loans together create this demand for foreign currency. The sums involved are very large with estimated global turnover in all currencies currently in the region of $880 billion each day. Typically wholesale deals are for amounts of $1mln-$5min though much larger transactions are often done.

Foreign exchange trading may be for spot or forward delivery.

Generally speaking, spot transactions are undertaken for an actual exchange of currencies (delivery or settlement) two business days later (the value day). Forward transactions involve a delivery date further into the future, possibly as far as a year or more ahead. By buying or selling in the forward market a bank can, on its own behalf or that or a customer, protect the value of anticipated flows or foreign currency from exchange rate volatility.

Unlike some financial markets, the foreign exchange market has no single location – it is not dealt across a trading floor. Instead, trading is via telephone, telex and computer links between dealers in different centers and, indeed, different continents. London is the world’s largest foreign exchange center. Banks here trade around $300 billion each day in foreign currencies.

London’s leading position arises from the large volume of international financial business generated here – insurance, Eurobonds, shipping, commodities and banking. London also benefits from its geographical location which enables it to trade not only with Europe throughout the day, but also with the USA and the Far East, whereas their time deference makes it difficult for those two centers to trade with each other. When banks in London begin trading at 8 am they can deal with banks in Tokyo, Hong Kong or Singapore whose trading day is just ending. From about 1 pm onwards, London banks can trade with banks in New York; before they close at 5 pm their counter partners may be in Los Angeles or San Francisco. The foreign exchange market trades 24 hours a day.

Ex. IV Answer the questions to the text:

1. What is foreign currency?
2. What is foreign exchange market?
3. Where do capital flows arise from?
4. What are the sums involved at foreign exchange market?
5. What are the types of delivery at foreign exchange trading?
6. What are the spot transactions at foreign exchange trading?
7. What are the forward transactions at foreign exchange trading?
8. What doesn’t the foreign exchange market have unlike some financial markets?
9. How the trading is held?
10. What is the world’s largest foreign exchange center?
11. What is the reason of London’s leading position?
12. How does the London foreign exchange market organize the work with different parts of the world?
13. What time does the foreign exchange market trade?

Ex. V Read, translate and analyze the text.

World Currency

The US dollar, and Euro to a lesser extent, are by far the most used currencies in terms of global reserves.

In the foreign exchange market and international finance, a world currency or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency. In March 2009, as a result of the global economic crisis, China and Russia have pressed for urgent consideration of a global currency and a UN panel has proposed greatly expanding the IMF's SDRs or Special Drawing Rights.

Currencies have many forms depending on several properties: type of issuance, type of issuer and type of backing. The particular configuration of those properties leads to different types of money. The pros and cons of a currency are strongly influenced by the type proposed. Consider, for example, the properties of a complementary currency.

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