In this case it constitutes a demand for the Euro.

In our example we have assumed that only two goods are being traded — French wine and

Russian caviare. Thus, the Russian demand for French wine creates a supply of roubles and a

demand for the Euro in the foreign exchange market. Similarly, the French demand for Russian

caviare creates a supply of the Euro and a demand for roubles in the foreign exchange market. In

the situation of freely floating (or flexible) exchange rates, the supply of and demand for roubles

and the Euro in the foreign exchange market will determine the equilibrium foreign exchange rate.

The equilibrium exchange rate will tell us how many the Euro a rouble can be exchanged for — that

Is, the rouble price of the Euro — or how many roubles the Euro can be exchanged for — that is, the

Euro price of roubles.

8.7.1.2. Read and translate the text “Option Business.” Retell it.

8 Мировая экономика 113

8.7.1.3. Read and translate the text “Arbitrage Transactions. Traders and Exchange Speculate

s .” Put forward your opinion about a concept of arbitrage.

A rbitrage Transactions. Tr(a! d) ers and Exchange Speculators

By arbitrage we mean the exploitation of differences between the prices of financial assets or

currency or a commodity within or between markets by buying where prices are low and selling

where they are higher. If wheat is cheaper in Chicago than in London after allowing for transport

and dealing costs, it will pay to buy in Chicago and sell in London. If interest rates are higher on

the Euro deposit in London than in Frankfurt, a higher return will be obtained by switching

funds from one centre to the other. It will also pay to switch funds from the Euro deposit in

Frankfurt to a sterling deposit in London if the interest rate differential is greater than the cost of

covering against the risk of a fall in the exchange rate of the pound against the Euro (forward

exchange market).

Unlike speculation, arbitrage does not normally involve significant risks, since the buying and

selling operations are carried out more or less simultaneously and the profit made does not depend

upon taking a view on fu ture price changes. By eliminating price differentials, arbitrage contributes

to the achievement of equilibrium. Price discrimination between markets is difficult or impossible

where possibilities for arbitrage exist. The participants of a forward market who exercise buying

of foreign exchange in one foreign exchange market and simultaneously exercise selling in

another forward market and gain spread are called arbitrageurs (arbitragists). The participants of a

forward market who buy and sell foreign exchange in accordance with the order of the stock exchange

customers and gain commission are called traders unlike exchange speculators who support

an open currency position.

Commentary and Notes to Text 8.7.1.3

1. Dealing costs — расходы, связанные со сделкой

2. switching from... to... — переключение с... на...

3. the cost of covering against the risk — стоимость покрытия риска

4. a forward market — срочный рынок

5. the order — поручение

6. the stock exchange customers — биржевые клиенты

7. traders — трейдеры (брокеры)

8. exchange speculators — спекулянты на валютной бирже

8.7.1.4. Read and translate the text “The Relationship Between Imports and Exports.” Try to

substantiate the corollary: “Any restriction of imports ultimately reduces exports.”

The Relationship Between Imports and Exports

The basic proposition in understanding all of international trade is this:

In the long run, imports are paid for by exports.

We have to modify this rule by adding that imports can also be paid for by the sale of real and

financial assets, such as land, stocks, and bonds, or through an extension of credit from other

countries.

The reason that imports are ultimately paid for by exports is that foreigners want something in

exchange for the goods that are shipped to other countries. For the most part, they want goods

made in the United States, Germany, Japan. From this truism comes a remarkable corollary:

Any restriction of imports ultimately reduces exports.

This is a shocking revelation to many people who want to restrict foreign competition to protect

domestic jobs. Although it is possible to protect certain jobs in an industrially developed nation by

restricting foreign competition, say, in automobiles or steel, it is virtually impossible to make everyone

better off by imposing import restrictions. Why? Because ultimately such restrictions lead to

a reduction in employment in the export industries of this nation.

114