Text 17. Foreign Exchange

Most countries of the world have their own currencies: The United States has its dollar; the European Monetary Union, the euro; Brazil, its real; and India, its rupee. Trade between countries involves the mutual exchange of different currencies (or, more usually, bank deposits denominated in different currencies). When an American firm buys foreign goods, services, or financial assets, for example, U.S. dollars (typically, bank deposits denominated in U.S. dollars) must be exchanged for foreign currency (bank deposits denominated in the foreign currency). The price of one currency in terms of another is called the exchange rate. The trading of currency and bank deposits denominated in particular currencies takes place in the foreign exchange market. Transactions conducted in the foreign exchange market determine the rates at which currencies are exchanged, which in turn determine the cost of purchasing foreign goods and financial assets.

There are two kinds of exchange rate transactions. The predominant ones, called spot transactions, involve the immediate (two-day) exchange of bank deposits. Forward transactions involve the exchange of bank deposits at some specified future date. The spot exchange rate is the exchange rate for the spot transaction, and the forward exchange rate is the exchange rate for the forward transaction.

When a currency increases in value, it experiences appreciation; when it falls in value and is worth fewer U.S. dollars, it undergoes depreciation. At the beginning of 1999, for example, the euro was valued at 1.18 dollars, and on February 5, 2003, it was valued at 1.08 dollars. The euro depreciated by 8%: (1.08 -1.18)/1.18 = - 0.08 = - 8%. Equivalently, we could say that the U.S. dollar, which went from a value of 0.85 euros per dollar at the beginning of 1999 to a value of 0.93 euros per dollar on February 5, 2003, appreciated by 9%: (0.93 - 0.85)/0.85 = 0.09 =9%.

Exchange rates are important because they affect the relative price of domestic and foreign goods. The dollar price of French goods to an American is determined by the interaction of two factors: the price of French goods in euros and the euro/dollar exchange rate.

Suppose that Sandra the Winetaster, an American, decides to buy a bottle of 1961 (a very good year) Château Lafite Rothschild to complete her wine cellar. If the price of the wine in France is 1,000 euros and the exchange rate is $1.08 to the euro, the wine will cost Sandra $1,080 (=1,000 euros × $1.08/euro). Now suppose that Sandra delays her purchase by two months, at which time the euro has appreciated to $1.20 per euro. If the domestic price of the bottle of Lafite Rothschild remains 1,000 euros, its dollar cost will have risen from $1,080 to $1,200.

The same currency appreciation, however, makes the price of foreign goods in that country less expensive. At an exchange rate of $1.08 per euro, a Compaq computer priced at $2,000 costs Pierre the Programmer 1,852 euros; if the exchange rate increases to $1.20 per euro, the computer will cost only 1,667 euros. A depreciation of the euro lowers the cost of French goods in America but raises the cost of American goods in France. If the euro drops in value to $0.90, Sandra’s bottle of Lafite Rothschild will cost her only $900 instead of $1,080, and the Compaq computer will cost Pierre 2,222 euros rather than 1,852.

Such reasoning leads to the following conclusion: When a country’s currency appreciates (rises in value relative to other currencies), the country’s goods abroad become more expensive and foreign goods in that country become cheaper (holding domestic prices constant in the two countries). Conversely, when a country’s currency depreciates, its goods abroad become cheaper and foreign goods in that country become more expensive.

Appreciation of a currency can make it harder for domestic manufacturers to sell their goods abroad and can increase competition at home from foreign goods, because they cost less.

 

Exercise 12 2. Translate the words and word combinations into English.

Валюта, обмінний курс, угода з негайною поставкою, форвардна угода, підвищення валютного курсу, знецінювання валюти, визначати ціну, ціна на внутрішньому ринку, іноземні товари.

 

Exercise 12 3 . Complete the sentences according to text 17.

1. Trade between countries involves… . 2. The price of one currency in terms of another is called … . 3. Spot transactions involve … . 4. Forward transactions involve … . 5. The spot exchange rate is …   6. The forward exchange rate is … . 7. When a currency increases in value, it experiences … . 8. When a currency falls in value, it undergoes … . 9. Exchange rates are important because … . 10. When a country’s currency depreciates, its goods abroad … .

 

Exercise 12 4 .Match the two parts of the sentences.

1. The price of one currency in terms of another	a) for the spot transaction.
2. Forward transactions involve the exchange of bank deposits	b) the country’s goods abroad become more expensive.
3. The spot exchange rate is the exchange rate	c) is called the exchange rate.
4.When a country’s currency appreciates	d) it undergoes depreciation.
5. When a currency falls in value,	e) at some specified future date.

 

Exercise 1 2 5 .Insert articles where necessary.

1. … currencies of the world have … diverse names and … backgrounds. 2. The dollar gets its name from … silver coin minted during … Middle Ages in … small valley. 3. The name of … Chinese currency, … yuan, derived from the old Chinese word "round," or "small round thing." 4. … word peso is used to describe … currency in English-speaking countries in … Latin America. 5. … dinar used in Iraq and Kuwait, derives its name from “denarius”, … Roman coin that was worth “ten bronze asses”.

 

Exercise 1 2 6 . Insert the necessary prepositions (of, in, for, from, to, by).

1. The currency “pound” used … Britain and some other countries refers … weight … precious materials in coins. 2. The currencies “krone”, “krona” derived the names … the word “crown”.    3. In India, Pakistan and other countries … the subcontinent, the currency is called “rupee”. 4. The crown on the currencies “krona”, “krone” was replaced … other symbols, but the name remained. 5. The major world currencies fluctuate freely … the world’s foreign exchange markets.

Exercise 127. Translate into English.

1. Коли фірма купує іноземні товари, послуги або фінансові активи, необхідно здійснювати обмін валюти. 2. Ціна однієї валюти відносно іншої називається обмінним курсом. 3. Форвардний валютний курс - це обмінний курс для форвардних угод. 4. Коли валюта падає в ціні, говорять, що вона знецінюється. 5. Обмінні курси важливі, бо вони впливають на відносну вартість вітчизняних та іноземних товарів.

Exercise 12 8 . Read, translate and give the gist of text 18.

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