Unit 3

Nguyễn Thị Hồng Anh 1701015030
UNIT 3: FOREIGN EXCHANGE TRADING

B. VOCABULARY:
1. Foreign exchange is money or currency of a foreign country.
2. The gold standard represented the beginning of a foreign exchange system, by
which the value of currencies could, on request of the owner (holder), be converted in
to gold at a country's central bank. As all currencies had a gold value, they also had a
certain value in relation to each other.
3. Three functions of a country’s central bank are: regulating the commercial banks;
holding gold and foreign currency reserves; intervening actively by buying and selling
its own currency. It is owned by government.
4. Under a floating exchange rate system, supply and demand determined the value of
currencies.
5. Fixed exchange rate is achieved by buying the currency when it reaches its low
point and selling the currency when it reaches its high point.
6. Spot transaction happens when the currency bought or sold today with delivery two
business days later.
7. On the forward transaction, the payment and delivery of funds are made at future
date.
8. Hedging is to offset a ‘buy’ contract with a ‘sell’ contract and vice versa, matching
the amounts and the time span exactly.
9. Premium is the additional amount that will cost to buy or sell a currency at a given
future date.
10. Arbitraging is the transfer of funds from one currency to another to benefit from
currency differentials or disparities in interest rates. In arbitraging, at least two
markets are entered.
C. READING:
1. In the earlier days, goods were exchanged for other goods, which is called battering.
Then it was replaced by foreign exchange system.
2. The gold standard system determined the value of all currencies based on gold,
which meant the values of different currencies could be compared in terms of one
another.
3. United States dollars remained convertible into gold until 1971.
4. The system of fix exchange rates is wherein central banks intenvene in the foreign
exchange markets at the intervention points. Breton Woods Agreement agreed upon
this system.
5. Devaluation means decreasing the value of a currency interms of gold. Three
countries that devalued their currencies between 1967 and 1973 are: England, France
and United States.
6. West Germany and Holland revalued their currencies in the early 1970s.
7. Yes, but a widening within 2.25 percent of the par value of the currencies
8. Snake is the system where countries preserve the fixed – rate system but allow a
widening of the intervention points to within 2.25% of the par value of the currencies.
9. The foreign exchange is not an actual marketplace but a system of telephone of
telex communications between banks, customers and middlemen.
10. A foreign exchange broker acts for a client vis – a – vis the bank.
11. Five active participants in the foreign exchange market: Tourists, investors,
exporters, importer, governments.
12. Spot transaction happens when the currency bought or sold today with delivery
two business days later. E.g: A French father transfers money to his son in New York.
Forwarding transaction means to buy or sell a currency in the future with payment and
delivery at that future date. E.g:Japanese exports on Toyota cars to the US will receive
a specified US dollar amount in 6 months. They sell the dollars forward six months to
their bank in Japan in return for yen to protect themselves against fluctuating
exchange sales.
13. Delivery of the foreign exchange takes place 2 days later, which permits sufficient
time to consumate the transaction.
14. Payment and delivery are taken place at a futute date. The exchange rate is
determinated on the date of contract.
15. Dealers’ not hedging with an offsetting contract will cause an open position.
16. A long open position is when dealers buy currency forward without selling it
forward at the same time. A short open position happens when dealers sell a currency
forward without buying forward at the same time.
17. A bid is the price dealers will pay to acquire a currency while an offer is the price
they will sell the currency for.
18. Arbitrage is the practice of transfering funds from one currency to another to
benefit from rate differentials.
19. If interest rates in England are 2 percent higher than in the United States money
market, a United States investor would do well to change United States dollars into
pounds sterling and then invest the sterling at the English interest rate. Without the
absence of foreign exchange regulation, such as capital transfer limitations, interest
arbitrage is not possible.
D. EXERCISES:
Exercise 1:
1. goods 2. gold 3. fixed; floating 4. long 5. arbitrage
Exercise 2:
1. 1973 2. 1992 3. 1944 4. 2002 5. 1971
E. EXTENSION ACTIVITIES:
In former times trade was based on bartering — goods were exchanged for other
goods. Several areas commonly used gold as a medium of exchange, howerver,
industrialization in Western countries made gold reserves no longer adequate to meet
the requirements. Thus, the gold standard, which determined the value of all
currencies based on gold, came into existence and was finally abolished by 1971. The
gold standard system worked well until World War I, when the trade was interrupted.
In 1944, the Bretton Woods Agreement stipulated that central banks of the member
countries, while expressed the value of their currencies in gold, were required to
intervene in the foreign exchange markets to keep the value of their currencies within
1 percent of the par value. This is called the system of fixed exchange rate. The
system of fixed exchange rates worked well until the late 1960s and early 1970s,
because a number of countries devalued their currencies. The world unsurprisingly
saw a return to a floating exchange rate system by then.
The last few decades have witnessed the developing of foreign exchange trading to
become the largest global market. Its main fuction is to reduce the risk of fluctuating
exchange rates or of a change in the parity of currencies (devaluation and revaluation)
Its importance has always been undeniable, as without foreign exchange trading,
international trade itself could not exist.
Main ideas:
The history of Forex trading, the main fuction of central banks, key terms of foreign
exchange trading

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Nguyễn Thị Hồng Anh 1701015030

UNIT 3: FOREIGN EXCHANGE TRADING

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