Учебное пособие для студентов заочной формы обучения для специальностей 190701 «Организация перевозок и управление на транспорте (водном)»

Foreign exchange rates

Determining foreign exchange rates

The prices of foreign currencies expressed in terms of other currencies are called foreign exchange rates. There are today three markets for foreign exchange: the spot market, which deals in currency for immediate delivery; the forward market, which involves the future delivery of foreign currency; and the currency futures and options market, which deals in contracts to hedge against future changes in foreign exchange rates. Immediate delivery is defined as one or two business days for most transactions. Future delivery typically means one, three, or six months from today.

Dealers and brokers in foreign exchange actually set not one but two exchange rates for each pair of 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.
Factors affecting foreign exchange rates

Balance-of-Payments Position
The exchange rate for any foreign currency depends on a multitude of factors reflecting economic and financial conditions in the country issuing the currency. One of the most important factors is the status of a nation's balance-of-payments position. When a country experiences a deficit in its balance of payments, it becomes a net demander of foreign currencies and is forced to sell substantial amounts of its own currency to pay for imports of goods and services. Therefore, balance-of-payments deficits often lead to price depreciation of a nation'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 was

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experiencing deep balance-of-payments deficits and owed substantial amounts abroad for imported oil, the value of the dollar fell.
Speculation

Exchange rates also are profoundly affected by speculation over future currency values. Dealers and investors in foreign exchange monitor the currency markets daily, looking for profitable trading opportunities. A currency viewed as temporarily undervalued quickly brings forth buy orders, driving its price higher vis-a-vis other currencies. A currency considered to be overvalued is greeted by a rash of sell orders, depressing its price. Today, the international financial system is so efficient and finely tuned that billions of dollars can flow across national boundaries in a matter of hours in response to speculative fever. These massive unregulated flows can wreak havoc with the plans of policymakers because currency trading affects interest rates and ultimately the entire economy.
Domestic Economic and Political Conditions

The market for a national currency is, of course, influenced by domestic conditions. Wars, revolutions, the death of a political leader, inflation, recession, and labor strikes have all been observed to have adverse effects on the currency of a nation experiencing these problems. On the other hand, signs of rapid economic growth, improving government finances, rising stock and bond prices, and successful economic policies to control inflation and unemployment usually lead to a stronger currency in the exchange markets.

Inflation has a particularly potent impact on exchange rates, as do differences in real interest rates between nations. When one nation's inflation rate rises relative to others, its currency tends to fall in value. Similarly, a nation that reduces its inflation rate usually experiences a rise in the value of its currency. Moreover, countries with higher real interest rates generally experience an increase in the exchange value of their currencies, and countries with low real interest rates usually face relatively low currency prices.
Government Intervention

It is known that each national government has its own system or policy of exchange-rate changes. Two of the most important are floating and fixed exchange-rate systems. In the floating system, a nation's monetary authorities, usually the central bank, do not attempt to prevent fundamental changes in the rate of exchange between its own currency and any other currency. In the fixed-rate system, a currency is kept fixed within a narrow range of values relative to some reference (or key) currency by governmental action. National policymakers can influence exchange rates directly by buying or selling foreign currency in the market, and indirectly with policy actions that influence the volume of private transactions. A third method of influencing exchange rates is exchange control—i.e., direct control of foreign-exchange transactions.
GLOSSARY

The stock market
The stock market. To some it's a puzzle. To others it's a source of profit and endless fascination. The stock market is the financial nerve center of any country. It reflects any change in the economy. It is sensitive to interest rates, inflation and political events. In a very real sense, it has


its fingers on the pulse of the entire world. Taken in its broadest sense, the stock market is also a control center. It is the market place where businesses and governments come to raise money so that they can continue and expend their operations. It is the market place where giant businesses and institutions come to make and change their financial commitments. The stock market is also a place of individual opportunity.

The phrase «the stock market» means many things. In the narrowest sense, a stock market is a place where stocks are traded — that is bought and sold. The phrase «the stock market» is often used to refer to the biggest and most important stock market in the world, the New York Stock Exchange, which is as well the oldest in the US. It was founded in 1792. NYSE is located at 11 Wall Street in New York City. It is also known as the Big Board and the Exchange. In the mid-1980s NYSE-listed shares made up approximately 60% of the total shares traded on organized national exchanges in the United States.

AMEX stands for the American Stock Exchange. It has the second biggest volume of trading in the US. Located at 86 Trinity Place in downtown Manhattan, the AMEX was known until 1921 as the Curb Exchange, and it is still referred to as the Curb today. Early traders gathered near Wall Street. Nothing could stop those outdoor brokers. Even in the snow and rain they put up lists of stocks for sale. The gathering place became known as the outdoor curb market, hence the name the Curb. In 1921 the Curb finally moved indoors. For the most part, the stocks and bonds traded on the AMEX are those of small to medium-size companies, as contrasted with the huge companies whose shares are traded on the New York Stock Exchange.

It costs money to become an Exchange member. There are about 650 memberships, or «seats» on the NYSE, owned by large and small firms and in some cases by individuals.

When an individual wants to place an order to buy or sell shares, he contacts a brokerage firm that is a member of the Exchange. A registered representative or «RR» will take his order. He or she is a trained professional who has passed an examination on many matters including Exchange rules and producers.

The individual's order is relayed to a telephone clerk on the floor of the Exchange and by the telephone clerk to the floor broker. The floor broker who actually executes the order on the trading floor has an exhausting and high-pressure job. The trading floor is a larger than half the size of football field. It is dotted with multiple locations called «trading posts». The floor broker proceeds to the post where this or that particular stock is traded and finds out which other brokers have orders from clients to buy or sell the stock, and at what prices. If the order the individual placed is a «market order»—which means an order to buy or sell without delay at the best price available—the broker size up the market, decides whether to bargain for a better price or to accept one of the orders being shown, and executes the trade—all this happens in a matter of seconds. Usually shares are traded in round lots on securities exchanges. A round lot is generally 100 shares, called a unit of trading, anything less is called an odd lot.

When you first see the trading floor, you might assume all brokers are the same, but they aren't. There are five categories of market professionals active on the trading floor.

Commission Brokers, usually floor brokers, work for member firms. They use their experience, judgment and execution skill to buy and sell for the firm's customer for a commission.

Independent Floor Brokers are individual entrepreneurs who act for a variety of clients. They execute orders for other floor brokers who have more volume than they can handle, or for firms whose exchange members are not on the floor.

Registered Competitive Market Makers have specific obligations to trade for their own or their firm's accounts—when called upon by an Exchange official-by making a bid or offer that will narrow the existing quote spread or improve the depth of an existing quote.

Competitive Traders trade for their own accounts, under strict rules designed to assure that their activities contribute to market

liquidity.

People who own stocks and bonds are referred to as investors or, respectively, stockholders (shareholders) and bondholders. In other words a share of stock is a share of a business. When you hold a stock in a corporation you are part owner of the corporation. As a proof of ownership you may ask for a certificate with your name and the number of shares you hold. By law, no one under 21 can buy or sell stock. But minors can own stock if kept in trust for them by an adult. A bond represents a promise by the company or government to pay back a loan plus a certain amount of interest over a definite period of time.

We have said that common stocks are shares of ownership in corporations. A corporation is a separate legal entity that is responsible for its own debts and obligations. The individual owners of the corporation are not liable for the corporation's obligations. This concept, known as limited liability, has made possible the growth of giant corporations. It has allowed millions of stockholders to feel secure in their position as corporate owners. All that they have risked is what they paid for their shares.

A stockholder (owner) of a corporation has certain basic rights in proportion to the number of shares he or she owns. A stockholder has the right to vote for the election of directors, who control the company and appoint management. If the company makes profits and the directors decide to pay part of these profits to shareholders as dividends, a stockholder has a right to receive his proportionate share. And if the corporation is sold or liquidates, he has a right to his proportionate share of the proceeds.

What type of stocks can be found on stock exchanges? The question can be answered in different ways. One way is by industry groupings. There are companies in every industry, from aerospace to wholesale distributors. The oil and gas companies, telephone companies, computer companies, auto companies and electric utilities are among the biggest groupings in terms of total earnings and market value. Perhaps a more useful way to distinguish stocks is according to the qualities and values investors want.
GLOSSARY