As a result of studying chapter 8, the student should:
know
be able to
own
International currency market is one of the segments of the international financial market. It is a specifically designed mechanism that serves and regulates international system foreign exchange transactions based on supply and demand.
There are other definitions of the international currency market (IMR). By economic essence The international foreign exchange market is understood as the sphere economic relations associated with the implementation of transactions for the purchase and sale of currency values, as well as with the investment of capital in foreign currency. FROM functional point of view The MVR can be viewed as a set of various operations with currency and currency values, including the implementation of international settlements, insurance of currency risks, diversification of foreign exchange reserves, foreign exchange interventions, speculative transactions. FROM institutional point of view The MVR is a set of participants in the global financial market that carry out currency transactions, including currency exchanges, authorized banks, brokerage companies, foreign banks and companies, etc. The foreign exchange market, defined from an institutional point of view, is called forex (foreign exchange market, forex). FROM organizational and technical point of view MVR is understood as a set of telegraph, telephone, telex, electronic and other communication systems that interconnect participants in the foreign exchange market. The currency market can be understood as the official international financial center, where the purchase and sale of currencies and currency values is concentrated.
The international currency market has three key features. Firstly, the organizational and institutional mechanism of the international currency market, which ensures the execution of foreign exchange transactions, includes a developed infrastructure: commercial banks authorized to conduct foreign exchange transactions; central banks; exchanges; brokerage companies; savings and credit banks, associations and foundations; insurance and investment companies; pension funds; investment banks and funds, etc. All participants in the international currency market act on the basis of the principles fixed in national and international legislative acts and in business practices. This feature distinguishes the international currency market from various illegal forms of circulation of foreign currency ("gray" and "black").
Secondly, an important feature of the international currency market is its ability to serve international trade, international movement capital and international payments. The international currency market is a mechanism for measuring, comparing and exchanging the currencies of individual countries. This gives him the opportunity to regulate the movement of goods and services in the field of international economic relations, the sale and purchase of foreign currency, the turnover valuable papers and loans in foreign currency and other foreign exchange instruments.
Thirdly, the peculiarity of the international currency market, like any other market, is that its functioning is based on the fundamental market laws of supply and demand. In the international currency market, national currencies lose their quality as the only legal tender in the territory of the respective national state. They become objects of comparison and international market value. This assessment takes into account the ability of each currency to act as a means of payment and measure of value on an international scale. As a result, in the international currency market, the currency of each country receives an international valuation in the form of proportions of its exchange for the currencies of other countries. The possibility of convertibility (convertibility) of currencies and their ability to perform a reserve function are also taken into account.
In addition to the three main features, the modern international currency market is characterized by a number of additional features arising from the practice of its functioning:
Object of sale on ICBMs, i.e. Currencies and currency values act as a kind of product of this market. The currency in the international currency market is actually the national currency (cash), currency (non-cash) and international collective units of account.
Currency - these are the funds of states in the form of cash and non-cash payment and settlement means (trading commercial bills or drafts; bank bills; bank transfers; telegraphic transfers; transfers by electronic banking system SWIFT, etc.). In addition, for a long time (until 1976), gold (in the form of coins and ingots) was the universal means of payment and settlement on the international currency market. International collective units of account have been used in the international currency market since 1946 (the moment of the creation of the Bretton Woods international monetary system and within its framework of the International Monetary Fund). To carry out settlements of the IMF member countries among themselves, a collective accounting unit, which was called the SDR, was used for account entries. The exchange rate of the collective currency SDR was calculated as the weighted average price of a standard currency basket consisting of 16 industrial currencies. developed countries(before the introduction of the euro in 2002). SDRs have never existed in cash, but only as entries in countries' accounts with the IMF. After 2002, the SDR exchange rate is calculated as a weighted average of the exchange rates included in a standard basket of five currencies: the US dollar, the euro, the Japanese yen, the British pound sterling and the Swiss franc. Another example of a collective currency that has existed for a long time in non-cash form, and then became cash, - ECU (European Currency Unii). This currency unit existed in a non-cash form for settlements of the EEC member countries, and since 2002 it has also become a means of cash payments, called the euro (Fig. 8.1).
Rice. 8.1.
The oldest currency in the international market was gold , which was demonetized (that is, it ceased to be an international means of payment in the international currency market) in 1976 at the Jamaica Currency Conference. tool foreign exchange transactions in the international currency market with the development in the XV-XVI centuries. in Europe foreign trade are becoming commercial bills of exchange (drafts ) - claims issued by the exporter or creditor to the importer or debtor (in the form of a consent to payment (simple) or an order to pay a third party (transferable)). With the development in the XVIII century. banks, commercial bills began to be squeezed out banking - those. promissory notes issued by a bank of one country to its foreign correspondent (through the system of correspondent accounts - LORO and NOSTRO). bank check – a written order from the bank-owner of assets (accounts in foreign banks) abroad to its correspondent bank to transfer a certain amount from its current account to the check holder. Exporters, having received such checks, transfer them to banks. In modern international currency markets are widely used bank transfers(postal and (or) telegraph). A transfer is an order by a bank to its correspondent bank in another country to pay, at the direction of its client, a certain amount in foreign currency from its account - NOSTRO. And the bill, and the check, and the transfer are credit means of payment, which have replaced gold in the international currency market and significantly save circulation costs. With development since the 1970s. SWIFT systems for transfers began to use electronic means of communication.
From fig. 8.1 shows that the concept of "currency" in the international currency market has expanded significantly: from gold in bullion and coins to collective international units of account (SDR, euro, etc.) and electronic money.
Under currency values means foreign currency and external securities issued in foreign currency. Under foreign securities refers to securities denominated in a foreign currency and not related to domestic securities.
International currency transactions require the organization of a standardized infrastructure that ensures the circulation of currency and currency values, which leads to the formation of an international currency market. Operations of buying and selling currencies, mainly in the form of a money changer, have existed for a long time. However, the actually organized international currency market was formed only at the end of the 19th century, when fast growth international economic relations in connection with the development of transport ( railways, ships, later aircraft) and means of communication (telegraph, telephone). The prerequisites for the formation of the international currency market can be represented as follows (Fig. 8.2).
Rice. 8.2.
Historically, the international currency market was formed simultaneously with the international credit and international stock market. The development of foreign trade and other forms of world economic relations (the movement of capital, tourism, services, private transfers, etc.) has led to the objective need to structure and organize the transactions of buying and selling currencies in export-import operations and operations related to the movement of capital, obtaining foreign bank loans, international bank settlements, foreign exchange servicing of numerous claims and obligations to receive and pay dividends, loans, loans, purchase of foreign securities. The demand and supply of currency for all these numerous requirements and obligations could only be provided by a well-structured and organized international currency market.
From the end of the 19th century the international currency market does not function spontaneously, but as an institutionalized system of international currency transactions, regulated by international legal norms, legislative acts, and customs international law and international agreements.
In addition to the system of currencies and the exchange rate important element international currency market is a system of foreign exchange liquidity and regulation of balance of payments. Foreign exchange liquidity - this is the ability of a country (or a group of countries) to ensure the timely repayment of its international obligations by means of payment acceptable to the creditor. International monetary liquidity is achieved by balancing all national balances of payments. Because the payment balance- this is the ratio of international claims and obligations of a given country, then international monetary liquidity is the equality of all amounts of positive balances of payments of countries participating in the international monetary system with the amounts of negative balances of payments of other countries.
The currency component of the international currency market has gone from the gold standard to modern system settlements in mottoes and collective currencies. The concept " motto "is closely related to the concept of "currency" in the international foreign exchange market. A motto is any means of payment in foreign currency used in the operations of the international foreign exchange market. A special category foreign currencies in the international currency market, regulated by the laws of the international currency market, are the key currencies (reserve). Such reserve or key currencies (key currencies) for a long time (from 1922 to 1936) there were the French franc, the British pound sterling and the US dollar (in the Genoese gold standard currency system in truncated forms: gold bullion for the franc and pound and in full gold coin form for the US dollar). Then, after the Second World War (in 1946), the US dollar and the British pound sterling (the gold standard) assumed the role of key currencies for settlements in the international currency market.
This international decision was made by the countries participating in the new international monetary system, legalized in 1946 in the resort town of Bretton Woods in the United States. In accordance with the Bretton Woods currency agreements, the system of a "cut down" gold standard was maintained in the international currency market: purchase and sale and other market transactions with currencies were carried out in key currencies (US dollar and British pound) and in gold bullion. In accordance with the Bretton Woods monetary mechanism, settlements in the international currency market were carried out in US dollar and the British pound, which, in turn, can be exchanged for gold at the official price ($35 = 1 troy ounce of gold) th years). After all, the key status implied that at any moment the countries participating in the Bretton Woods monetary system could exchange US dollars accumulated as a result of international settlements for gold at the official price. It was legally established that such free exchange should be carried out from the reserves of the US Federal Reserve Treasury, i.e. from the national gold reserves of this state. Thus, the United States assumed the function of supporting the entire balanced system of settlements in the international currency market at the expense of its gold reserves.
Bretton Woods monetary system just as the Genoese was a truncated (incomplete) form of the gold standard, when the currencies participating in the international currency market were exchanged for gold not directly, but indirectly: through the key currency - the US dollar. Such an international monetary system was called the gold motto and lasted until the early 1970s. Legally, the abolition of the Bretton Woods monetary system of the curtailed gold standard and the legislative consolidation of the new, so-called multi-currency system, when purchase and sale and other operations on the international currency market are carried out in any stable convertible national or collective currency by mutual agreement of counterparties, was formalized on the international currency conference of the IMF member countries in 1976 in Kingston, Jamaica (see Chapters 5 and 6).
Collective currencies first appeared as a means of international settlements in 1944 in the Bretton Woods agreements on the IMF. The need of the international currency market for collective currencies is explained by the need to insure the risks of currency losses in exchange and other transactions, which depend on the instability of the exchange rates of individual national currencies. In collective currencies (the euro, for example), the exchange rate is more stable, since behind it is not a separate national economy, but the combined economies of several countries.
The international currency market is a crisis-prone structure. Since its inception, the international currency market has experienced several cyclical crises (Table 8.1).
Table 8.1
Evolution of the International Currency Market: Crisis Component and Post-Crisis Reform
The development of the international currency market goes through the following stages in succession: creation → crisis → reform → functioning → crisis → reform... The pattern of such a rhythmic functioning of the international currency market is explained by the fact that it is closely connected with the entire world economic system. The cyclical development of the world economy (revival → rise → crisis → recession), superimposed on the international currency market, gives the cyclical nature of crises. The creation of the Genoa system of gold bullion and gold-coin standard for the international currency market was superimposed on the post-war recovery and recovery of the entire world economy (1920s), and its crisis was associated with the Great Depression of 1929–1933. and World War II. The creation of the Bretton Woods system of organizing the international currency market coincided with the end of the war, the post-war recovery of the European economy and the subsequent (1950–1960s) revival and rise of the world economy. The crisis of the Bretton Woods system (the gold standard, the key currency is the dollar, fixed exchange rates) occurred in the 1970s. It coincided with the world economic crisis which was especially exacerbated by the global energy crisis. The creation of a new organizational system of the international currency market took place against the backdrop of a revival and subsequent rise in the world economy in the late 1970s. The Jamaican system of the multi-device standard for operations in the international currency market (multi-currency international settlements, floating exchange rates) fully corresponded to the new state of world economic relations and the beginning of the transition to a global economy. The subsequent functioning of the international currency market (from the late 1970s to the present) was repeatedly disrupted by regional and local currency crises. They periodically flare up in the global monetary and economic system and follow economic upheavals and crises in certain segments of the world economy. This is an external debt crisis. developing countries in 1982, the Mexican currency crisis (1994), the currency crisis in Southeast Asia (1997), the currency crisis in Russia in 1998. It should not be assumed that all these regional and local currency crises passed without a trace for international currency market. These crises were followed by partial reforms: after the crisis external debt developing countries in 1982 completely changed the role of the IMF and the IBRD group in the international currency market. Crises of the 1990s (banking and debt) led to significant reforms in the international currency market, up to a change in the fundamental economic concept of its functioning: from the monetarist theory of a self-regulating market and freely floating exchange rates to the concept of J. Stiglitz on a reasonable combination of market self-regulation and supra-market regulation (2002). ) with a simultaneous significant reduction in the functions of the IMF in the system of the international currency market.
After reading this article, you will learn what the foreign exchange market and the exchange rate are. We will consider these concepts in detail, give their classifications and give examples.
The foreign exchange market is a sphere of economic relations that appear when selling or buying securities in foreign currency (or foreign currency itself), as well as those associated with the investment of foreign exchange capital. This is the official financial center in which the sale and purchase of all of the above is concentrated on the basis of supply and demand for it.
From the point of view of functionality, currency markets today provide for the implementation of various international settlements, as well as insurance against risks associated with currency, diversification of foreign exchange reserves, profits for participants due to exchange rate differences, and foreign exchange intervention. From an institutional position, they are a combination of investment companies, authorized banks, brokerage houses, various exchanges, as well as foreign banks that carry out foreign exchange transactions. From an organizational and technical point of view, the foreign exchange market is a set of communication systems connecting banks of various countries with each other, which carry out international settlements and other foreign exchange transactions.
Entities participating in the exchange are entrepreneurs, brokers, dealers and players. There are also entities that are outside the currency exchange. These are such participants in the foreign exchange market as:
The national currency in the foreign exchange market is exchanged for the money of other states. The exchange rate is a proportion, a quantitative ratio in which the currency of a certain state is exchanged for the monetary unit of a country. In other words, this is the price of a unit of foreign currency, expressed in a certain number of national currency units. It is this rate that determines the situation in the foreign exchange market. When the price of a unit of foreign currency increases in terms of domestic, there is a depreciation of the domestic, and vice versa.
The following types are distinguished:
In 1976, at the Jamaica Conference, it was decided to introduce a floating exchange rate system. The state, as a rule, imposes on the export, import and transfer of foreign and national currency abroad and from abroad certain limitation. The ratio of supply and demand determines all prices market economy, as well as currency prices (that is, exchange rates).
The following factors determine the size of supply and demand in the foreign exchange market:
The latter is determined by the number of identical services and goods that can be purchased for a certain amount of different national currencies (in other words, the consumer basket). For example, for 100 rubles, francs, dollars, etc.
However, the ratio of currencies in different countries Purchasing power for different goods is not the same. In world practice, therefore, today the exchange rate can be determined on the basis of purchasing power parity. It acts as a result of comparing the volume of goods that can be bought in the markets of different countries in the national currency. In this case, the same set of goods is selected in the basket and the amount required to purchase this set in different countries is determined.
Only when using a variety of different services and goods that are included in the consumer basket of the two states, it is possible to achieve an objective comparison. For example, if a basket costs 815 rubles in Russia and 100 dollars in the United States, then the exchange rate (the price of one dollar) will be 8 rubles. 15 kopecks, 19 cents will be the price of one ruble. Therefore, if prices double in our country, and in the United States they remain unchanged, then the dollar to ruble exchange rate, if other conditions of exchange remain the same, will increase by 2 times. But in reality, the exchange rate can deviate significantly under the influence of many reasons. For example, the exchange rate may rise under the influence of the demand for the currency.
However, the greatest difficulty lies in the fact that a single way how to determine the composition consumer basket, does not exist. The structure of consumption of goods and services included in it in different countries is very different. However, there is no other way to determine the exchange rate.
It is possible to classify foreign exchange markets according to many criteria: in relation to various currency restrictions, according to the scope of distribution, according to the degree of organization and types of foreign exchange resources.
According to the breadth of coverage, that is, according to the scope of distribution, domestic and international currency markets are distinguished. Both of them, in turn, consist of regional ones formed by financial centers in the regions of a given country or the world (for example, the Moscow currency market).
International unites the currency markets of all countries of the world. It means a chain of world regional markets connected by a system of satellite and cable communications. There is an overflow of funds between them under the influence of current information, as well as forecasts about the possible position of certain currencies, which are made by leading market participants.
Domestic foreign exchange market - the market of one state, that is, functioning within a particular country. It consists of regional domestic markets, which include currency markets, the centers of which are located in interbank exchanges.
It is also possible to single out unfree and free currency markets in relation to certain currency restrictions.
The latter are a system of state measures (administrative, organizational, economic, legislative) to establish the procedure for carrying out transactions with various currency values. They include measures aimed at targeted regulation of payments, as well as transfers abroad of foreign and national currencies. Monetary and financial market, on which there are currency restrictions, is not free, and in case of their absence - free.
The market, according to the types of exchange rates that are used on it, can be with a double or with a single regime. With one regime - when there are free exchange rates, that is, exchange rates are floating, their quote is set on the exchanges during trading. For example, official exchange rate ruble is established due to fixing.
Fixing in Russia is carried out by the Central Bank of the Russian Federation on the Moscow Exchange. It is a definition of the US dollar exchange rate against the ruble. The fixing rate is thus the unified exchange rate of the Central Bank in the Russian currency market. Using information from the Reuters agency about cross-rates, he deduces the ruble exchange rate against other currencies through it. Currency fixing takes place twice a week. The Central Bank of the Russian Federation on its day reports the exchange rates of the main freely convertible currencies against the ruble by publishing in the media.
A dual regime market is one that uses both a floating and a fixed exchange rate. An example of it is the foreign exchange market of the Russian Federation. The introduction of such a regime is used by countries as a measure aimed at regulating the movement of capital in the international and national loan capital markets. Such a measure is designed to control and limit the impact on the economy of this country of the international loan capital market. In our country, for example, "Vnesheconombank" in relation to blocked accounts for foreign investment(if the calculations are not completed in full) applies the exchange rate of the ruble, which is a commercial one, established by the Central Bank of the Russian Federation.
According to the degree of organization, there is an over-the-counter and exchange currency market (Moscow Exchange, for example). Exchange - an organized market, represented by a currency exchange, that is, an enterprise that organizes trading in currency and securities in it. The exchange is not a commercial enterprise. Main function her - not in making a profit, but in mobilizing Money, which are temporarily free, through the sale of currency, as well as securities in it, and in setting the exchange rate, that is, its market value. In our country, for example, the largest is the currency market of the Moscow Exchange. It was created in 2011 through the merger of MICEX and RTS.
The stock exchange market has a number of advantages. It is the cheapest source of foreign exchange funds and currency; tendered bids have absolute liquidity. What is the liquidity of securities and currencies? It means their ability to quickly turn into a national currency without loss in price.
Monetary outside stock market organized by various dealers. They may or may not be members of the currency exchange and conduct their activities via computer networks, telefax, and telephone.
The over-the-counter and exchange currency markets, which develop in parallel, contradict each other to some extent. At the same time, they are complementary. This is due to the fact that, while performing their activities the general function of the circulation of securities and currency trading, they use various forms and methods of selling currency and securities in it.
The advantages of the foreign exchange over-the-counter market are as follows. Firstly, in a rather low cost of costs associated with currency exchange operations. Often, bank dealers use face-to-face currency auctions to reduce their costs for currency conversion by concluding agreements on the sale and purchase of currency at the rate set before the start of trading. Commissions are withdrawn from participants in trading on the stock exchange, and their amount directly depends on the amount of ruble and foreign exchange resources that have been sold. The law also establishes a special tax on transactions on the stock exchange. The operation of currency conversion in the over-the-counter market is carried out for authorized bank after finding a counterparty for the transaction, it is practically free.
Secondly, here the calculation speed is higher than when trading on the stock exchange. This is mainly due to the fact that the foreign exchange market allows transactions within business day at any time, and not only at a specific time of the exchange session. Therefore, the over-the-counter foreign exchange market is very important. Its development is necessary for each state for faster and less costly currency exchange.
The over-the-counter market significantly exceeds the exchange market in terms of trading volume. The most liquid in the world today is considered over-the-counter Forex market. It operates around the clock in all world financial centers (from Tokyo to New York).
When classifying foreign exchange markets, the markets for Eurobonds, Eurocurrencies, Eurocredits, Eurodeposits, "gray" and "black" markets should also be singled out.
The Eurocurrency market is international market Western European currencies, where transactions take place in the currencies of these states. Its functioning is due to the fact that currencies are used in deposit and loan non-cash transactions outside the issuing states. The Eurobond market is financial relations in eurocurrencies for debt obligations in the case of long-term loans issued as bonds of borrowers.
On the Eurodeposit market, financial relations are carried out on deposits of commercial banks of various states in foreign currency at the expense of funds that circulate on the Eurocurrency market. Accordingly, stable financial relations and credit relations are taking place in the Eurocredit market for the provision of various international loans by commercial banks of states in foreign currency.
Interventions in the foreign exchange market are carried out by the Central Bank of certain countries to manipulate the exchange rate of these states. Sometimes they are organized by several Central Banks. For example, interventions by the Bank of Japan, the Fed and the ECB led to the fact that in 2011 the price of the yen fell by 2%. This was done in order to support Japan after a serious earthquake occurred here. Supporting the economy of this country contributed to the depreciation of the yen against the dollar.
In addition to changing the quotes of certain currencies, interventions are also used to control the state over the volatility of the currency market, manage liquidity, and increase the reserves of the Central Bank (in different currencies), stimulating the outflow and inflow of capital. Often interventions are carried out in the short term. They are fictitious and real. With real interventions, the Central Bank really does throw in or buy up foreign currency. With fictitious ones, he only declares his intention to carry out certain monetary transactions. Fictitious interventions are also aimed at changing currency quotes, although they have very short-term consequences.
Now you know what the foreign exchange market and the exchange rate are. These topics are very important in international economy especially today when exchange rates fluctuate rapidly.
The monetary system can be viewed from two sides: on the one hand, it is an objective reality that arises with the deepening economic ties between countries; on the other hand, this objective reality is recognized and fixed in legal norms, institutions, and international agreements.
The national monetary system is a form of organization of the country's monetary relations, determined by its currency legislation. The features of the national monetary system are determined by the conditions and level of development of the country's economy, its foreign economic relations, and the tasks of social policy.
The International Monetary System (IMS) is a form of organization of currency relations within the framework of the world economy, legally fixed by interstate agreements. the main task MVS - regulation of the sphere of international settlements and foreign exchange markets to ensure sustainable economic growth, curbing inflation, maintaining the balance of foreign economic exchange and payment turnover.
Within the framework of the MVS, a regional monetary system can be created. An example is the European Monetary System, which played the role of a transitional step towards the formation of a monetary union of countries that are members of the European Union.
MVS is a dynamically developing system. The direction of evolution of the IAM is determined by the leading trends in the transformation of the economies of the Western countries, changes in the conditions and needs of the world economy as a whole.
In its development, the IMF went through four stages, each of which corresponds to its own type of organization of international monetary relations:
Since 1979, there has been a European Monetary System (regional) - first the ECU standard, and then since 1999 - the euro.
The market where international transactions with currencies take place is called the international (world) currency market. The foreign exchange market is a special market in which foreign exchange transactions are carried out, that is, the exchange of the currency of one country for the currency of another country at a certain exchange rate.
The most complete data on the world foreign exchange market is collected and summarized by the Bank for International Settlements (BIS) as part of the reviews of the situation on the world market of currencies and financial derivatives held every three years with the assistance of central banks. Such reviews were carried out three times - in 1989, 1992 and 1995.
Prerequisites for the formation of world markets for currencies, loans, securities are:
Currency markets are a set of organizational and economic relations regarding the sale and purchase of payment documents denominated in foreign currency, the currency itself and the investment of foreign exchange capital. In terms of volume, the nature of foreign exchange transactions, the number of currencies involved in transactions, foreign exchange markets are divided into national, regional and world.
National currency markets serve the movement cash flows within the country and communication with world monetary centers. Regional currency markets arise on the wave of integration (for example, the European currency market). World currency markets are concentrated in the world's financial centers. Here, operations are carried out with currencies that are widely used in the global payment turnover, and almost no transactions are made with the currencies of the regional and local importance regardless of their status and reliability. In the late 1990s more than half of international currency transactions were concentrated in three world currency markets: London - 30% of the volume of transactions, New York - 16%, Tokyo - 10%. The world currency market serves the movement of cash flows, mediating the intercountry movement of goods, services, and the redistribution of capital.
At present, as a result of the development of communication technology and the removal of currency restrictions, the allocation of national, regional and world markets has become largely conditional. There is a global foreign exchange market that operates 24 hours a day, alternately in all parts of the world. It was called "International Currency Exchange" - FOREX. Its daily turnover is 1.2-1.4 trillion dollars.
Currency markets perform the following tasks:
The main participants in the foreign exchange markets are transnational banks operating at two levels. In the retail market, they deal with clients: exporters and importers, foreign creditors and investors, foreign consignees and tourists, and so on. Wholesale market represented by the relations of banks among themselves and with central banks of issue, which are another important participant in the foreign exchange markets. Among other participants, TNCs should be singled out, which mainly carry out operations through commercial banks and currency exchanges. An intermediary in the foreign exchange markets is a foreign exchange broker, which connects the seller and the buyer of currency. Basically, the activity of brokerage firms is connected with clients of commercial banks. In relations with foreign correspondent banks, banks often communicate directly with each other.
The exchange rate has a great influence on many macroeconomic processes taking place in society. The level of the exchange rate, which compares prices for goods and services produced in different countries, determines the competitiveness of national goods in world markets, the volume of exports and imports, and, consequently, the state of the current account balance.
The exchange rate affects the direction of international capital flows. The decision to invest national capital in the assets of a particular country is made on the basis of the expected real return on invested capital, which depends on the interest rate and expected changes in the exchange rate.
The exchange rate, along with the interest rate, is itself the price of an asset. In mature financial markets, the present value of an asset expected to be received in the future is determined by discounting its future value in accordance with the interest rate and expected exchange rate. The dynamics of the exchange rate, the degree and frequency of its fluctuations are the economic and political stability of society.
The exchange rate is the object macroeconomic policy. With its help, the balance of payments is often settled. The exchange rate plays an important role in the development and implementation monetary policy, since maintaining a certain level of the exchange rate may require the use of official foreign exchange reserves, which will inevitably affect the money supply in the economy. In countries in transition, stabilization programs can use the exchange rate as a "nominal anchor" against high inflation or hyperinflation.
The nominal currency (exchange) rate is the relative price of the currencies of two countries, or the currency of one country, expressed in the monetary units of another country. When the term "exchange rate" is used, it refers to the nominal exchange rate. Setting the course for the national monetary unit in a foreign currency is currently called a currency quote. There are two types of quotes - direct and indirect.
The existing exchange rate of two currencies approximately corresponds to the ratio of their purchasing power at a given point in time, that is, you can buy approximately the same amount of goods and services. It follows that the exchange rate expresses the purchasing power parity of national currencies.
Traditionally, the foreign exchange market is divided into spot transactions, as well as foreign exchange derivatives - direct forwards, swaps, futures and options. Spot exchanges of two currencies based on simple standardized contracts with settlements on them within a period of up to two business days. Direct forwards are structurally close to spot transactions for the exchange of two currencies on the basis of contracts that provide for settlements after more than two business days.
The only difference between currency forwards and spot transactions is that the parties agree on the rate at which they are willing to exchange currencies today, while in a forward transaction the parties agree on the rate at which they will exchange currencies at some point in the future. Accordingly, the difference between the actual exchange rate stipulated in the forward contract is the profit or loss of one party.
The settlement process is the same as in the spot market. The term of forward contracts is usually a week, a month, three months, six months and a year. Currently, most forwards are short term, forwards for the year are very rare. If the forward rate is lower than the spot rate, then the foreign currency is sold at a forward discount; if the forward rate is higher than the spot rate, then the foreign currency is sold at a forward markup. Forward markup discounts are usually expressed as a percentage per year of the spot rate using the formula:
Premium/Discount = Eforward-Espot/Espot n*100,
where E is the exchange rate, respectively, forward and spot rate. The coefficient n shows the number of periods until the payment is due and thereby translates the percentage into annual terms.
Swaps are transactions structurally similar to spot transactions, involving the exchange of a certain amount of two currencies and the reverse exchange of the same number of currencies on an agreed date in the future. In forward transactions, approximately 85% is accounted for by currency swaps, which are used primarily for the purpose of hedging currency risks.
Futures are standardized forward contracts for currencies that are traded on exchanges. Futures, which are the same forwards, but traded in the form of standardized contracts for certain amounts of currency on organized exchanges, appeared in 1972. The size of the contract is limited by the rules of a particular exchange, trading takes place with delivery on strictly defined days of the year, the exchange imposes restrictions on the extent of changes in the exchange rate. The currency futures market is developing in only a few cities such as Chicago, New York, London and Singapore. The size of a futures contract is usually smaller than a forward contract, and the commission on it is higher.
Options - a contract that gives the buyer, for a certain fee, the right, which is not his obligation, to buy or sell, on the basis of a standard contract, a currency on a certain day at a fixed price. Options are standard contracts half the size of standard futures contracts that give the buyer the right to buy or sell a certain amount of currency on a certain day (European option) or any time before a certain day (American option) at a fixed price. Thus, the buyer of the option has a choice: either to buy it or not to buy, while the seller is obliged to sell the option at the first demand of the buyer. For this, the buyer pays the seller a premium of 1-5% of the contract value. Options are also used for the purpose of currency speculation: if the buyer purchases a currency at a price that is much lower than that prevailing in the market, he, even after deducting the option price, wins against the seller.
The main point of commercial trading on the world market, which is carried out to a large extent in the form of spot transactions, is the desire of participants to profit from differences in exchange rates in geographically different currency centers, the so-called arbitrage.
Arbitrage is an operation involving the purchase of a currency or other asset (commodity, securities) in one market, its immediate sale in another market and making a profit due to the difference in the purchase price and the sale price. Arbitrage equalizes supply and demand for a currency and therefore helps to eliminate for some time differences in the exchange rate between geographically different markets, uniting national currency markets into a single global one.
The great mobility of exchange rates, the complexity and huge size of the foreign exchange market have led to the emergence of a specific group of risks that must be taken into account in international transactions.
Currency risks - a group of risks arising from the use of several currencies in international transactions. Currency risks are divided into two groups: risks associated with changes in the future exchange rate, and risks associated with settlements. Since arbitrage involves the purchase of one currency and its immediate sale in another market, there is no other risk, except for the risk of obstruction of settlements. Another thing is with all other forms of currency trading in the world market, where there is a risk of changes in the exchange rate during the implementation of a particular operation. Such risks are neutralized by hedging.
Hedging is a compensatory action taken by a buyer or seller in the foreign exchange market to protect their income in the future from changes in the exchange rate.
The size of the currency trading market is incomparable and exceeds by an order of magnitude all other forms of international economic relations, such as trade in goods, trade in services, international movement of capital, labor or technology. Approximately 41% of all currency transactions are spot transactions, 53 are direct forwards and swaps, and about 6% are futures and options, while the share of swap transactions is gradually decreasing, direct forwards and swaps is increasing, and futures and options continue to be a small segment of the market.
Transactions in the foreign exchange market can be made both by partners within the country and by partners located in different countries. Domestic transactions account for approximately 47% of all foreign exchange transactions, with the share of the domestic market gradually increasing, while foreign exchange transactions between countries account for approximately 53% and their share in the global foreign exchange turnover is slightly decreasing. However, the averages hide a great deal of variation. For example, in Bahrain, international currency transactions absolutely dominate over local ones, accounting for 91%, while in Japan, external currency transactions account for only 9% of the currency market turnover, and the rest of the currency transactions are made between banks within the country.
Geographically, the currency market is highly concentrated. Three cities (London, New York and Tokyo) host 55% of the world's currency trading, with London absolutely dominating with a share of 30%, and the rate of development of this market far exceeds all other currency centers. The turnover of currency trading in these three cities ranges from 161 to 464 billion dollars. in a day. The next group includes Singapore, Hong Kong, Zurich and Frankfurt, where the daily turnover is 76-105 billion dollars. Within each of the countries, currency trading is also highly concentrated - on average, 11% of financial institutions carry out 75% of currency trading. In London, the share of the 10 largest banks in this business is 44%, in New York - 47, in Tokyo - 51%. Foreign banks play an active role in the foreign exchange markets: in London they account for 79% of currency trading, in Tokyo - 49%, in New York - 46%.
Currency market- this is the sphere of economic relations manifested in the implementation of the transaction for the purchase and sale of foreign currency and securities in foreign currency, that is, the exchange of the currency of one country for the currency of another country at a certain nominal exchange rate, as well as operations for investing foreign exchange capital.
Nominal currency (exchange) rate is the relative price of the currencies of two countries, or the currency of one country expressed in the monetary units of another country. When the term "exchange rate" is used, it refers to the nominal exchange rate.
Establishing the rate of the national currency in foreign currency is currently called currency quote. The exchange rate of the national currency can be determined as in the form direct quotes when a foreign currency is taken as a unit, and in the form reverse quote when the national currency is taken as the unit.
The vast majority of monetary assets sold on the foreign exchange markets is in the form of a demand deposit in largest banks who trade with each other. Only a small part of the market falls on the exchange of cash. It is in the interbank foreign exchange market that the main quotations of exchange rates are carried out.
When entering the foreign exchange market economic entities have different goals:
continuous implementation of international settlements (enterprises - clients of banks)
diversification (change in the structure) of foreign exchange reserves and their replenishment (commercial, central banks)
profit in the form of a difference in exchange rates and interest rates on various debt obligations (commercial banks, enterprises)
· hedging (insurance) against currency and credit risks. When hedging, economic agents, wanting to reduce the risk associated with exchange rate fluctuations that can have a negative impact on their capital, seek to get rid of net liabilities in foreign currency, that is, to achieve a balance between assets and liabilities in this currency
Conducting monetary policy (Central banks, the Fed, Treasuries);
From an organizational and technical point of view, the foreign exchange market is a set of communication systems that interconnect banks of different countries that carry out international settlements and other foreign exchange transactions.
The participants of the foreign exchange market are:
· commercial banks, which not only diversify their portfolios with foreign assets, but also carry out foreign exchange transactions on behalf of firms entering foreign markets as exporters and importers. Currency transactions for the export and import of goods and services of each country form the basis for determining the value of the national currency
· Central banks
currency exchanges, brokerage agencies
interbank corporations
individual participants in the foreign exchange market.
Classification of currency markets. Foreign exchange markets can be classified according to a number of criteria: by the scope of distribution, in relation to foreign exchange restrictions, by types of foreign exchange resources, by the degree of organization.
By dissemination- international and domestic currency markets, which, in turn, consist of a number of regional markets, formed by financial centers in certain regions of the world or a given country.
International currency market- this is a chain of world regional currency markets closely interconnected by a system of cable and satellite communications. Places of concentration of banks, specialized financial institutions, where international currency, credit, financial operations, transactions with securities and collateral have international financial centers.
Domestic foreign exchange market- this is the foreign exchange market of one state, i.e. market within a given country.
Towards currency restrictions one can distinguish between free and non-free foreign exchange markets. Currency restrictions are a system of government measures (administrative, legislative, economic, organizational) to establish the procedure for conducting operations with currency values. Currency restrictions include measures for targeted regulation of payments and transfers of national and foreign currency abroad.
By types of applied exchange rates the foreign exchange market can be single mode and dual mode.
A single mode market is a foreign exchange market with floating exchange rates, the quotation of which is set on exchange trading.
A dual currency market is a market where both fixed and floating currencies are used simultaneously. The introduction of a dual currency market is used by the state as a measure to regulate the movement of capital between the national and international loan capital markets. This measure is designed to limit and control the influence of the international loan capital market on the economy of a given state.
According to the degree of organization, the foreign exchange market is exchange and over-the-counter.
Exchange currency market- this is an organized market, which is represented by a currency exchange, it is the cheapest source of currency and foreign exchange funds; orders put up for exchange auctions have absolute liquidity.
Currency exchange- an enterprise that organizes trading in currency and securities in foreign currency. Its main function is not to receive high profits, but to mobilize temporarily free funds through the sale of currency and securities in foreign currency and to establish the exchange rate.
The over-the-counter currency market is organized by dealers who may or may not be members of the currency exchange and conduct it by telephone, telefax, computer networks.
The exchange and over-the-counter markets contradict each other to a certain extent and complement each other. This is due to the fact that, while performing the general function of trading in currency and circulation of securities in foreign currency, they use various methods and forms of selling currency and securities in foreign currency.
The advantages of the over-the-counter foreign exchange market are:
Sufficiently low cost of expenses for currency exchange operations. Bank dealers often use face-to-face currency auctions on the exchange to reduce their own costs for currency conversion by concluding agreements on the sale and purchase of currency at the exchange rate before the start of trading on the exchange. On the exchange, commissions are charged from bidders, the amount of which is directly dependent on the amount of currency and ruble resources sold. In addition, the law establishes a tax on exchange transactions. In the over-the-counter market for an authorized bank, after the counterparty to the transaction has been found, the currency conversion operation is carried out practically free of charge
· higher speed of settlements than when trading on the currency exchange. This is primarily due to the fact that the over-the-counter foreign exchange market allows you to conduct transactions throughout the entire trading day, and not at a strictly defined time of the exchange session.
When classifying foreign exchange markets, the markets of eurocurrencies, eurobonds, eurodeposits, eurocredits, as well as "black" and "gray" markets are also distinguished.
Eurocurrency market is the international market for the currencies of countries Western Europe where operations are carried out in the currencies of these countries. The functioning of the eurocurrency market is associated with the use of currencies in non-cash deposit and loan transactions outside the countries issuing these currencies.
Eurobond market expresses financial relations on debt obligations with long-term loans in eurocurrencies, issued in the form of bonds of borrowers. The bond contains data on the amount of debt, the conditions and terms of its repayment, the procedure for obtaining interest in accordance with coupons (a coupon is a part of a bond certificate, which, when separated from it, gives the owner the right to receive interest).
Eurodeposit market expresses stable financial relations on the formation of deposits in foreign currency in commercial banks foreign countries at the expense of funds circulating on the Eurocurrency market.
Eurocredit market expresses stable credit relations and financial relations for the provision of international loans in Eurocurrency by commercial banks of foreign countries.
Spot market, or the market for the immediate supply of currency (within 2 business days).
Urgent (forward) currency market. If a participant in the foreign exchange market needs to buy foreign currency after a certain period of time, he can conclude a so-called forward contract for the purchase of this currency. Forward currency contracts include forward contracts, futures contracts and currency options.
Both a forward and a futures contract are an agreement between two parties to exchange a fixed amount of currency at a certain date in the future at a predetermined (term) exchange rate. Both contracts are binding. The difference between the two is that a forward contract is entered into off-exchange, while a futures contract is bought and sold only on a foreign exchange exchange subject to certain rules, through an open bidding of the currency by voice.
currency option- This is a contract that provides the right (but not the obligation) to one of the participants in the transaction to buy or sell a certain amount of foreign currency at a fixed price for a certain period of time.
When concluding specific transactions for the purchase and sale of currencies, the following are used:
Spot rate- the price of a foreign currency unit of one country, expressed in currency units of another country, established at the time of the conclusion of a transaction involving immediate payment and delivery of currency (subject to the exchange of currencies by counterparty banks on the second business day from the date of the transaction).
Forward (term) rate- the price at which a given currency is sold or bought, provided that it is delivered on a certain date in the future. Forward (urgent) transactions with currency serve to insure participants against the risk of larger losses and extract speculative profits on the difference in rates (forward and spot) at the time of delivery of the currency.
All settlements on international transactions between direct participants in foreign exchange transactions are carried out through banks that consider foreign exchange transactions as one of the means of generating income. Therefore, when quoting, banks set two types of exchange rates: buyer's rate , at which the bank buys the currency, and seller rate, at which the bank sells the currency.
The difference between them, which is the bank's income, is called spread , or margin, which should cover the operating costs of the bank and provide it with a normal profit when conducting currency transactions.
Term exchange rate is the sum of the spot rate at the time of the transaction and the premium or discount, that is, the premium or discount, depending on interest rates at the moment. The currency with the higher interest rate will be traded in the forward market at a discount to the currency with the lower interest rate. Conversely, the currency with the lower interest rate will sell in the forward market at a premium to the currency with the higher interest rate. In international practice, along with the difference in interest rates, interest on deposits in the interbank London market, that is, the LIBOR rate, is used. The difference between the forward exchange rate and the spot rate is calculated using the formula:
where is the spot rate (amount of national currency per unit of foreign currency)
Interest rates on deposits in national and foreign currencies
Forward term (in days).
The term currency market allows both to insure currency risks and to speculate in currency.
Swap operations make it possible to receive the necessary currency without currency risk, compensate for the temporary outflow of capital from the country, regulate the structure of foreign exchange reserves, including official ones.
In the practice of international settlements are very widely used cross rates , those. the ratio between two currencies, which are established from their rate in relation to the rate of a third currency.
The foreign exchange market, like any other market, requires certain regulation and control by the state. Currency regulation includes:
the procedure for conducting foreign exchange transactions
formation of the country's foreign exchange reserve and foreign exchange funds of economic entities,
currency and export controls.
The subjects of currency relations in the foreign exchange market are divided into residents and non-residents.
Foreign exchange transactions include transactions related to:
transfer of ownership of currency values
use of currency as a means of payment, as well as the ruble in the implementation of foreign economic activity
import and transfer to the Republic of Belarus and export and transfer from it abroad of currency valuables
Implementation of international money transfers.
Foreign exchange operations are divided into
current operations
transactions related to the movement of capital.
The state develops and pursues a certain monetary policy. Monetary policy is the activity of the state for the purposeful use of foreign exchange. The content of the monetary policy is multifaceted and includes the development of the main directions for the formation and use of foreign exchange funds, the development of measures aimed at effective use these funds.
The main executive body of currency regulation is central bank Republic of Belarus (National Bank), and specific executors - authorized commercial banks, business entities and citizens.
National Bank of the Republic of Belarus:
manages foreign exchange transactions
Issues licenses to commercial banks to carry out operations in foreign currency on the territory of the Republic of Belarus and abroad and controls their execution
issues permits to authorized enterprises for the right to trade for currency
Issues permits to business entities to open current and deposit accounts abroad
introduces restrictions for commercial banks on the volume of loans from abroad, sets them maximum dimensions currency, interest and exchange rate risk
manages foreign exchange reserves on its balance sheet, determines the scope and procedure for the circulation of foreign currency on the territory of the Republic of Belarus
regulates the foreign exchange market of the Republic of Belarus and the ruble exchange rate against foreign currencies
establishes uniform forms of accounting, reporting, documentation and statistics of foreign exchange transactions
· prepares and publishes statistics of currency and financial operations of the Republic of Belarus in accordance with accepted international standards.
Key Concepts
International currency market; conversion operations; spot market; spot rate; among; forward market; forward rate; hedging currency futures; currency options; speculative currency transactions; currency arbitrage; percentage arbitrage; euro banks; eurocurrencies; Eurocurrency market.
The international currency market is the largest financial market world and occupies an important place in ensuring interaction between the components of the world market.
The foreign exchange market is a system of currency and organizational relations associated with conversion operations, international settlements, and the provision of foreign currency on loans under certain conditions.
The peculiarity of this market is that it:
§ intangible;
§ does not have a specific location, center;
§ the mechanism of its functioning - the exchange of the currency of one country for the currency of another country;
§ there is complete freedom to instantly open or close any position, the ability to trade 24 hours a day in online mode;
§ is an interbank market;
§ has a flexible system of trade organization and a flexible strategy of payment for the conclusion of the transaction;
§ is one of the most liquid markets due to the possibility of working with various currencies on it;
§ thanks to the process of telecommunications and informatics, it is global, that is, deployed on a global scale.
Direct connections between the main centers of currency trading (London, New York, Tokyo, Frankfurt, Singapore) using telephones, faxes and computers turn each of these centers into a part of a single world market that operates around the clock. Economic news, which appears at any time of the day, is transmitted around the world and causes an immediate reaction in the foreign exchange market. Of course, agreements are invested by oral agreement. If necessary, documents confirming the transaction are sent later. The decisive factor is the speed of obtaining the necessary information, since exchange rates change within seconds.
The main participants in the international currency market are commercial banks, corporations that are engaged in international trade, non-banking financial institutions(asset management firms, Insurance companies*), central banks.
The central element of the international currency market is commercial banks, since most of the transactions with currencies involve the exchange bank deposits, denominated in different currencies.
The main product of this market is foreign currency in various forms: foreign currency deposits, any financial requirements denominated in foreign currency. The foreign exchange market is dominated by transactions with foreign currency deposits poste restante.
Demand deposits are funds that are used in currency trading between banks operating in the foreign exchange market. Bank dealers hold termless deposits in foreign currency with correspondent banks located in countries where this foreign currency is national. A bank in any country may sell foreign currency by instructing foreign employees to transfer a demand deposit to the buyer. The purchase of currency is carried out in the same way. In this case, the seller transfers it to a bank located abroad, to the buyer's account. The currency transaction goes like this. For example, an American firm must pay 200,000 euros for the supply of goods to a German firm. The firm instructs its bank to debit its dollar account and pay this amount by transferring it to the supplier's account in a German bank. An American bank transfers from the account of an American firm to a debit of a German bank dollars at the cash exchange rate in exchange for a deposit in euros, which will be used to pay the German supplier.
The international foreign exchange market consists of many national foreign exchange markets. Operations on it are carried out on three levels.
1st level: retail trade. Operations in one national market, when the dealer bank interacts directly with customers.
2nd level: wholesale interbank trade. Operations in one national market, when two dealer banks interact through a foreign exchange broker.
3rd level: international trade. Transactions between two or more national markets when banks-dealers of different countries interact with each other. Such transactions often include arbitrage transactions in two or three markets.
An arbitrage process where market participants buy a currency that is falling in value and sell a currency that is worth more than exchange rate in other market centers, gives rise to the tendency of the law of one price.
Depending on the level of organization of the foreign exchange market, exchange and pozabi-Rzhov foreign exchange markets are distinguished. The exchange market is represented by currency exchanges, and the over-the-counter market, which is also called the interbank market, is represented by banks, financial institutions, enterprises and organizations.
The functions of the exchange market are to determine the demand and supply of currency, establish exchange rates, predict their dynamics, determine reference exchange rates, as well as form a certain strategy and tactics. central bank countries regarding financial and credit policy and the system of currency regulation. On currency exchanges, both transactions of a current nature and forward transactions are concluded. In terms of volume, the exchange market is small, since it functions mainly as a national currency market (approximately 10% of all currency transactions are concluded).
The activity of the interbank market is directly related to the implementation of foreign exchange transactions. It accounts for about 90% of foreign exchange turnover.
Most foreign exchange transactions account for interbank trade. Exchange rates, published in newspapers, is interbank, i.e. rates that banks ask each other. Interbank "wholesale" rates are lower than "retail" rates for clients. The difference in bank income for the service rendered.
Transnational corporations to carry out operations in different countries buy the currency they need on the international currency market. The participation of central banks in operations on international currency markets is carried out in the form of foreign exchange interventions.
Any two currencies can be involved in foreign exchange transactions, but most interbank transactions are currency exchange transactions for the US dollar, which is considered the key currency. An important role in the international currency market is also played by the euro, the Japanese yen, the Swiss franc, and the British pound sterling. Demand for these currencies exists every second, unlike other currencies.
The international currency market operates an extremely large money supply. Its volume exceeds 700 trillion dollars a year, and the daily turnover is more than 4 billion dollars, 20% of which falls on the Asian market, 40% on the European market and 40% on the American one.
In Ukraine, the cash foreign exchange market (purchase and sale of foreign currencies for hryvnia in dollar terms) tends to grow: in 1999 p. - 8063780000 dollars, in 2000 p. - 25159700000 dollars, which is a consequence of the growth of exports of goods and services.
By the nature of transactions, the foreign exchange market is divided into markets: spot, forward, swap, currency futures and options market.
