Реферат: Foreign exchange market (Иностранный обменный рынок)Contents
TOC o «1-2» I. Introduction PAGEREF _Toc535148698 h 2
II. The structure of the foreign exchange market PAGEREF _Toc535148699 h 3
1. What is the foreign exchange? PAGEREF_Toc535148700 h 3
2. The participants of the foreign exchange markets PAGEREF_Toc535148701 h 4
3. Instruments of the foreign exchange markets PAGEREF_Toc535148702 h 5
III.Foreign exchange rates PAGEREF _Toc535148703 h 6
1. Determining foreign exchange rates PAGEREF_Toc535148704 h 6
2. Supply and Demand for foreign exchange PAGEREF_Toc535148705 h 7
3. Factors affecting foreign exchange rates PAGEREF_Toc535148706 h 11
IV.Conclusion PAGEREF _Toc535148707 h 13
V. Recommendations PAGEREF _Toc535148708 h 14
VI.Literature used PAGEREF _Toc535148709 h 16
I.<span Times New Roman""> Introduction
Trade and payments across national bordersrequire that one of the parties to the transaction contract to pay or receivefunds in a foreign currency. At some stage, one party must convert domesticmoney into foreign money. Moreover, knowledgeable investors based in eachcountry are aware of the opportunities of buying assets or selling debtsdenominated in foreign currencies when the anticipated returns are higherabroad or when the interest costs are lower. These investors also must use theforeign exchange market whenever they invest or borrow abroad.
I’d like to add that theforeign exchange market is the largest market in the world in terms of thevolume of transactions. That the volume of foreign exchange trading is manytimes larger than the volume of international trade and investment reflectsthat a distinction should be made between transactions that involve only banksand those that involve banks, individuals, and firms involved in internationaltrade and investment.
The phenomenal explosionof activity and interest in foreign exchange markets reflects in large measurea desire for self-preservation by businesses, governments, and individuals. Asthe international financial system has moved increasingly toward freelyfloating exchange rates, currency prices have become significantly morevolatile. The risks of buying and selling dollars and other currencies haveincreased markedly in recent years. Moreover, fluctuations in the prices offoreign currencies affect domestic economic conditions, internationalinvestment, and the success or failure of government economic policies.Governments, businesses, and individuals involved in international affairs findit is more important today than ever before to understand how foreigncurrencies are traded and what affects their relative values.
Inthis work, we examine the structure, instruments, and price-determiningforces of the world's currency markets.
II.<span Times New Roman""> The structure of the foreign exchange market1.<span Times New Roman""> What is the foreign exchange?
The foreignexchange markets are among the largest markets in the world, with annualtrading volume in excess of $160 trillion. The purpose of the foreign exchangemarkets is to bring buyers and sellers of currencies together. It is anover-the-counter market, with no central trading location and no set hours oftrading. Prices and other terms of trade are determined by negotiation over thetelephone or by wire, satellite, or telex. The foreign exchange market isinformal in its operations: there are no special requirements for marketparticipants, and trading conforms to an unwritten code of rules.
Youknow that almost every country has its own currency for domestic transactions.Trading among the residents of different countries requires an efficient exchangeof national currencies. This is usually accomplished on a large scale throughforeign exchange markets, located in financial centers such as London, NewYork, or Paris—in order of importance—where exchange rates for convertiblecurrencies are determined.<span Timeg New Roman",«serif»; mso-bidi-font-family:«Times New Roman»;color:black;mso-ansi-language:EN-US">The instruments used to effectinternational monetary payments or transfers are called foreign exchange.Foreign exchange is the monetary means of making payments from one currencyarea to another. The funds available as foreign exchange include foreign coinand currency, deposits in foreign banks, and other short-term, liquid financialclaims payable in foreign currencies. An internationalexchange rate is the price of one (foreign) currency measured in terms ofanother (domestic) currency. More accurately, it is the price of foreignexchange. Since exchange rates are the vehicle that translates prices measuredin one currency into prices measured in another currency, changes in exchangerates affect the price and, therefore, the volume of imports and exports exchanged.In turn the domestic rate of inflation and the value of assets and liabilitiesof international borrowers and lenders is influenced. The exchange rate rises(falls) when the quantity demanded exceeds (is less than) the quantitysupplied. Broadly speaking, the quantity of U.S. dollars supplied to foreign exchangemarkets is composed of the dollars spent on imports, plus the amount of fundsspent or invested by U.S. residents outside the United States. The demand forU.S. dollars arises from the reverse of these transactions.
Many newspaperskeep a daily record of the exchange rates in the highly organized foreignexchange market, where currencies of different nations are bought and sold. Forinstance, the Wall Street Journalshows the price of a currency in two ways: first the price of the othercurrency is given in U.S. dollars, and second the price of the U.S. dollar isquoted in units of the other currency. Pairs of prices represent reciprocals ofeach other. These rates refer to trading among banks, the primary marketplacefor foreign currencies.2. The participants of the foreign exchange markets
The foreignexchange market is extremely competitive so there are many participants, noneof whom is large relative to the market.
The centralinstitution in modern foreign exchange markets is the commercial bank. Most transactions of any size in foreigncurrencies represent merely an exchange of the deposits of one bank for thedeposits of another bank. If an individual or business firm needs foreigncurrency, it contacts a bank, which in turn secures a deposit denominated inforeign money or actually takes delivery of foreign currency if the customerrequires it. If the bank is a large money center institution, it may hold inventoriesof foreign currency just to accommodate its customers. Small banks typically donot, hold foreign currency or foreign currency-denominated deposits. Rather,they contact large correspondent banks, which in turn contact foreign exchangedealers.
The majorinternational commercial banks act as both dealers and brokers. In their dealerrole, banks maintain a net long or short position in a currency, and seek toprofit from an anticipated change in the exchange rate. (A long position meanstheir holdings of assets denominated in one currency exceed their liabilitiesdenominated in this same currency.) In their broker function, banks compete toobtain buy and sell orders from commercial customers, such as the multinationaloil companies, both to profit from the spread between the rates at which theybuy foreign exchange from some customers and the rates at which they sellforeign exchange to other customers, and to sell other types of bankingservices to these customers.
Frequently, currency-trading banks do not deal directly with each otherbut rely on foreign exchange brokers.These firms are in constant communication with the exchange trading rooms ofthe world's major banks. Their principal function is to bring currency buyersand sellers together.
Security brokerage firms, commodity traders, insurance companies, andscores of other nonbank companies have come to play a growing role in theforeign exchange markets today. These NonbankFinancial Institutions have entered in the wake of deregulation of thefinancial marketplace and the lifting of some foreign controls on internationalinvestment, especially by Japan and the United Kingdom. Nonbank traders nowoffer a wide range of services to international investors and export-importfirms, including assistance with foreign mergers, currency swaps and options,hedging foreign security offerings against exchange rate fluctuations, and providingcurrencies needed for purchases abroad.
In main all participants of an exchange market are usually divided on twogroups. The first group of participants is called speculators; by definition, they seek to profit from anticipatedchanges in exchange rates. The second group of participants is known as arbitragers. Arbitrage refers to thepurchase of one currency in a certain market and the sale of that currency inanother market in response to differences in price between the two markets. Theforce of arbitrage generally keeps foreign exchange rates from getting too farout of line in different markets.
3. Instruments of the foreign exchange markets
·<span Times New Roman"">Cable and Mail Transfers
Several financial instruments are used to facilitate foreign exchangetrading. One of the most important is the cable transfer, an execute order sentby cable to a foreign bank holding a currency seller's account. The cabledirects the bank to debit the seller's account and credit the account of abuyer or someone the buyer designates.
The essential advantage of the cable transfer is speed because thetransaction can be carried out the same day or within one or two business days.Business firms selling their goods in international markets can avoid tying upsubstantial sums of money in foreign exchange by using cable transfers.
When speed is not a critical factor, a mail transfer of foreign exchangemay be used. Such transfers are written orders from the holder of a foreignexchange deposit to a bank to pay a designated individual or institution onpresentation of a draft. A mail transfer may require days to execute, dependingon the speed of mail deliveries.
·<span Times New Roman"">Bills of Exchange
One of the most important of all international financial instruments isthe Bill of Exchange. Frequently today the word draft is used instead of bill.Either way, a draft or bill of exchange is a written order requiring a person,business firm, or bank to pay a specified sum of money to the bearer of thebill.
We may distinguish sight bills, which are payable on demand, from timebills, which mature at a future date and are payable only at that time. Thereare also documentary hills, which typically accompany the international shipmentof goods. A documentary bill must be accompanied by shipping papers allowingimporters to pick up their merchandise. In contrast, a clean hill has noaccompanying documents and is simply an order to a bank to pay a certain sum ofmoney. The most common example arises when an importer requests its bank tosend a letter of credit to an exporter in another country. The letterauthorizes the exporter to draw bills for payment, either against the importer'sbank or against one of its correspondent banks.
·<span Times New Roman"">Foreign Currency and Coin
Foreign currency and coin itself (as opposed to bank deposits) is animportant instrument for payment in the foreign exchange markets. This isespecially true for tourists who require pocket money to pay for lodging,meals, and transportation. Usually this money winds up in the hands ofmerchants accepting it in payment for purchases and is deposited in domesticbanks. For example, U.S. banks operating along the Canadian and Mexican bordersreceive a substantial volume of Canadian dollars and Mexican pesos each day.These funds normally are routed through the banking system back to banks in thecountry of issue, and the U.S. banks receive credit in the form of a depositdenominated in a foreign currency. This deposit may then be loaned to a customeror to another bank.
·<span Times New Roman"">Other Foreign Exchange Instruments
A wide variety of other financial instruments are denominated in foreigncurrencies, most of this small in amount. For example, traveler's checksdenominated in dollars and other convertible currencies may be spent directlyor converted into the currency of the country where purchases are being made.International investors frequently receive interest coupons or dividendwarrants denominated in foreign currencies. These documents normally are soldto a domestic bank at the current exchange rate.<span Times New Roman",«serif»;color:black;mso-ansi-language:EN-US;layout-grid-mode: line">III.<span Times New Roman""> <span Times New Roman",«serif»; color:black;mso-ansi-language:EN-US;layout-grid-mode:line">Foreign exchangerates<span Times New Roman",«serif»; color:black;mso-ansi-language:EN-US;layout-grid-mode:line">1. Determining foreign exchange rates
As I’ve alreadymentioned the prices of foreign currenciesexpressed in terms of other currencies are called foreign exchange rates. There are today three markets for foreignexchange: the spot market, which deals in currency for immediate delivery; theforward market, which involves the future delivery of foreign currency; and thecurrency futures and options market, which deals in contracts to hedge againstfuture changes in foreign exchange rates. Immediate delivery is defined as oneor two business days for most transactions. Future delivery typically meansone, three, or six months from today.
Dealers and brokersin foreign exchange actually set not one, but two, exchange rates for each pairof currencies. That is, each trader sets a bid (buy) price and an asked (sell)price. The dealer makes a profit on the spread between the bid and asked price,although that spread is normally very small.2. Supply and Demand for foreign exchange
The underlying forces that determine the exchange rate between two currenciesare the supply and demand resulting from commercial and financial transactions(including speculation). Foreign-exchange supply and demand schedules relate tothe price, or exchange rate. This is illustrated in Figure 1, which assumes free-market or flexible exchange rates.Figure 1
<img src="/cache/referats/8174/image002.gif" v:shapes="_x0000_i1025">
Before examining this figure, we need to define two terms. Depreciation(appreciation) of a domestic currency is a decline (rise) brought about bymarket forces in the price of a domestic currency in terms of a foreign currency.In contrast, devaluation (revaluation) of a domestic currency is a decline(rise) brought about by government intervention in the official price of adomestic currency in terms of a foreign currency. Depreciation or appreciationis the appropriate concept to deal with floating, or flexible, exchange rates,whereas devaluation or revaluation is appropriate when dealing with fixedexchange rates.
In the dollar-pound exchange market, the demand schedule for pounds representsthe demands of U.S. buyers of British goods, U.S. travelers to Britain,currency speculators, and those who wish to purchase British stocks and securities.It slopes downward because the dollar price to U.S. residents of British goodsand services declines as the exchange rate declines. An item selling for£1 in Britain would cost $2.00 in the U.S. if the exchange rate were£1/$2.00 U.S. If this exchange rate declined to £1/$1.50 U.S., thesame item is $.50 cheaper in the United States, increasing the demand forBritish goods and thus the demand for pounds. The supply schedule of poundsrepresents the pounds supplied by British buyers of U.S. goods, British travelers,currency speculators, and those who wish to purchase U.S. stocks andsecurities. It slopes upward because the pound price to British residents ofU.S. goods and services rises as the $ price of the £ falls. Assuming anexchange rate of £1 /$2.00 U.S., a $2.00 item in the U.S. costs £1in Britain. If this exchange rate declined to £1/$1.50 U.S., the sameitem is 33 percent more expensive in Britain, decreasing the demand for dollarsto buy U.S. goods and thus reducing the supply of pounds. The equilibriumexchange rate in Figure 1 is £1/$2.00 U.S. The amounts supplied anddemanded by the market participants are in balance.Figure 2
<img src="/cache/referats/8174/image004.gif" v:shapes="_x0000_i1026">
To understand better the schedules, several of the factors that mightcause these curves to shift are discussed next. If there is a decrease innational income and output in one country relative to others, that nation'scurrency tends to appreciate relative to others. The domestic income level ofany country is a major determinant of the demand for imported goods in thatcountry (and hence a determinant of the demand for foreign currencies). Figure 2 shows the effects of a declinein national income in Britain (assuming all other factors remain constant). Thedecrease in British income implies a decrease in demand for goods and services(both domestic and foreign) by British people. This reduction in demand forimported goods leads to a reduction in the supply of pounds, which is shown bya leftward shift of the supply curve in Figure 2 (from S<img src="/cache/referats/8174/image006.gif" v:shapes="_x0000_i1027"> to S<img src="/cache/referats/8174/image008.gif" v:shapes="_x0000_i1028">Figure 3
<img src="/cache/referats/8174/image010.gif" v:shapes="_x0000_i1029">
In Figure 3, an initialexchange-rate equilibrium of £1/$2.00 U.S. is assumed. Now presume therate of price inflation in Britain is higher than in the United States. Britishproducts become less attractive to U.S. buyers (because their prices are increasingfaster), which causes the demand schedule for pounds to shift leftward (D<img src="/cache/referats/8174/image006.gif" v:shapes="_x0000_i1030"> to D<img src="/cache/referats/8174/image008.gif" v:shapes="_x0000_i1031"><img src="/cache/referats/8174/image006.gif" v:shapes="_x0000_i1032"> to S<img src="/cache/referats/8174/image008.gif" v:shapes="_x0000_i1033">
Differences in yields on various short-term and long-term securities caninfluence portfolio investments among different countries and also the flow offunds of large banks and multinational corporations. If British yields riserelative to others, an investor wishing to take advantage of these higherinterest rates must first obtain British pounds to buy the securities. Thisincreases the demand for British pounds shift the demand schedule in Figure 4 to the right (D<img src="/cache/referats/8174/image006.gif" v:shapes="_x0000_i1034"> to D<img src="/cache/referats/8174/image008.gif" v:shapes="_x0000_i1035"><img src="/cache/referats/8174/image006.gif" v:shapes="_x0000_i1036"> to S<img src="/cache/referats/8174/image008.gif" v:shapes="_x0000_i1037">Figure 4
<img src="/cache/referats/8174/image014.gif" v:shapes="_x0000_i1038">3. Factorsaffecting foreign exchange rates
·<span Times New Roman"">Balance-of-Payments Position
The exchange rate for any foreign currency depends on a multitude offactors reflecting economic and financial conditions in the country issuing thecurrency. One of the most important factors is the status of a nation's balance-of-paymentsposition. When a country experiences a deficit in its balance of payments, itbecomes a net demander of foreign currencies and is forced to sell substantialamounts of its own currency to pay for imports of goods and services.Therefore, balance-of-payments deficits often lead to price depreciation of anation's currency relative to the prices of other currencies. For example,during most of the 1970s, 1980s, and into the 1990s, when the United States wasexperiencing deep balance-of-payments deficits and owed substantial amountsabroad for imported oil, the value of the dollar fell.
·<span Times New Roman"">Speculation
Exchange rates also are profoundly affected by speculation over future currencyvalues. Dealers and investors in foreign exchange monitor the currency marketsdaily, looking for profitable trading opportunities. A currency viewed astemporarily undervalued quickly brings forth buy orders, driving its pricehigher vis-a-vis other currencies. A currency considered to be overvalued isgreeted by a rash of sell orders, depressing its price. Today, the internationalfinancial system is so efficient and finely tuned that billions of dollars canflow across national boundaries in a matter of hours in response to speculativefever. These massive unregulated flows can wreak havoc with the plans ofpolicymakers because currency trading affects interest rates and ultimately theentire economy.
·<span Times New Roman"">Domestic Economic and PoliticalConditions
The market for a national currency is, of course, influenced by domesticconditions. Wars, revolutions, the death of a political leader, inflation,recession, and labor strikes have all been observed to have adverse effects onthe currency of a nation experiencing these problems. On the other hand, signsof rapid economic growth, improving government finances, rising stock and bondprices, and successful economic policies to control inflation and unemploymentusually lead to a stronger currency in the exchange markets.
Inflation has a particularly potent impact on exchange rates, as dodifferences in real interest rates between nations. When one nation's inflationrate rises relative to others, its currency tends to fall in value. Similarly,a nation that reduces its inflation rate usually experiences a rise in thevalue of its currency. Moreover, countries with higher real interest ratesgenerally experience an increase in the exchange value of their currencies, andcountries with low real interest rates usually face relatively low currencyprices.
·<span Times New Roman"">Government Intervention
It is known that each national government has its own system or policy ofexchange-rate changes. Two of the most important are floating and fixedexchange-rate systems. In the floating system, a nation's monetary authorities,usually the central bank, do not attempt to prevent fundamental changes in therate of exchange between its own currency and any other currency. In the fixed-ratesystem, a currency is kept fixed within a narrow range of values relative tosome reference (or key) currency by governmental action.
National policymakers can influence exchange rates directly by buying orselling foreign currency in the market, and indirectly with policy actions thatinfluence the volume of private transactions. A third method of influencingexchange rates is exchange control—i.e., direct control of foreign-exchangetransactions.
Intervention of a central bank involves purchases or sales of thenational money against a foreign money, most frequently the U.S. dollar. Acentral bank is obliged to prevent its currency from depreciating below itslower support limit. The central bank should buy its own currency fromcommercial banks operating in the exchange market and sell them dollars inexchange. These transactions are effectively an open-market sale using dollardemand deposits rather than domestic bonds. Such transactions reduce thecentral bank's domestic liabilities in the hands of the public. The ability ofa foreign central bank to prevent its currency from depreciating depends uponits holdings of dollars, together with dollars that might be obtained by borrowing.Even if a national monetary authority has the foreign exchange necessary for intervention,its need to support its currency in the exchange market might be inconsistentwith its efforts to undertake a more expansive monetary policy to achieve itsdomestic economic objectives.
Also I’d like to say a few words about currency sterilization. A decision by a central bank to intervenein the foreign currency markets will have both currency market and money supplyeffects unless an operation known as currency sterilization is carried out. Anyincrease in reserves and deposits that results from a central bank currencypurchase can be «sterilized» by using monetary policy tools thatabsorb reserves. There is currently a great debate among economists as towhether sterilized central bank intervention can significantly affect exchangerates, in either the short term or the long term, with most research studiesfinding little impact on relative currency prices.
IV.<span Times New Roman""> Conclusion
A market in national monies is a necessity in a world of nationalcurrencies; this market is the foreign-exchange market. The assets traded inthis market are demand deposits denominated in the different currencies. Individualswho wish to buy goods or securities in a foreign country must first obtain thatcountry's currency in the foreign-exchange market. If these individuals pay intheir own currency, then the sellers of the goods or securities, use theforeign-exchange market to convert receipts into their own currency.
One from the most important participants of an exchange market is abusiness bank, which act as the intermediaries between the buyers and sellers.As already it is known they can execute a role speculators and arbitragers.
Most foreign-exchange transactions entail trades involving the U.S. dollarand individual foreign currencies. The exchange rate between any two foreigncurrencies can be inferred as the ratio of the price of the U.S. dollar interms of each of their currencies.
The exchange rates are prices that equalize the demand and supply offoreign exchange. In recent years, exchange rates have moved sharply, moresharply than is suggested by the change in the relationship between domesticprice level and foreign price level. Exchange rates do not accurately reflectthe relationship between the domestic price level and foreign price levels.Rather, exchange rates change so that the anticipated rates of return fromholding domestic securities and foreign securities are the same afteradjustment for any anticipated change in the exchange rate.
The major factor influencing to the rate of exchange, is interference ofgovernment in the person of central bank in currency policy of thecountry. The value of a nation'scurrency in the international markets has long been a source of concern togovernments around the world. National pride plays a significant role in thiscase because a strong currency, avidly sought by traders and investors in theinternational marketplace, implies the existence of a vigorous and well-managedeconomy at home. A strong and stable currency encourages investment in the homecountry, stimulating its economic development. Moreover, changes in currencyvalues affect a nation's balance-of-payments position. A weak and decliningcurrency makes foreign imports more expensive, lowering the standard of livingat home. And a nation whose currency is not well regarded in the internationalmarketplace will have difficulty selling its goods and services abroad, givingrise to unemployment at home. This explains why Russia made such strenuousefforts in the early 1990s to make the Russian ruble fully convertible intoother global currencies, hoping that ruble convertibility will attractlarge-scale foreign investment.
<span Arial",«sans-serif»;mso-bidi-font-family: «Times New Roman»;color:black;mso-ansi-language:EN-US;layout-grid-mode:line">V.<span Times New Roman""> Recommendations
The problem of “laundering”money is essential with regard to theexchange market. I’d like to add that the Russian exchange market comes firstin this respect.
The origin of this problem directly is connected with activity of theorganized crime: funds obtained in a criminal way are presented as legalcapital to introduce them in economic and financial structures of the state.Therefore struggle against “laundering”money is recognized in all countries as one from major means of a counteractionof the organized crime. The sources of “dirty” money are as follows:
international drugs traffic;
illegal trade of weapon.
The use of exchange markets for “laundering” money is not a contingency.This process is promoted by absence of restrictions concerning foreign exchange.
Unfortunately today participation of Russia in international struggleagainst outline problem is limited by signing of the Viennese convention onstruggle against an international drugs trafficking and entering Interpol. Thework on struggle against “laundering” money in Russia should start from thevery beginning. The process of developing legislation and mechanisms of itsapplication is supposed to give instructions aimed at lawful struggle against“laundering” money, developing bilateralcooperation with countries of European Union, USA and Japan.
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1.<span Times New Roman"">“Money, banking andthe economy” T. Mayer, J.S. Duesenberry,R.Z. Aliber
W.W. Norton & company NewYork, London 1981
2.<span Times New Roman"">“Principles ofinternational finance” Daniel R. Kane
Croom Helm 1988
3.<span Times New Roman"">“Money and banking” David R. Kamerschen
College Division South-western Publishing Co. 1992
4.<span Times New Roman"">“Money and capitalmarkets: the financial system in a increasingly global economy” fifth edition Peter S. Rose