8.8.2. Commentary and Notes to Text 8.8.1

1. наличные операции — cash payments

2. срочная операция — forward operation

3. своп — swap

4. *арбитраж — arbitrage

5. поставка — delivery

6. котировка — quotation; косвенная котировка — indirect quotation

7. расторгнуть сделку — cancel a contract

8. премия — premium (pm)

9. дисконт — discount (dis)

10. валютный риск — currency risk

11. валютные фьючерсы — currency futures

12. обязательство — commitment

13. спрэд — spread

14. опцион — option

15. клиринговая палата — clearing house

8.9. Oral Practice. Round Table

Discussion

We have learned a lot of new things relating to foreign exchange export-import banking operations:

about cash payments and payments on a specified future date; the meanings of such notions

as quotation, position, spread, arbitrage, etc.

In our panel discussion we would like to touch upon the following issues:

1. What is the principal difference between international payment operations and domestic

payments?

2. In what way are the currencies of different countries exchanged in export-import transactions?

What is the real significance of such notions as ‘"quotation” and “spread”?

3. In what way can any nation’s exports finance or “pay for” its imports?

4. What immediate foreign exchange transactions are effected in the foreign exchange market?

5. What can you say about a concept of arbitrage? What is it based on?

8.10. Written Practice

Summarize the unit in a paragraph of about 300—350 words.

* Арбитраж — арбитражные операции (одновременная покупка и продажа ценных бумаг с целью

получить выгоду на разнице цен).

119

Unit 9. Exchange Rate Regimes.

The Factors Influencing Their Value

and the Balance of Payments

9.1. Preview Basic notions

The conceptual differences between the depreciatio n

schools of economic thought are reflected i n fle xiblet, floahting, flucteuating,

variety of exchange rate theories. T h e i firxe d,p pegrgead, cadjutsitedcal

aim is to find effective a d j u s t m e nextc hmangeec rahteasnisms

consistent with n a t i o n faorlm alm, offoicinal, eactuaal,r dye f acpto ofixlinigcy

frameworks. T h o u g h biand , mtharegion, rleyve,l , rtahngee orfe fl ucitsu atniono

difference b e t w e e n t h e o r y aanncdh opra ccutircree n—c yin

practice there is. In this unit we are going to

familiarize ourselves with exchange rate arrangements

and theoretical reasoning, which

requires your

9.2. Warm-up

Before you start reading the unit think and try to answer the following questions:

1. What were the exchange rate arrangements of the Bretton Woods Monetary System?

2. What/who defines the exchange rate regimes?

3. What influences the value of the currency exchange rate?

4. Does the exchange rate regime adjust the nation’s balance of payments automatically?

5. Can the exchange rate be stabilized?

9.3. Rapid Reading (skimming, scanning, reading for general understanding

of the basic Text 9.4)

Work in pairs or small groups.

1. Skim the text to find out what it is about in general. Do not try to read or understand the text in

detail for this activity.

2. Find the main themes in part II and think of a suitable heading for each one. Make a note of

these headings.

3. Scan the text to find the graphs. Discuss them with a partner.

4. Make comments on the text saying what seems most interesting to you. Compare the information

gained from the text with the information which you gained at your specialized lectures.

Discuss it in a small group.

9.4. Basic Text. Exchange Rate Rates

Freely Floating Exchange Rates (Part I)

Freely floating exchange rates are determined by the unimpeded forces of demand and supply.

Let us examine the rate, or price, at which American dollars might be exchanged for, say, British

pounds sterling, Swiss francs, the Euro, or any other freely convertible currency (FCC).

The downsloping demand for pounds, FCC shown by DD( Figure 9.1) indicates that, if pounds

become less expensive to Americans, imported goods will become cheaper in the US. This fact

appreciation

c r i t i c a l

e y e .

120

causes Americans to demand larger quantities of imported goods and therefore larger amounts of

pounds and FCC with which to buy those goods.

The supply of pounds and other FCC is falling, as shown by SS, because, as the dollar price of

pounds, other FCC rises (that is, the pound price of dollars falls), the Europeans will be inclined to

purchase more American goods. The reason, of course, is that at higher and higher dollar prices for

pounds and other FCC, the Europeans can get more American dollars and therefore more American

goods per pound, FCC. Thus, American goods become cheaper to the Europeans, inducing

them to buy more American goods. When buying these goods, they supply pounds and other FCC

to the foreign exchange market because they must exchange pounds and FCC for dollars to purchase'American

goods.

The intersection of the supply and demand for pounds will determine the dollar price of pounds

and other FCC. In this instance the equilibrium rate of exchange is $1.5 to ￡1.0.

Figure 9.1. The market for foreign exchange

Depreciation and appreciation. An exchange rate which is determined by free-market forces can

and does change frequently. When the dollar price of pounds increases, for example, goes from

$1.5 for ￡1 to $2.25 for ￡1, we say that the value of the dollar has depreciated relative to the pound.

The same refers to any other FCC. More generally, currency depreciation means that it takes more

units of a country’s currency (dollars) to buy a single unit of some foreign currency (pounds, the

Euro, yen, etc.). Conversely, when the dollar price of pounds decreases — goes from $ 1.5 for ￡ 1 to

$1 for ￡1 — the value of the dollar has appreciated relative to the pound (the Euro, yen, etc.). In

general terms, currency appreciation means that it takes fewer units of a country’s currency (dollars)

to buy a single unit of some foreign currency (pounds, the Euro, yen, etc.).