UNIT 6 FOREIGN EXCHANGE MARKETS

PREVIEW
Match the following words or phrases in column A with their definitions column B

Column A Column B
1. currency A. an individual or firm that acts as an intermediary between an
2. exchange rate investor and a securities exchange
3. commission B. expressed as a comparison of the currencies of two countries.
4. bid rate C. currency held on deposit by governments or corporations
5. offer rate operating outside of their home market
6. quote D. the price at which a buyer is willing to pay for a currency,
7. forward transaction security or asset.
E. circulating money in a country
8. spot transaction F. amount of money charged for a service
9. broker G. contractual transaction to buy or sell an item, in which the
10. eurocurrency payment and delivery take place at a predetermined future date.
H. the price a seller at which people are willing to sell
I. the purchase or sale of a foreign currency, financial
instrument, or commodity for instant delivery on a specified spot
date
J. set or list the price of a good or service

READING 1

What are foreign exchange markets?

The foreign exchange market is the market in which such national currencies as dollars, pesos,
deutschemarks, yen, francs, and others are exchanged.
The operations of foreign exchange markets
It is not an organized market with fixed hours and a physical meeting place, such as the New
York Stock Exchange or Chicago Board of Trade. The foreign exchange market is an over – the
– counter market, the primary communication instruments being the telephone and the
computer. The market has developed rapidly in the past quarter century, and the volume of
activity has escalated dramatically in response to the growth in the volume of world trade in
goods and services, and especially in response to the expansion of international capital flows –
the acquisition of financial and real assets across national borders. Total worldwide foreign
exchange market transactions in 1996 were approximately $1.2 trillion, or $1,200 billion per
day. More than 90 percent of these transactions are associated with capital flows. Among the
most important financial centers are New York, London, Tokyo, Paris, Frankfurt, Hong Kong,
and Zurich. Among them, London is the world’s largest foreign exchange centre. Banks here
trade almost $200 billion each day in foreign currencies.
London’s trading position arises partly 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 through-
out the day but also with the US and the Far East, whereas time difference makes it difficult for
those two centres to trade with each other. When banks in London begin trading at 8 a.m. they
can deal with banks in Tokyo, Hong Kong, Singapore whose trading day is just ending. From 1
p.m. London banks can trade with banks in New York: before they close at 5 p.m., their
counterparts may be in Los Angeles or San Francisco. The foreign exchange market thus trades
24 hours a day.
Foreign exchange trading is divided into spot and forward business. Generally speaking, spot
transactions are undertaken for an actual exchange of currencies (delivery or settlement) two
business days later (the value date).
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 of
a customer, protect the value of anticipated flows of foreign currency from exchange rate
volatility.
The roles of Foreign exchange markets
The foreign exchange market enables banks and international corporations to trade foreign
currencies in large amounts. Capital flows arising from trade in goods and services, international
investment and loans together create this demand for foreign currency.
Participants in Foreign exchange markets
Broadly speaking, there are four types of participants in the market: the market maker,
customers, dealers and brokers. Customers such as importing & exporting companies or
multinational corporations, are in the market because they require foreign currency in the course
of their cross-border trade or investment business. Central banks participate as market makers
who at any time quote bid (buying) rates and offer (selling) rates for currencies – dollars to the
pound, deutschemarks to the dollar and so on. Other banks or corporations participate as dealers
who trade foreign currencies on their own accounts. They can earn a profit on the difference
between their buying and selling rates, but, clearly they have to be ready to change their prices
very quickly so that they avoid holding large volumes of a depreciating currency, or being short
of a rising currency. The fourth type of participant, the brokers, acts as intermediaries between
the banks. They are specialist companies with the telephone lines to the banks throughout the
world so that at any time they should know which bank has the highest bid rate for a currency
and which the lowest offer rate. By calling a broker, therefore, it should be possible for banks to
find the best dealing rate currently available. The broker doesn’t deal on his own account but
charges a commission for his services.

COMPREHENSION QUESTIONS

1. What is the foreign exchange market?

2. Why is it considered to be an OTC market?
3. Why is London the world’s largest foreign exchange centre?
4. What are two types of transactions in the foreign exchange market?
5. How many types of participants are there? Who are they?
6. For what purposes do multinational corporations need foreign currencies?
7. What do the terms “bid rates” and “offer rates” mean?
8. How do brokers participate in the foreign exchange market?

KEY TAKEAWAYS
The foreign exchange market is the market in which national
currencies are exchanged.
Foreign exchange market is an OTC market because it is not an
organized market with no fixed trading hours and no physical meeting
place. The main communication instruments are telephones and
computers.
London is the world’s largest foreign exchange centre.
2 types of transactions are spot and forward transaction. Spot
transactions are undertaken for an actual exchange of currencies
(delivery or settlement) two business days later (the value date) .
Forward transactions involve a delivery date further into the future,
possibly as far as a year or more ahead
There are 4 groups of participants in the foreign exchange market:
customers, dealers, market makers and brokers.

Match up the half-sentences below.

1 To ‘peg’ a currency against A. the amount of a country’s money that residents were able
something means to to change into foreign currencies.
2 A clean floating exchange B. fix its value in relation to it.
rate C. make a profit by making capital gains or by investing at
3 Exchange controls used to higher interest rates
limit D. is determined by supply and demand.
4 Speculators buy or sell E. trying to insure against unfavorable price movements by
currencies in order to way of futures contracts.
5 ‘Market forces’ means F. the determination of price by supply and demand (the
6 ‘Hedging’ means quantity available and the quantity bought and sold).

READING PRACTICE
History of the Forex Market
Up until World War I, currencies were pegged to precious metals, such as gold and silver.
Then, after the Second World War, the system collapsed and was replaced by the Bretton
Woods agreement. That agreement resulted in the creation of three international organizations
to facilitate economic activity across the globe. They were the following:
1. International Monetary Fund (IMF)
2. General Agreement on Tariffs and Trade (GATT)
3. International Bank for Reconstruction and Development (IBRD)
The new system also replaced gold with the U.S. dollar as a peg for international currencies.
The U.S. government promised to back up dollar supplies with equivalent gold reserves. But
the Bretton Woods system became redundant in 1971 when U.S. President Richard Nixon
announced a “temporary” suspension of the dollar’s convertibility into gold.
Currencies are now free to choose their own peg and their value is determined by supply and
demand in international markets.
Type of Forex Markets
Three are three key types of forex markets: spot, forward, and futures.
Spot Forex Market
The spot market is the immediate exchange of currency between buyers and sellers at the
current exchange rate. The spot market makes up much of the currency trading.
The key participants in the spot market include commercial, investment, and central banks, as
well as dealers, brokers, and speculators. Large commercial and investment banks make up a
major portion of spot trades, trading not only for themselves but also for their customers.
Forward Forex Market
In the forward markets, two parties agree to trade a currency for a set price and quantity at
some future date. No currency is exchanged when the trade is initiated. The two parties can be
companies, individuals, governments, or the like. Forward markets are useful for hedging.
On the downside, forward markets lack centralized trading and are relatively illiquid (since
there are just the two parties). As well, there is counterparty risk, which is that the other part
will default.
Futures Forex Market
Future markets are similar to forward markets in terms of basic function. However, the big
difference is that future markets use centralized exchanges. Thanks to centralized exchanges,
there are no counterparty risks for either party. This helps ensure future markets are highly
liquid, especially compared to forward markets.
Big Players in the Forex Market
The U.S. dollar is by far the most-traded currency. The second is the euro and the third is the
Japanese yen. JPMorgan Chase is the largest trader in the forex market. Chase has 10.8% of the
global forex market share. They have been the market leader for three years now. UBS is in
second, with 8.1% of the market share. XTX Markets, Deutsche Bank, and Citigroup make up
the remaining places in the top five
Decide if the statements are True or False
1. The World war two resulted in the formation of 3 organizations: IMF, GATT, IBRD
2. The currency value is determined by supply and demand in international markets.
3. In forward market, currency is traded when the trade is initiated.
4. Future markets can decrease risks for investors because they use centralized exchanges
5. The USD, euros and Japanese yen are the most traded currencies in the foreign exchange
market.

REVISION QUESTIONS

1. What is a foreign exchange market? Why is it considered to be an OTC market?

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2. What are 2 types of transactions in the foreign exchange market?
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3. What are 4 groups of participants in the foreign exchange market?
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TRANSLATION

1. Forex trading is the exchange of one currency for another. Forex trading is the trading of
currency pairs—buying one currency while at the same time selling another.
……………………………………………………………………………………………………
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2. There’s a very large amount of trading volume and markets are open almost 24/7. With that,
people who work nine-to-five jobs can also partake in trading at night or on the weekends.
……………………………………………………………………………………………………
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3. In most cases, you can open and trade via forex account for as little as $100. Of course, the
higher the amount you can invest the greater the potential upside.
……………………………………………………………………………………………………
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4. The forex market is not dominated by a single market exchange, but a global network of
computers and brokers from around the world.
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5. Forex brokers act as market makers as well and may post bid and ask prices for a currency
pair that differs from the most competitive bid in the market.
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- exchange (v) [ɪksˈtʃeɪndʒ]: To give in return for something received; trade – trao đổi
E.g. Can you exchange a dollar note for two 50-cent pieces?
- exchange (n) - the act, process, or an instance of exchanging
- exchange rate (n) - the rate at which the currency unit of one country may be
exchanged for that of another – tỷ giá hối đoái
E.g. What is the rate of exchange between the U.S. dollar and the yen?
- float (v) [fləʊt]: To find a level in relationship to other currencies solely in response to
the law of supply and demand – thả nổi
E.g. allowed the dollar to float.
- intervene (v) [ˌɪntəˈviːn] - to take action to affect the market forces of an economy, esp
to maintain the stability of a currency – can thiệp
E.g. to intervene in the affairs of another country.
- convert (v) [kənˈvɜːt] - to exchange (a security or bond) for something of – đổi
E.g. He has converted his house into four separate flats.
- convertibility (n) - the quality of being exchangeable (especially the ability to convert a
currency into gold or other currencies without restriction) – sự chuyển đổi, khả năng
chuyển đổi
- equivalent (adj) [ɪˈkwɪvələnt] - equal or interchangeable in value, quantity, significance,
etc – tương đương
E.g. A metre is not quite equivalent to a yard.
Would you say that `bravery' and `courage' are exactly equivalent?
- acquire (v) [əˈkwaɪə] - To gain possession of – nhận, đạt được
E.g. The company acquired a 50% stake in Saab for $4m.
- acquisition (n) [ӕkwiˈziʃən] - the act of acquiring / something acquired
E.g. the acquisition of more land; Her recent acquisitions included a piano.
- transaction (n) [trænˈzækʃən] - the act of transacting or the fact of being transacted –
giao dịch
E.g. They have always been honest in their transactions with us.
 - benefit (n) [ˈbɛnɪfɪt] - something that is advantageous or good – lợi ích
E.g. The field trip was of great benefit to the students.
- trade (v) [treɪd] - to exchange (one thing) for another – trao đổi
E.g. I traded my watch for a bicycle.
- Trade (n) - the buying and selling of goods – sự trao đổi, thương mại
E.g. Japan does a lot of trade with Britain.
- participate (v) [pɑːˈtɪsɪˌpeɪt] - to be one of a group of people actively doing something –
tham gia
E.g. Did you participate in the discussion?
- participant (n) a person who participates (in a particular activity) – người, đối tượng
tham gia
E.g. the participants in the Olympic Games.
- quote (v) [kwəʊt] - to state the current or market price of (a stock, bond, etc.) - ấn định,
xác định
E.g. He quoted a price for the repairs.

CÂU HỎI TRẮC NGHIỆM LUYỆN TẬP

1. Foreign exchange market is the market in which…………………………currencies are
exchanged.
A. nation B. national C. nationality D. international
2. The ………………of activity has escalated dramatically in response to the growth in the
volume of world trade in goods and services and the expansion of international capital flows
A. volume B. amount C. lots D. deal
3. Foreign exchange markets operate 24 hours a day because of difference in ……………..
A. time zones B. currencies C. banks D. trading floor
4. In ……………., you can exchange a currency for instant delivery.
A. future market B. forward market C. spot market D. None of above
5. In…………….., you can exchange a currency for future delivery.
A. spot market B. forward market C. capital market D. money market
6. If you want to buy a currency, you have to pay at …………….
A. interest rate B. offer rate C. discount rate D. bid rate
7. What is another name for currency trading?
A. International money B. USA overseas
C. Foreign exchange or FOREX D. FEDEX
8. In currency trading, currencies are always quoted in ……………..
A. groups B. pairs C. brackets D. accounts
9. USD/JPY = 119.962 means……………….
A. That the United States and Japan use the same currency
B. That 1JPY which is the base currency is trading for US$119.962 which is the quote currency.
C. That the United states has traded with japan 119.962 times
D. That US $1, which is the base currency, is trading for JPY119.962, which is the quote
currency
10. An increase in the value of a domestic currency will mainly result in ………...
A. lower imports B. trade surplus C. trade deficit D. increased exports
11. An decrease in the value of a domestic currency will mainly result in …………..
A. increased imports B. lower exports C. trade deficit D. trade surplus
12. If there is an increase in exchange rate, ………………….
A. exports get cheaper B. imports will decrease
C. a business owner will export more D. imports get cheaper
13. If there is a decrease in exchange rate, ………………….
A. exports get cheaper B. imports will increase
C. a business owner will export more D. imports get cheaper
14. Exchange controls used to ……………….. the amount of a country’s money that residents
were able to change into foreign currencies.
A. protect B. increase C. limit D. maximize
15. Multinational companies participate in foreign exchange market because they want money
for their…………………in other countries
A. invest B. investor C. investment D. investible
16. Central banks are market makers in the forex by quoting ……………….for national
currencies
A. exchange rate B. discount rate C. floating rate D. interest rate
17. Brokers benefit in participating in the forex from …………………for the services they
provide.
A. interest B. spread C. commission D. profit
18. ……………………. buy or sell currencies in order to make a profit by making capital gains
or by investing at higher interest rate.
A. Speculators B. market makers C. brokers D. customers
19. To ‘peg’ a currency against something means to fix its …………….. in relation to it.
A. cost B. value C. rate D. power
20. Hedging means trying to insure against unfavorable price movements by way of futures
contracts.
A. protecting B. countering C. insuring D. hedging
21. An exchange rate is basing on the …………….rate because it is determined by supply and
demand.
A. floating B. fixed C. constant D. nominal
22. ……………..exchange rate occurs when the government intervenes to try and keep the value
of the currency at a certain level against other currencies
A. floating B. fixed C. constant D. nominal
23. If a bank wants to sell a foreign currency, it sells at……………..
A. bid rate B. offer rate C. discount rate D. interest rate
24. The idea of single currency such as Euro in European countries is an example of a bold
attempt to ……………..exchange rate fluctuations
A. eliminate B. increase C. control D. create
25. Central banks of countries participate in the foreign exchange market to protect the financial
strength and ………………….of the country’s balance of payments.
A. stability B. stable C. stabilize D. stably