Briefing

Date: 2015-10-07; view: 672.

Foreign exchange dealing is, as its 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 the USA, for example, will probably use sterling to buy US dollars from its bank in order to pay an invoice from the US company. The bank buys the US dollars 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 market. Making a profit on the transaction is the basic idea of foreign exchange dealing.

Currencies can be bought or sold in the foreign exchange market either for immediate delivery, that is at the spot rate, or for delivery later (e.g. two weeks, three months, etc.) at a forward rate. The forward market is useful for companies, since if a company knows that it will need a particular foreign currency to pay a bill in four weeks' time, for example, a forward deal 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 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 centers, for the currency in question. In the case of sterling, for example, this is London, for US dollars it is New York and for Yen it is Tokyo. 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, then 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.

· Read the briefing

· Check your comprehension and answer the following questions:

1. What does foreign exchange imply?

2. What is the basic idea of foreign exchange dealing?

3. In what way are currencies bought and sold in the foreign exchange market?

4. What is the procedure of settlement for a spot transaction?

5. What paper work accompanies the currency transaction?

6. Why is it necessary for dealers to maintain a balanced total position?

· Say if the statements are true or false.

1. Forward contract is an agreement to deliver a specified amount of currency at a set price within two working days.

2. Currency risk exposure means that a currency dealer may suffer losses due to adverse changes in exchange rates.

3. The objective of the forward market is to reduce the risk associated with the future currency transaction by setting prices in advance.

4. The major dealers in the foreign exchange market are issuing banks.

5. If payment is to be made in future there is uncertainty as to what spot rate will be on a given future date.

6. If the amount of claims in specified currency is larger than the debts the bank has a short position.

7. A forward contract is useful to hedge against currency risk.

8. The objective of foreign exchange dealing is to forecast possible changes in exchange rates.

9. Exchange dealers are directly involved with day-to-day dealing in foreign exchange.

10. To conduct international payments banks should maintain long position in dollars.

· Arrange the following words and word combinations into:

a) pairs of synonyms

value, spread, to fluctuate, forecast, deficit, to issue, differential, to devalue, cost, dealing, gap, proceeds, to make out, to float, to submit, to make gains, yield, currency, transaction, to yield a profit, to depreciate, foreign exchange, prediction, to present.

b) pairs of antonyms

adverse, forward, loss, exposure, revenue, payable, cutting, favourable, bankrupt, adjusted, spot, solvent, security,

profit, expense, unbalanced, increase, receivable.