Banks and the Foreign Exchange Market

The banks are the natural intermediary between foreign exchange supply and demand. The.main task of a bank's foreign exchange department is to enable its commercial or financial customers to convert assets held in one cvirrency into funds of another currency. This conversion can take the form of a spot transaction or a forward operation.Banking activities in the foreign exchange field tend inevitably to es­tablish a uniform price range for a particular currency

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throughout the financial centres of the world. If at a given moment the market rate in one centre deviates too far from the average, a balance will soon be restored by "arbitrage", which is the process of taking advantage of price differences in different places. It can be seen that foreign exchange busi­ness acts as a very important regulator in a free monetary system.

Only the big banks and a number of local banks specializ­ing in this kind of business have a foreign exchange depart­ment with qualified dealers. Banks which merely carry out their customers' instructions and do no business on their own account do not really require the services of a foreign exchange expert. For these it will be sufficient to have some­one with a general knowledge of the subject because his role in practice will be that of an intermediary between the cus­tomer and a bank professionally in the market.

A foreign exchange dealer acquires his professional skill largely through experience. Here we should point out how important close cooperation is among a team of dealers. The group can work together smoothly only if each member is able to shed his individuality. We must not forget that, al­most incessantly, all the dealers are doing business simulta­neously on different telephones and when large transactions are completed the rates may change, whereupon the other dealers must be brought up-to-date immediately. It is essen­tial for a dealer to have the knack of doing two things at once so that he can do business on the telephone and at the same time take note of the new prices announced by his colleagues.

Professional foreign exchange dealing requires advanced technical equipment. Business is done by telephone (with many direct lines to important names) and teleprinter de­pending on distance and convenience. Spot and forward rates of the most important currencies and money market rates are displayed on a big rate board, remote-controlled by the chief dealers. Electronic data processing equipment is em-

ployed to keep track instantly of the exchange positions and for the administrative handling of the business done. Cross rates are figured out with the help of electronic table calcu­lators.

I -----------------

Using the words in brackets as a guide, explain the mean­ing of the following terms and phrases: j

1. foreign exchange supply (the total amount of, available,
at a given price) •

2. foreign exchange demand (the total amount of, required)

3. foreign exchange (foreign bank notes, placed without re­
strictions, to the credit of, abroad)

4. spot transaction (are traded, goods or securities, for im­
mediate delivery)

5. forward transaction (in the future, at fixed dates, at fixed
prices, to supply currencies)

6. market rate (a fixed ratio between)

.
Find the proper answer: ^v .

1. "to convert into":

a) to supply,

b) to carry out,

c) to change into.

2. "to establish a uniform price range '^r :

a) to set the limits within which the price varies,

b) to take advantage of price differences,

c) to differentiate prices.

3. "to deviate from the market rate":

a) to announce new market rates,

b) to turn away from the market rate,

c) to differ from the market rate.

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4. "to restore a balance":

a) to bring back into a former position,

b) to take advantage of price differences,

c) to rebuild the economy.

5. "to do business on your own account":

a) not to cooperate with a team of dealers,

b) to settle accounts on your own,

c) to do business for one's own profit or advantage.

6J "dealers must be brought up-to-date":

a) acquainted with the recent methods of marketing,

b) notified immediately about any changes in market rales,

c) alarmed by any changes in market rales.

7. "to have a knack of doing Iwo Ihings al a lime":

a) lo be able to do two Ihings simultaneously,

b) lo conducl Iransaclion by lelephone or cable,

c) lo get in touch with two people at a time.

8. "tokeeplrackof":

a) lo use advanced lechnical equipmenl,

b) lo keep in louch with,

c) lo figure oul cross rales.

HI

Say ivhal is true and what is false. Correct the false sen­tences:

1. One of Ihe main objectives of banking aclivilies in foreign
exchange markets is lo prevenl loo high markcl rale de­
viations from Ihe average.

2. The conversion of assels held in one currency inlo funds of
another currency lakes Ihe form of forward Iransaclions.

3. All banks have foreign exchange department and employ
foreign exchange dealers.

4. If one wants lo become a foreign exchange dealer he must
be able lo do Iwo Ihings al Ihe same time.

5. If Ihe market rate changes, dealers all over the world must

be notified at once, b'. Spot rales of the mosl important currencies are revealed

while forward rates are kept secret.

iv у

Answer the following questions: \

1. What is the lask of a bank's foreign (exchange department?

2. What types of transactions are concluded al foreign ex­
change markels? /

?). VVhal are banking aclivilies in foreign exchange dealings aimed al?

4. Whal sleps are taken when the market rale of a currency
in one foreign exchange market deviates too far from the
average?

5. Which banks employ foreign exchange dealers?

6. What fealures of character should a foreign exchange
dealer possess? /

7. What modern technical devices are foreign exchange mar­
kets equipped wilh? How are Ihey used?

V'

Show the relationship between pairs of the. following sen­tences by using a pronoun instead of a noun phrase which is repealed in the second sentence.

Ex. The banks arc the natural intermediary between foreign ex­change supply and demand.

The banks enable their commercial or financial customers to con­vert assets hold in one currency inlo funds of another currency. The banks are the natural intermediary between foreign exchange supply and demand. They enable their commercial or financial customers lo convert assels held in one currency inlo funds of another.

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1. Banking activities in the foreign exchange field tend to
establish a uniform price range for a particular centres of
the world.

A uniform price range for any currency is achieved by means of arbitrage.

2. Only the big banks have a foreign exchange department
with qualified dealers.

Local banks do not usually employ qualified foreign ex­change dealers.

3. A foreign exchange dealer acquires his professional skill
largely through experience.

A foreign exchange dealer works in close cooperation with other dealers.

4. When large transactions are completed the rates may
change.

VI

Find the nouns which are qualified in the text by the phrase foreign exchange. Write them down.

VII

Combine the words listed below into meaningful two or
three word expressions as possible. Some are used in the
text (e.g.: forward market operation):
forward operation spot

market price system

monetary . range transaction

money rate

3. Only the banks dealing in foreign exchange employ....

4. Transactions in which the amount due is paid on the de­
livery of goods are called....

5. Transactions in which the sum due is to be remitted in the
agreed period of time are called.....

6. Electronic data processing equipment facilitates ....

7. Foreign exchange supply and demand dictate ....

8. Arbitrage in foreign exchange dealings takes advantage of

\

VIII

Complete the following sentences:

1. Banks specializing in foreign exchange dealings act as an
intermediary in the conversion of.....

2. A balance in market rates at foreign exchange markets
may be restored by......

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