UNIT 2

THE FOREIGN EXCHANGE

OBJECTIVES

This unit will help you to::

 recognize the basic functions and activities performed by the FOREX Market
Market;
 have a go at acquiring highly specialized market terminology used by foreign
exchange dealers.

LEAD-IN

1. Read the words below. If you are not familiar with their meaning, you are
advised to use a dictionary:

banknotes
barter
coinage
fiduciary issue
forgery
gold reserves
issue
mint
monetary policy
promissory notes
sound money
watermark
2. Use the words to complete the text “The history of the foreign exchange market”:

The History of the Foreign Exchange

In the days before money was created, traders exchanged one type of goods for
another. This was called (1) ….. trade. Later, countries produced units made of gold.
This was called (2) ….. and was produced in a (3) ….. . Originally, the total value of
metal coins produced by a country was backed by its (4) ….. and was called (5) …...
However, in some countries the amount of gold held by a country does not
correspond to the value of coins in circulation, but may instead represent securities.
This system is called the (6) ….. .

The main disadvantage of using money made of metal was that it was difficult to
transport. So, traders began using documents which promised to pay a sum of money
in exchange for goods. These documents were called (7) ….. .

Banks also began to (8) ….. papers to clients to confirm that they had deposited
money in the bank. These papers were issued in standardized amounts and were
called (9) ….. .

To prevent (10) ….. or the copying of banknotes, banks adopted a number of

security devices such as a design on the sheets of paper used to make money. This
design is called a (11) ….. .

Nowadays, each country has its own system of safeguarding the currency. This
system is called (12) ….. .

(from Pratten, J., Banking English, Unit 5, Foreign Exchange and Money
Matters, p. 57)
 READING

Read the text below:

Foreign Exchange

Foreign exchange dealing is, as the name implies, the exchange of the currency of
one country for the currency of another. The rate of exchange is the value of one
unit of the foreign currency expressed in the other currency concerned.

With the growth of global trade, many companies need foreign currencies to pay
producers in other countries. A British company with a supplier in Germany, for
example, will probably use sterling to buy Euros from its bank in order to pay an
invoice from the German company. The bank buys the Euros from another bank at a
particular rate and provides them to its customer at a higher rate, thus making a
profit. Similarly, a bank may make gains on buying and selling currencies on the
inter-bank
bank market. Making a profit on the transaction is the basic idea of foreign
exchange dealing.

Currencies can be bought or sold in the FOREX market either for immedia
immediate
delivery, that is at the spot rate, or for delivery later, at a forward rate. The
forward market is useful for companies, since if a company knows that it will need a
particular foreign company to pay a bill in four weeks’ time, for example, a forward
deal
eal enables it to protect itself against future adverse movements in the exchange
rate which would have otherwise had the effect of making the foreign goods more
expensive. When dealing in foreign exchange, normally by telephone, the bank
quotes both the selling
elling and buying rate of a currency at which it is prepared to
transact business. Settlement for a spot transaction is two working days later.

Thus if a contract is made on Monday, the seller delivers the amount sold and
receives payment on Wednesday. Similarly if the contract is made on Tuesday,
value is Thursday. Currency traded in this way is delivered to the buyer’s account
 with a bank in the main centre, or one of the main centres, for the currency in
question. In the case of sterling, for example
example,, this is London. The buyer decides the
bank where his or her account is to be credited.

The foreign exchange dealer fills in a dealing slip containing basic information such
as the date and time of the deal, the contracting party, the amount and rate agreed on,
the date of settlement, and the place of delivery of the currency dealt in. As soon as
a foreign exchange transaction has been carried out, both banks send a written
confirmation containing the basic information mentioned above. Any discrepancies
may thus be detected quickly.

A bank holding debts or claims in a foreign currency is itself exposed to an

exchange risk, unless the debts and claims neutralize each other by being of equal
size and by having roughly the same maturity dates. Dealers therefore aim for a
balanced total position.. If the amount of a bank’s claims in dollars, for example, is
larger than the total debts in dollars, than the bank has a long position, but if the
debts are larger than the claims, the bank is short in dollars. As long as the total
position balances, there is no risk for the bank.

(from Corbett, J., English for International Banking and Finance,, Unit 3 Foreign
Exchange, pp. 18-19 )

VOCABULARY

1. Match the words in bold face type in the text above with their Romanian
counterpart. Remember, though, that most professionals worldwide use these words
in English.

1.to have a balanced position a) scadenţă

2. settlement b) rata unei tranzacţii la vedere
3. forward rate c) creanţe
 4. spot rate d) stingerea datoriei, plata
5. to be short in dollars e) a avea excedent valutar
6. value date f) a avea acoperire
7. dealing slip g) data valutei
8. claims h) a avea deficit valutar (pe dolari)
9. maturity i) rata unei tranzacţii la termen
10. to have a long position j) foaia de tranzacţie

2. Complete the text below with the following words: big figure, spot, value date,
base currency, deal slip, cable, spread, cross rates.

Currency dealing

When dealers talk about a (1) ….. deal, they mean a purchase or sale of one currency
for another, with the delivery date two working days after the dealing day. The
delivery date is often called the (2) ….. , the day funds are delivered to your account.

When referring to currency prices, a dealer may ask for a (3) ….. , the sterling/dollar
quote, or he may want to know the (4) ….. ,the first three digits of a quote. When
giving quotes between two currencies, dealers may refer to the (5) ….. , that is the
currency quoted first. If more than two currencies are involved, dealers talk about
(6) ….. , the rate between currency A and currency B, calculated from the market
rates between A and B and C.

Before making a purchase or sale, dealers will calculate the (7) ….. , their margin on
the deal. On completion of a deal the dealer will complete the (8) ….. , a piece of
paper which records vital details about the deal, i.e. amount, currency, and
counterparty.
 SELF-ASSESSMENT
ASSESSMENT TEST

Match each of the terms below with the right explanation:

a) netting
b) best order
c) hot money
d) Bretton Woods system
e) premium
f) fluctuate
g) issue
h) fiduciary issue
i) firm
j) promissory note
k) pip
l) The Royal Mint
m) legal tender
n) intra-day limit
o) coinage
p) forward
r) spread
s) devaluation
t) sound money
u) intervention
v) future
w) swap
x) option
y) intaglio

1. A contract obliging one party to buy, and the other to sell, a specific currency for
a fixed price at a future date.
2. The minimum price change in floating foreign exchange rates.
3. The production of money backed by securities, not gold.
4. A set of monetary units made stamped metal.
5. The practice of dealing only for the net amounts in a currency where a
counterparty has a two-way cash-flow.
6. A contract which gives the holder the right to purchase property or assets during a
specific period at an agreed price.
7. A method of fixing the major currencies against the dollar, used until 1973.
8. A method of producing banknotes which creates a complex design and is difficult
to counterfeit.
9. Lowering the value of a nation’s currency.
10. To move up and down.
11. The participation of a government or bank to cause change.
12. To put into circulation.
13. A written promise to pay an amount of money to another party.
14. A forward contract traded on an exchange.
15. A purchase order placed with a dealer to be executed when a currency or
commodity becomes available.
16. A currency which is appreciating on the market.
17. The number of points between a bank’s bid rate and its offered rate in currency
dealing.
18. The limit set by bank management on the size of each dealer or counterparty’s
position.
19. The acceptable form of currency in a country.
20. Money with dependable value, backed by gold reserves.
21. British agent producing coins by stamping metal.
22. An agreement by two parties to exchange a series of cash-flows in the future.
23. Speculative money moving in and out of a particular market, changing in value.
24. The front end fee paid for an option.