Unit 3: Foreign exchange trading

A. Vocabulary
1. Foreign exchange is money or currency of a foreign country.
2. The “gold standard” represented the beginning of a foreign exchange system
because it is an international monetary system in which nations linked the value of
their paper currencies to specific values of gold.
3. Central bank is owned by government. It regulates the commercial banks and holds
gold, foreign currency reserves. It also keeps the currency at a certain value.
4. Under a “floating exchange rate” system, supply and demand are 2 sources which
determine value.
5. An exchange rate system is fixed when the currency reaches its low or high point.
6. Spot Transaction is the currency bought or sold today with the delivery 2 business
days later.
7. On the “forward transaction”, the payment and delivery are made on the future date
when a currency is sold or bought.
8. Hedging is to offer a “buy” contract with a “sell” contract and vice sera, matching
the amounts and the time span exactly.
9. Premium is the additional amount it will cost to buy or sell a currency at a given
future date. Discount is the opposite of premium.
10. Arbitrage is the transfer which funds from one currency to another to benefit from
currency differentials or disparities in interest rates. In this, at least 2 markets are
entered.
B. Reading comprehension tasks:
1. In the earlier days, goods were exchanged for other goods, which is called battering.
Then it was replaced by precious metals (i. e gold or silver)
2. The gold standard system determined the value of all currencies based on gold, so
that the currencies could be compared easier.
3. Until 1971, The US Dollars was the only one convertible into gold.
4. The fixed exchange rate system is that there are prices are beyond which the central
bank intervenes. The Bretton Woods Agreement agreed upon this system.
5. Devaluation in currencies means that the currencies are now worth less in terms of
gold. 3 countries experiencing the devaluation in their currencies from 1967 to 1973
were England, France and The US.
6. Western German and Holland were 2 of countries to revalue in early 1970s.
7. No, the intervention points are not applicable in a system of floating exchange rate.
The reason is that central banks are no longer required to support their own currencies.
8. Snake is a widening of the intervention points to within 2.25 percent of the par
value of the currencies. It is called the snake since the currencies move up and down
together against currencies outside the snake. The British and the Italians are outside
it.
9. The foreign exchange market is the mechanism through which foreign currencies
are traded. It is a system of telephone of telex communications between banks,
customers and middlemen.
10. A foreign trade broker often trade with customers on behalf of banks or
cooperations.
11. Active participants in the foreign market include tourists, investors, exporters and
importers, governments.
12. Spot transaction means the money is transferred immediately while forward
transaction means the delivery of a currency will take place at a future date. For
example: when a French father transfers money to his son in New York, which is spot
transaction. Japanese exporters of Toyota cars to the US will receive a specified US
dollars amount in six month from the contract.
13. In spot transaction, the delivery takes place immediately but the actual delivery
might take 2 days. This is because the transaction needs sufficient time to
consummate.
14. The payment and delivery in forward transaction can take place at any time before
the contract expiration. The rate of exchange is fixed on the date of the contract.
15. Dealers not hedging with an offsetting contract will lead to an open position.
16. If dealers buy currency forward without selling forward at the same time, this is
known as short. But if they buy currency forward and sell forward at the same time,
this is called long
17. A bid is the price dealers will pay to acquire pounds. An offer is the price they will
sell the pounds for.
18. Arbitrage is the practice of transferring funds from one currency to another to
benefit from rate differentials.
19. If interest rates in England are 2 percent higher than in the US money market, a
US investor would do well to change US dollars into pounds sterling and then invest
the sterling at the English interest rate. Without the absence of foreign exchange
regulation, interest arbitrage is impossible to happen.

C. Exercises:
Exercise 1:
1. Goods
2. Gold
3. Fixed – Floating
4. Short
5. Arbitrage
Exercise 2:
1. 1973
2. 1992
3. 1944
4. 2002
5. 1971