Types of operations and transactions on the global foreign exchange market. Foreign exchange transactions on the global foreign exchange market Financial transactions on the foreign exchange market

The foreign exchange market is the totality of all relations that arise regarding a foreign exchange transaction. This is an officially established center where the purchase and sale of foreign currency takes place. There are many organizations and individual intermediaries operating in the foreign exchange market. First of all, central banks, large commercial banks, non-bank dealers and brokers enter the foreign exchange market. The bulk of the currency circulating on the market is sold and bought in non-cash form, and only a small part accounts for the share of cash turnover.

The most important functions of the foreign exchange market include the following:

· timely execution of international payments,

· regulation of exchange rates,

· diversification of foreign exchange reserves,

· currency risk insurance,

· receiving profit from foreign exchange market participants in the form of differences in exchange rates.

The foreign exchange market has all the attributes of an ordinary market: objects and subjects, supply and demand, price, special infrastructure and communications that provide operational communication between all market entities not only within the borders of individual states, but on a global scale.

Rice. 8.2. Object and subjects of the foreign exchange market

Object purchases and sales in this market are currency values. Since transactions are simultaneously carried out on the market both for the purchase of foreign currency for national currency and vice versa, then the object of purchase and sale at the same time is both national and foreign currency values.

Subjects in the foreign exchange market there may be any economic agents and intermediaries, primarily banks, brokerage companies, and currency exchanges, which organizationally provide transactions for the purchase and sale of foreign currency assets.

More specifically, the foreign exchange market consists of a number of formally undefined markets, interconnected through a system of international banking connections. Participants in this market can maintain contacts with each other using various means of communication. The purchase and sale of currency can occur daily at any time of the day or night. In foreign exchange markets there are no written rules governing their activities, however, all transactions carried out on them must be carried out in accordance with established unspoken procedural and ethical standards. The activity with which a monetary unit is bought and sold on the world currency market depends to some extent on the domestic legislation adopted in that country. In practice, each country is, to a greater or lesser extent, a participant in the foreign exchange market.

The foreign exchange market has a certain structure. There are world, regional and national currency markets. They differ in the number of currencies used, the volume of sales and the nature of foreign exchange transactions. In the economic literature, the foreign exchange market is classified according to other criteria.

Rice. 8.3. Classification of the foreign exchange market

The international foreign exchange market covers the foreign exchange markets of all countries of the world. The international foreign exchange market is understood as a chain of world regional foreign exchange markets closely interconnected by a system of cable and satellite communications. There is a flow of funds between them depending on current information and forecasts of leading market participants regarding the possible position of individual currencies.

Part of the global foreign exchange market is the global gold market. In addition to special gold trading centers (London, Zurich are the main ones), the subjects of this market are also banks authorized to carry out transactions in gold. These banks carry out intermediary operations, concentrate the volumes of supply and demand, and fix specified market goals.

The global gold market performs the following functions:

ü creating conditions for the participation of gold in international monetary relations;

ü maintaining official gold reserves of countries held in central banks;

ü maintaining official reserves of currencies that are purchased in exchange for gold.

On regional markets carry out transactions with the currency that is most common in a given territory.

National foreign exchange market exists in almost every country. The national currency system is part of the country's monetary system, within the framework of which foreign exchange resources are formed and used, and international payment turnover is carried out. National currency systems are formed on the basis of national legislation, taking into account the norms of international law. Their features are determined by the conditions and level of development of the country’s economy, its foreign economic relations, and the tasks of social development.

Foreign exchange markets ensure the prompt implementation of international payments, the interconnection of world foreign exchange markets with credit and financial markets. With the help of foreign exchange markets, foreign exchange reserves of banks, enterprises, and the state are replenished. The mechanism of foreign exchange markets is used for government regulation of the economy, including at the macro level. Modern foreign exchange markets have some peculiarities.

Rice. 8.4. Classification of foreign exchange transactions

When considering the topic of foreign exchange transactions, it is necessary to highlight such a concept as a transaction, because a transaction plays an important role in foreign exchange transactions.

The deal is subject to several conditions:

1) at least two valuable objects,

2) agreed upon conditions for its implementation,

3) the agreed time of execution,

4) agreed upon venue.

Cash operations represent the purchase and sale of currency on the terms of its delivery no later than the next business day from the date of the agreement at the rate agreed upon at the time of its signing. This agreement is called “spot”, and cash transactions on such conditions are “spot transactions”. They enable participants to quickly satisfy their needs in currency on favorable terms.

Futures transactions in foreign currency are carried out for the following purposes:

· conversion (exchange) of currency for commercial purposes, advance sale of foreign exchange earnings or purchase of foreign currency for upcoming payments in order to insure foreign exchange risk;

· insurance of portfolio or direct capital investments abroad against losses due to a possible depreciation of the currency in which they are made;

· obtaining speculative profit due to exchange rate differences.

Essence forward transactions consists of the purchase and sale of currency between two entities with its subsequent transfer at an agreed time and at the rate indicated at the time of drawing up the contract. The forward rate consists of the spot rate and premiums or discounts associated with differences in bank interest rates in the countries in whose currencies the transaction is carried out.

At futures transactions two counterparties undertake to buy or sell a certain amount of currency at a certain time at the rate established at the time of drawing up the contract. The difference between these operations and forward operations comes down to the fact that they are carried out only on exchanges and under their control. The form and terms of contracts are strictly unified. The price of a currency futures contract is determined in the same way as the price of a forward contract, that is, taking into account the difference in interest rates of the two currencies being exchanged.

Option operations- this is a type of forward transactions when a special agreement (option) is drawn up between the participants, in which one of the participants is given the right to buy or sell to another participant a certain amount of currency within a specified period and at the rate agreed upon by the parties. When purchasing an option, the buyer pays the seller a premium, which is determined by agreement of the parties as a percentage of the contract amount or in an absolute amount.

A type of foreign exchange transaction that combines cash transactions are swap transactions.

For swap transactions, a cash transaction is carried out at the spot rate, which in a counter-transaction (forward) is adjusted to take into account a premium or discount depending on the movement of the exchange rate. Swap operations are used for:

· carrying out commercial transactions: the bank sells foreign currency on the terms of immediate delivery and at the same time buys it for a period.

· acquisition by the bank of the necessary currency without currency risk (based on the coverage of the transaction) to ensure international payments, diversification of currency holdings.

· mutual interbank lending in two currencies.

As international and domestic experience shows, the state and dynamics of supply and demand in the foreign exchange market are influenced by many different factors, which can be grouped into three groups.

Concept, functions of the foreign exchange market, transaction instruments. Quotation of foreign currencies. Quotation methods: direct, indirect. Cross courses. Courses for sellers and buyers. Classification of foreign exchange transactions. Cash transactions. Methods of payment in international circulation. Spot currency transactions. Urgent transactions with foreign currency. Currency futures, forwards, options. Currency arbitrage.

1. Organization of the world foreign exchange market

The foreign exchange market is the most mobile, liquid and profitable segment of financial and economic relations that arise during the purchase and sale of foreign currency and foreign currency values. Institutionally, this is a set of banks, companies, brokerage firms that carry out foreign exchange transactions at the national, regional and global level.

Eurocurrency market is a universal international market in which currencies circulate that have left domestic circulation and are outside national currency legislation (for example, foreign exchange transactions with the dollar, yen, euro on the London foreign exchange market). The prefix “euro” indicates the release of national currencies from the control of national currency regulation authorities and banking supervision.

World foreign exchange market(FOREX -FOReignEXchangemarket) was formed in two stages. At the first stage, which took place in parallel with the creation of the Eurocurrency market - the early 1960s, there was an expansion of the convertibility of national currencies for non-residents. At the second stage, in the 1980s, there was a liberalization of foreign exchange transactions for residents. Increased mobility of capital has created conditions for highly profitable foreign exchange transactions between residents and non-residents in the largest financial centers. The main object of foreign exchange relations in the global foreign exchange market is the American dollar, servicing the vast majority of transactions (89%).

currency transaction, or currency transaction, is the exchange of money from one country for the currency of another. The vast majority of monetary assets traded in foreign exchange markets are in the form of demand deposits with leading banks trading with each other. Only a small part of the market is cash exchange.

The main subjects of the global foreign exchange market are: commercial banks. Therefore, the interbank foreign exchange market forms the basis of the world foreign exchange market (65%), on which the demand and supply of currency, as well as the exchange rate, are formed. For many years, the leaders in terms of income in foreign exchange transactions have been Citibank, Deutsche Bank, Barclays Bank, Chase Manhattan Bank, Bank of America, J. P Morgan Bank. Commercial banks trade for their own account to make a profit or clear positions on client transactions, or process payments for their clients.

In addition to banks, large companies are actively represented on the market. brokerage firms And financial companies, as well as such non-banking financial institutions as insurance companies, pension funds, investment funds,hedge funds. In terms of activity in the global foreign exchange market, commercial organizations are not inferior to such central banks as the Federal Reserve System USA. Central banks carry out foreign exchange transactions in the market for purposes such as payments, collection of checks and bills, foreign exchange interventions to maintain foreign exchange markets and their normal functioning. In order to regulate inflation and the exchange rate of the national currency, central banks change refinancing rates. When interest rates fall, business activity increases and inflation increases. A decrease in interest rates leads to a depreciation of the national currency. An increase in interest rates leads to a decrease in business activity, a fall in inflation and an appreciation of the national currency. In addition to the interest rate, central banks mainly use foreign exchange interventions to influence the state of the foreign exchange market.

play a smaller role in the global foreign exchange market foreign trade enterprises(exporters and importers) who buy and sell currency to make payments, carry out transactions to insure currency risks and receive or issue loans in foreign currency.

The arena of foreign exchange transactions is exchanges. The largest volume of foreign exchange transactions occurs in London (32%), New York - 18%, Tokyo - 8, Singapore - 7, Frankfurt - 5, Hong Kong, Paris and Zurich - 4% each, with other countries remaining at about 18%. Unlike the universal London Exchange, currency exchanges in Japan, France and Germany are mainly engaged in fixing reference exchange rates, so they are less significant in the global foreign exchange market. Foreign exchange transactions are also carried out on futures, financial and commodity exchanges, in particular in Chicago.

Operations in the foreign exchange markets are carried out around the clock. The financial day begins in Wellington (New Zealand), then - Sydney, Tokyo, Hong Kong; Singapore, Bahrain, Frankfurt am Main, London, New York, Los Angeles. In total, there are three geographical zones of activity of foreign exchange transactions (time is indicated in Greenwich Mean Time):

East Asian centered in Tokyo, 21:00-7:00;

European centered in London, 7:00-13:00;

American centered in New York, 13:00-21:00.

The work of the exchange is organized mainly by the brokerage chamber and the board. The competence of the brokerage house includes the quotation of currencies and the supervision of exchange rate brokers. In the foreign exchange market, brokers sit at their desks at various banks and communicate with each other using a computer and telephone. The computer terminal shows current quotes for all major currencies with the date of transactions. Each major bank sends out its own currency quotes, i.e. informs at what rate he is ready to trade. Having found a suitable rate, the buying bank contacts the seller by phone and concludes a deal. It takes no more than a minute to complete the transaction. If necessary, it is documented. The board controls the progress of official quotations, direct supervision is vested in the members of the foreign exchange trading committee. Various methods are used to quote currencies and set exchange rates on the stock exchange.

An important aspect of the functioning of the global foreign exchange market is its information and technological support. The main system for transmitting financial information is the private non-profit corporation SWIFT (SWIFT -Society for Worldwide Interbank Financial Telecommunications), existing since 1973. It provides transmission via artificial satellites of up to 3 million messages per day with a total cost of about 400 trillion. dollars Alternative - news agency Reuters, EBS, Telerate, Knight Ridder, Bloomberg and etc. ,

A new technological breakthrough in the global foreign exchange market emerged in the mid-1990s. with the introduction of Internet technologies. These were mainly information systems.

Foreign exchange transactions are the most profitable, and therefore risky, activity. According to the economic nature, foreign exchange transactions can be divided into the following types: foreign exchange dealing, deposit and credit operations, foreign trade foreign exchange operations, other foreign exchange operations.

Transactions with foreign currency, as a rule, involve the purchase and sale or conversion of currencies on exchanges or in commercial banks. Such transactions are usually called currency dealing. Foreign exchange operations of commercial bikes to attract and place foreign currency funds are called deposit and credit. These are interbank transactions for mutual lending, for the placement of borrowed or own funds. Foreign trade foreign exchange transactions involve opening and servicing foreign currency accounts of exporters and importers, and conducting international payments. In addition to foreign trade, there are also other currency transactions for servicing bank card holders and other non-trading operations related to tourism, money transfers, etc.

The modern foreign exchange market is an extremely complex and dynamic system that is influenced by many economic, political, and psychological factors and immediately responds to their changes. Compared to the material sphere, the foreign exchange market is more stochastic, its level of uncertainty and unpredictability is much higher. Conducting foreign exchange transactions is objectively always associated with risk. The possibility of incurring losses due to unfavorable changes in exchange rates is designated by the term “currency risk” (currency risk, exchange rate risk).

The foreign exchange market is not only a generator of currency risks, but also a system for preventing them. He plays the role of an insurer, and the insurance operation is called hedging. Hedging (from English. hedge – fence, protection) is achieved through an extensive system of special currency transactions and techniques, the use of which, however, requires special training. Hedging operations are carried out, as a rule, in the derivatives segment of the European market. Thus, an important function of the euro market is to minimize the risk associated with exchange rate fluctuations through the purchase of currency derivatives (derivatives). In relation to the degree of risk in the European market, there are four main groups of participants.

• Entrepreneurs – invest their own capital at a certain risk acceptable to themselves (these include commercial firms, commercial banks). At the same time, they buy currency derivatives in order to limit the consequences of unfavorable changes in the exchange rate.
• Institutional investors – those who, when investing capital, mainly someone else's, care about minimizing risk (these include financial intermediaries-brokers who receive income in the form of commissions, i.e. a certain percentage of the transaction amount).
• Speculators – those who are ready to take a certain pre-calculated risk within the limits of their capabilities (these include dealers who receive income in the form of exchange rate differences). The leading motive for operations in the modern foreign exchange market is speculative. A speculator, for example, buys a certain amount of euros in the morning and sells it in dollars in the evening. In the event of a favorable change in the exchange rate, the currency speculator receives one or another profit from the transaction (currency margin).
• Players – those who are ready to take any risk. Players' actions are unpredictable.

Based on the location where currency trading is carried out, a distinction is made between exchange ( excliange ) and over-the-counter ( off-exchange ) segments of the foreign exchange market. Exchange foreign exchange market is currency trading on official, specially organized exchange platforms. Unlike him on the over-the-counter market Currency trading is carried out by commercial banks using global computer systems. Depending on the deadline for fulfilling foreign exchange claims and obligations, a distinction is made between the current and futures segments of the foreign exchange market. On current In the foreign exchange market, transactions are carried out within a short time - no more than two banking days (spot transactions). Urgent The foreign exchange market combines transactions that are executed over a longer period of time – usually 1–3, 6, 9 and even 12 months.

The formation of the national currency market in Russia began in 1991 with the creation of an exchange market, which included eight currency exchanges. Commercial banks and the Central Bank of the Russian Federation act as sellers and buyers of foreign currency on exchange platforms. Russia has introduced a managed floating exchange rate regime, which depends on the relationship between supply and demand on the country's currency exchanges, primarily on the Moscow Interbank Currency Exchange. Direct quotation of the ruble to foreign currency is applied, i.e. a unit of foreign currency is expressed in a certain number of rubles. The official exchange rate of the US dollar to the ruble is set by the Central Bank of the Russian Federation, taking into account the results of trading on the MICEX. This operation is called fixing The Central Bank of the Russian Federation fixes the exchange rate daily and, in order to maintain the official ruble exchange rate, has introduced a “dirty floating” exchange rate regime, i.e. periodically intervenes in the formation of supply and demand for currency on the MICEX, primarily the US dollar, with the help of special foreign exchange interventions. The exchange rate of other currencies is determined based on the cross rate. In this case, the exchange rates of these currencies to the US dollar are used as an intermediate (third) currency.

Since September 2003, a new fixing procedure has been introduced: the official exchange rate of the ruble against the dollar is determined based on the results of trading on the MICEX with a settlement date of “tomorrow”. Previously, within the framework of a single trading session (UTS), there were only two instruments - “dollar/ruble” and “euro/ruble” settlements with the term “today”. Moreover, the time frame for these trades was very limited - from 10.00 to 11:00 for dollar trades, and from 10:00 to 11:30 for euro/ruble trades. Now a third instrument has appeared - “dollar/ruble” with a settlement period of “tomorrow”, which is traded from 10:00 to 16:45 Moscow time. This significantly expands the capabilities of regional participants in the foreign exchange market. After all, at the regular day session of the MICEX, trading in dollars for “tomorrow” had been carried out for a long time, but the opportunity to participate in them was mainly available to Moscow dealers, and the Unified Trading Session takes place simultaneously according to the same rules on all eight exchanges of the country - from Vladivostok to St. -Petersburg.

The change in the system for determining the ruble exchange rate also means that the Central Bank has transferred its activity from the settlement market “today” to “tomorrow”. Market participants believe that this has qualitatively affected the exchange rate of the national currency; it is now determined solely on the basis of supply and demand and has become more market-oriented, and this, in turn, has led to a new round of ruble strengthening. For currency dealers, this new system for determining the official exchange rate will make it possible to judge with greater certainty the goals and expectations of the Central Bank, based not on rumors and speculation, but on its behavior during “tomorrow’s” trading.

In 2005, the Central Bank of the Russian Federation switched to a new regime for regulating the exchange rate based on the dollar/euro currency basket, which also helps to strengthen the stability of the ruble exchange rate.

The second segment of the national foreign exchange market is the interbank foreign exchange market. It is organized by commercial banks that trade foreign currency among themselves and provide it to their clients. The interbank foreign exchange market is more liberal than the exchange market and is less dependent on the actions of the Central Bank. The market reacts more quickly to changes in supply and demand for foreign currency by foreign exchange market participants. The relatively greater flexibility of the interbank foreign exchange market determines the general global tendency towards the dominance of this segment in terms of the number of foreign exchange transactions conducted. Thus, in recent years, the share of direct transactions between banks in Russia’s total foreign exchange turnover has increased from 85 to 94%.

About 10% of foreign exchange market transactions occur on currency exchanges, where the main exchange rate quotes are carried out. However, recently the largest transnational banks also carry out their own exchange rate quotes. Market makers - These are large banks and financial companies that determine the current level of exchange rates due to a significant share of their operations in the total global market volume. These are market participants who have committed themselves to providing liquidity for a specific instrument by placing buy and sell orders during the trading session. Major global market makers include: Deutsche Bank, Mizuho Bank, Barclays Bank, PBS, Citi Bank, Chase Manhattan Bank, Union Bank of Switzerland. In order to determine whether a given organization is a market maker or not, one should take into account not the size of the bank itself, but its share in the operations of the general market and its ability to influence the market by setting the price. Use the services of market makers market users – financial institutions that request the value of currencies on the market. Usually these are small banks and financial companies that use for their operations the rate that market makers set for them. Market users are not active players in the markets, and although the total volume of their transactions in the market may be quite large, the share of each of them is insignificant. Market makers determine currency quotes for small banks, and market users accept or reject these quotes. Thus, market makers quote the price (make price), and market users take the price (take price).

Carrying out settlements for foreign economic transactions, investing capital in international projects, speculative transactions, insurance against possible losses - all this involves transactions for the purchase and sale of foreign currency, which are called conversion operations. Conversion operations are the exchange of national currency for other financial assets (for other foreign currencies or debt obligations).

Conversion operations are divided into:

• for current (cash) conversion transactions (transactions with immediate delivery, cash), or spot-type transactions;
• urgent conversion operations.

The differences between the two groups of conversion transactions lie in the value date. When concluding any transaction, two dates are distinguished:

• conclusion of a transaction (by telephone, telex, in writing, etc.);
• execution of the transaction, i.e. physical movement of funds, which is called the value date. This is the calendar date on which the actual exchange of funds will occur in the form of receipt of purchased currency and delivery of sold currency, and on which conversion transactions are reflected on balance sheet items. For current foreign exchange transactions, the value date is no further than the second business day from the date of the transaction, i.e. the transaction is executed no later than on the second business day from the date of the transaction.

Standard value dates for current transactions may vary:

• spot – settlement terms with a value date on the second business day;
• “today”, or tod (today, or tod) – terms of settlements with a value date on the same day;
• “tomorrow”, or tom (tomorrow, or tom) – terms of settlements with a value date on the next business day.

By agreement, the delivery of currency for spot transactions is delayed until two business days after the conclusion of the contract so that the parties involved in the transaction can document it and carry out settlements taking into account different time zones of the foreign exchange markets. Thus, the essence of a spot currency transaction is the purchase and sale of currency on the terms of its delivery by counterparty banks on the second business day from the date of signing the foreign exchange contract at the rate fixed at the time of its conclusion. The delivery date of the currency is called the “value date”, i.e. this is the date on which the relevant currency funds actually become available to the parties to the transaction. When fixing the value date, only business days are considered for each of the currencies involved in the transaction, i.e. if the next day after the transaction date is a non-working day for one currency, then the delivery time for the currencies is increased by one day. If the next day is a non-working day for another currency, the delivery time is automatically extended by one more day.

When conducting conversion transactions, you should pay attention to currency quotes. Determining the exchange rate is called their quotation. Direct currency quotation is the expression of the price of a foreign currency in units of the national currency. Indirect quotation is an expression of the price of the national currency in units of foreign currency. Indirect quotation was and is used mainly in those countries whose currencies are reserve, which makes it easier for banks to make the necessary accounting entries. Cross-rate is the relationship between two currencies, which is derived from their rates in relation to a third currency. A full currency quotation includes determining the purchase rate (bid – buying rate) and the seller rate (ask, offer – purchasing rate), according to which banks buy and sell the quoted currency.

Example 1

1 USD = 27.30-27.70 RUB.

In this case, USD is the quoted currency, and RUB is the quoted currency.

The first digit indicates the bid rate (bicl price) - 27.30, at this price the bank buys dollars from its clients. The second number is the ask rate (ask price), at which the bank will sell dollars. The difference between the buying and selling rates is called the bid/offer spread, on the basis of which the bank, depending on the volume of the transaction, receives revenue, which in turn is called the bank margin from conversion operations.

Based on the data shown on the Reuter monitor, the foreign exchange dealer compares global market conditions with the specific data of the contracts being concluded. Recall that the nominal foreign exchange (exchange) rate is the relative price of the currencies of two countries - the currency of one country expressed in the monetary units of another country. When the price of a unit of foreign currency in national monetary units increases, we speak of depreciation (cheaper) of the national currency. Conversely, when the price of a unit of foreign currency in national monetary units falls, they speak of an appreciation of the national currency (Table 6.1).

Table 6.1

Quotation of exchange rates of major national currencies

As a rule, Reuter, Teleright, Diling spreadsheets provide currency quotes against the US dollar. Based on this, you can derive cross rates of any currency against another.

Example 2

1 USD = 0.9220-40 EUR; 1 USD = 0.6270-77 GBP.

We need to determine the purchase rate for GBP to EUR from the proposed quotes. In reality, our client would like to convert proceeds from GBP to EUR. From a technical point of view, this operation in a commercial bank can be represented as follows:

• a) the bank first buys USD for EUR at the rate of 1 USD = 0.9240 EUR;
• b) then the bank sells USD to GBP at the rate of 1 USD = 0.6270 GBP;
• c) Thus, we can make the following proportion:
  • 0.9240 EUR = 0.6270 SVR.

As a result, we obtain the following relationship:

1 SVR = 0.9240 EUR: 0.6270 = 1.4737 EUR.

Thus, the client’s purchase of pounds sterling for euros (and for the bank – sale of pounds sterling for euros) will be equal to:

1 GBP= 1.4737 EUR.

Similarly, you can calculate the GBP sale rate for the client (purchase rate for the bank):

1 GBP = 0.9220: 0.6277 = 1.4688 EUR.

This deal can be summarized as follows:

Example 3

Let's solve a similar problem for the case when one of the currencies has an indirect quotation. Suppose a British exporter wishes to convert export proceeds received in German marks into pounds sterling, and the following currencies are quoted against the US dollar.

• 1 SVR = 1.5930-40 USD.
• 1 USD = 1.4964-74 CHF.

Our task is to determine the course of SVR to CHF.

In this case, the bank first sells Swiss francs for US dollars at the offer rate: 1 USD = 1.4974 CHF. Then the bank will buy pounds for dollars at the offer rate: 1 SVR = 1.5940 USD.

Schematically, this transaction can be represented as follows:

1 GBP/CHF = 2.3838 – 2.3868

Now let’s find the purchase rate for pounds sterling for Swiss francs using a chain equation:

X CHF = 1 SVR

• 1 SVR = 1.5930 USD
• 1 USD = 1,4964 CHF
• 1,5930 1,4964 = 2,3838

The spot market (spot transactions) is the largest segment of the foreign exchange market. In relation to conversion operations, the English language has adopted the stable term Foreign Exchange Operations. Its share in the total volume of transactions on the global foreign exchange market is 90%.

When firms are involved in the transactions, the spot transaction is carried out as follows. The client makes an application to the bank to buy or sell a certain amount of currency in exchange for another. Regardless of the purchase volume, the bank gives a currency quote, which contains two parts: bid and offer. The difference between them is called the spread, and it is used to calculate the bank's commission for a foreign exchange transaction. Thus, the price of a currency is largely determined by the banking institution's spread. The bank sets a larger spread for small transactions, since the rate provides for compensation of fixed costs that arise during the implementation of transactions. For large firms with high ratings, banks offer transactions with a narrower spread, which corresponds to a smaller share of profits in exchange for a larger volume of transactions. All this allows banks to earn satisfactory profits from the foreign exchange transactions of their clients. In addition, the spread can be large for limited circulation currencies, which is associated with higher risk and coverage costs.

When determining the result of a transaction, the amount of the quoted currency spent on the exchange of the quoted currency is equal to:

P h = P a R.

Conversely, the amount of currency when exchanging the quoting currency is equal to:

P h = P b /R.

Where R A – quoted currency; R b – quotation currency; R – rate A in foreign currency IN.

Depending on the type of transaction, either the purchase rate or the sale rate is selected.

Example 4

1 EUR = 1.0702–07 USD.

When a client purchases 10,000 EUR from a bank, he must pay: 10,000 1.0707 = 10,707 USD.

When a client sells 10,000 EUR to a bank, the client will receive:

10,000 1.0702 = 10,702 USD.

The difference of 10,707–10,702 = 5 USD is the bank’s margin.

Thus, the bank adheres to the principle of buying a quoted currency at a lower rate, and selling a quoted currency at a higher rate.

Problem 1

The bank in Basel set the following quotation:

1 USD = 1.4944–64 CHF.

Define:

• a) how many Swiss francs will be received when exchanging 100 USD;
• b) how much USD will be received when exchanging 1,000,000 CHF.

Solution

• a) 100 1.4944 = 149.44 CHF;
• b) 1,000,000: 1.4964 = 668,270.5 CHF.

Problem 2

The bank in St. Petersburg established the following rates for selling and buying euros based on quotes from the Central Bank of the Russian Federation:

1 EUR = 33.40–33.60 RUB.

Define:

• a) how many rubles will be received when exchanging 10,000 EUR;
• b) how many EUR will be received when exchanging 1,000,000 RUB.

Solution

• a) 10,000 33.40 = 334,000 RUB;
• b) 1,000,000: 33.60 = 29,761.9 EUR.

Problem 3

The London bank set a quote of 1 GBP = 1.6124–34 USD. Define:

• a) how much GBP will be received when exchanging 1000 USD;
• b) how much USD will be obtained when exchanging 1000 GBP.

Solution

• a) 1000: 1.6134 =619.8 SVR;
• b) 1000 1.6124 = 1612.4 USD.

A special place in spot currency transactions is occupied by arbitration deals, those. operations undertaken with the aim of profiting from probable changes in the exchange rate. Arbitrage transactions are the main source of income for many financial entities. There are equalizing, differentiated (spatial) and temporal arbitration. Leveling Arbitrage is the use of exchange rate differences in order to make a profit by using an exchange transaction with a third currency. Differentiated (spatial ) arbitrage – the use of price differentiation on different currency trading platforms. Temporal arbitrage – the use of differentiation of exchange rates at different time intervals.

If a participant in the foreign exchange market needs to receive foreign currency after a certain period of time, he can enter into a so-called forward contract to purchase this currency today for delivery in the future. Forward currency contracts include direct forward contracts, swaps, futures contracts, and currency options. Both direct forward contracts and futures contracts are agreements between two parties to exchange a fixed amount of currency at a specified date in the future at a pre-agreed exchange rate. Both contracts are binding. The difference between the two is that a forward contract is entered into outside an exchange, while a futures contract is purchased and sold only on a foreign exchange exchange, subject to certain rules, through an open bid for the price of the currency.

Currency option An option of exchange is a contract that gives the right (but not the obligation) to one of the parties to the transaction to buy or sell a certain amount of foreign currency at a fixed price over a certain period of time. The buyer of the option pays a premium to the seller in return for his obligation to exercise the above right.

Swap(from English swap - exchange) is, in general terms, the exchange of foreign exchange assets with different financial characteristics between monetary institutions for a short period. Conducted most often between central banks, a swap allows a country's foreign exchange reserves to increase for a short period of time without transferring the risk of that exchange to the person coming to the rescue. The central bank making a request for an exchange receives at its disposal for a limited period and at a small percentage a certain amount of currency, for which it transfers to its partner the same amount, but in its national currency. The transaction is completed by canceling the transaction, i.e. return of received deposits. Western central banks are linked by a network of standing swap agreements that allow them to quickly provide each other with the support they need without wasting time on preliminary negotiations.

Often, in cases where a futures contract does not result in actual delivery of an asset, these derivative financial instruments are called derivatives. Derivative currency instruments (derivatives) are used, on the one hand, for speculative transactions, and on the other, for hedging foreign exchange transactions, i.e. for insurance of currency risks. When hedging, economic agents, wanting to reduce the risk associated with exchange rate fluctuations that may have a negative effect on their capital, seek to get rid of net liabilities in foreign currency, i.e. achieve a balance between assets and liabilities in a given currency.

If, for example, an exporter from Germany receives foreign exchange earnings of $100,000 and wants to eliminate the uncertainty of estimating their future value, he can immediately exchange the received dollars for euros at the current rate and invest them at interest in Germany, regardless of the deadline by which this amount will be required. But, on the other hand, the exporter can buy derivatives in foreign currency and hedge the transaction by purchasing a futures contract.

Finally, the foreign exchange market allows for currency speculation, i.e. play on the future price of a currency. The behavior of foreign exchange market participants who want to get the maximum benefit from a foreign exchange transaction depends on the difference between interest rates, as well as on the expected revenue. Thus, if a German exporter who receives $100,000 in foreign exchange earnings that he will need in six months does not expect any changes in the exchange rate, he will invest the amount received in an American bank if the interest rate in the United States higher than in Germany, and will exchange dollars for euros after a six-month period. If the interest rate is higher in Germany, the exporter will immediately exchange the amount received into euros and invest them in German banks. If we assume that the level of interest rates in the USA and Germany is the same (for example, 4% on a six-month deposit), but the euro is expected to depreciate from 0.9 euros per dollar to 1.0 euros per dollar, then it is more profitable for the exporter to put money in an American bank and exchange them for euros in six months, which will allow him to receive a larger amount - 104.0 thousand euros (1.0 1.04 100 thousand = 104.0 thousand euros) instead of 93.6 thousand euros (0. 9 1.04 100 thousand = 93.6 thousand euros) today.

Thus, the general rule for speculative transactions in foreign currencies is that their profitability depends on how much the currency will fall in value beyond the difference in interest rates on deposits in domestic and foreign currencies. However, speculative operations are profitable only if market participants are able to correctly predict expected changes in the exchange rate.

In recent decades, the nature of trading has changed in the foreign exchange market: there has been a significant increase in transactions that are executed in the future (Table 6.2). This was largely due to:

• acceleration of the transfer of the most relevant information using modern means of communication;
• globalization and interconnection of national markets, as a result of which changes in one of the centers of world trade affect the state of the world foreign exchange market as a whole;
• liberalization of legal conditions and weakening of government regulation in the field of foreign exchange trade.

Table 6.2

Volume of the global foreign exchange market (billion dollars per day)

Source: International Financial Statistics. Yearbook. Wash., 2005; Bank for International Settlements, 2011.

During the crisis year of 2009, the turnover of the global FOREX currency market decreased by almost 25%. In 2010, its turnover exceeded pre-crisis levels, reaching $4 trillion per day. The development of trading in futures contracts was facilitated by the specialization of exchanges, when, along with traditional currency exchanges, exchanges specializing in futures trading in currencies and financial assets began to function. Examples of such exchanges in long-established global currency trading centers include the London International Financial Futures Exchange (LIFFE) or the European Options Exchange in Amsterdam (European Options Exchange (EOE), the German Derivatives Exchange in Frankfurt (Deutsche Terminboerse, DTB). The Singapore International Monetary Exchange (S1MEX), the Sydney Futures Exchange (SFE), and the Austrian Futures Options Exchange in Vienna (Oesterreichische Termin Optionsboerse, OSTOV) began operating on the relatively new global currency markets. The increase in trading in futures contracts has led, on the one hand, to an increased sensitivity of the foreign exchange market to market changes and to a significant increase in currency fluctuations, and on the other hand, to an increase in opportunities for highly effective investment.

Forward contract (forward contract) is a firm deal, i.e. mandatory, but with the delivery of currency not today, but in the future. The subject of a forward contract can be not only currency, but also other financial assets, such as shares, bonds, etc.

A forward foreign exchange transaction has three features:

• 1) purchase or sale of currency at a pre-agreed date (value date) at a pre-determined price (forward rate);
• 2) the execution of the transaction is separated by more than two business days, i.e. The transfer of currency is carried out after a certain period. The most common terms for this type of transaction are 1, 2, 3, 6 months, and sometimes 1 year;
• 3) at the time of conclusion of the transaction, no deposits or other amounts are usually transferred. The motive for forward transactions is to eliminate exchange rate risks that arise when purchasing currency on the due date.

In forward transactions, two indicators are important: the exchange rate and the interest rate on deposits. The difference between spot and forward rates is called forward margin and is present in the following form:

C f =C s ± FM

When the forward rate is higher than the spot rate, it is a premium, otherwise it is a discount. The size of the forward margin depends on the length of the period under consideration and the so-called difference in interest rates of the two currencies. The forward margin is calculated using the formula

Where C s – spot rate; t – number of days in the forward contract; D – length of the year in the interest period (relative to the US dollar, the length of the year is 360 days; in calculations with the pound sterling, 365 days are used (see Appendix 2)); I f – interest rate of traded (foreign) currency; I d – interest rate of the quotation currency (national currency).

For the calculation, interest rates of the European market are taken, not the domestic market.

Example 5

The rate on loans in dollars is 5%, on deposits in euros – 7%. The euro to dollar exchange rate is 1.3 USD/EUR. It is necessary to calculate the premium or discount when purchasing euros in a month.

The discount will be: (1.3 30 (5–7)) / ((7 30) + (100 360) = –0.00215, and the forward rate: 1.3–0.00215 = 1.29785 USD/EUR.

The forward rate is also called outright in the case where a classic forward transaction is made, freed from additional obligations or clauses.

Let us formulate a general rule for determining whether we have a discount or a premium. The currency with the higher interest rate will trade in the forward market at a discount to the currency with the lower interest rate. Conversely, a currency with a lower interest rate will sell at a premium to a currency with a higher interest rate in the forward market. When setting the forward rate, it is taken into account that during the period before the transaction is executed, the owner of the currency can receive more in the form of interest on the deposit. Therefore, in order to equalize the position of the participants in the transaction, the conversion conditions should be adjusted: in our example, “euro – dollar”, i.e. in this case we are dealing with a discount. Forward exchange rates are not determined as a result of trading on the foreign exchange market, but are set by banks with whom clients enter into forward contracts for the sale or purchase of foreign currency.

The size of the discount (premium) in the foreign exchange market is determined by a special quotation table of forward outright rates (Table 6.3).

Table 63

Calculation of discount in the foreign exchange market

For the US dollar to ruble exchange rate, the forward margin for the buy rate is less than for the sell rate, therefore, its values ​​​​must be added to the spot rate, which gives the following forward rate values:

• 1 month – 29.88–30.01;
• 2 months – 29.93–30.03;
• 3 months – 29.98–30.05.

For the US dollar/euro rate, the forward margin for the buy rate is greater than the sell rate, so its values ​​must be subtracted from the spot rate, giving the following forward rate values:

• 1 month – 1.1505–1.1517;
• 2 months – 1.1500–1.1512;
• 3 months – 1.1494–1.1507.

Since forward foreign exchange transactions are usually concluded for a certain number of months, in the financial press, along with forward buying and selling rates, the ratio of the forward margin (premium or discount) to the spot rate in terms of the annual interest rate is often given:

Where C f – forward rate; C s – spot rate; m – number of months.

Then the Outright table will take the following form (Table 6.4).

Table 6.4

Quote of forward rates outright

The data shows that at the close of trading (Close), the spot rate of the US dollar to the euro is 1.1515, and the pound sterling rate to the US dollar is 1.6235. The change in the exchange rate (Change – Chg) of the dollar to the euro compared to the closing rate of the previous day amounted to +0.0108 euros per dollar. The difference between the buying and selling rates (Bid/offer spread) of the dollar to the euro was 1.1510–1.1520 euros per dollar. Forward dollar to euro exchange rate for 1 month. (One month Rate) was 1.1495. Thus, the dollar to the euro is quoted at a discount or, what is the same, the euro to the dollar is quoted at a premium, which in terms of annual interest will be equal to:

In international practice, along with the difference in interest rates, interest on deposits on the London interbank market is used, i.e. Libor rate. In this case, the forward rate is calculated using the formula

Where C f – forward exchange rate; C s – spot rate; A – interest rate on the interbank domestic market; L – Libor rate.

Example 6

Current rate is 1 USD = 29.85 RUB. Placement of US dollars on the Russian interbank foreign exchange market for one month at 12%, and the Libor interest rate on the international interbank market is 5.6%. Then the forward rate after 24 days will be:

Please note that the outright rate applies only to forward contracts and is different from the forward rate that is used for swap transactions. A forward transaction can be concluded at the exchange rate or at the rate of any business day. Those dates that do not correspond to calendar monthly dates are called non-round, or non-standard. Prices or rates for these dates are usually calculated based on linear interpolation, or extrapolation.

The formula for linear interpolation, or extrapolation:

Example 7

The bank enters into a forward contract on March 1 for the delivery of 2 million euros for dollars on April 20. The monthly premium will be 55 points (or 0.0055), the two-month premium will be 75 points.

Thus, the premium for 51 days (from 01.03 to 20.04) will be:

The international interbank foreign exchange market is considered the largest market for forward transactions, although there are no official statistics on its turnover. Forward foreign exchange contracts usually have terms of 1, 2, 3, 6 and 12 months, although they can have other terms. Since this fixes the duration of the contract rather than the delivery date, new contracts are entered into the market every day. For example, a buyer who purchased a 1-month contract on June 2 for delivery on July 1 cannot sell it on June 6 because 1-month contracts entered into on that day have a July 5 delivery date.

Combinations of spot and forward transactions (purchase through a spot transaction and sale through a forward transaction, and vice versa - sale through a spot transaction, and purchase through a forward transaction) are called swap transactions. Standard swaps are concluded for a period of one week, and the purchase is carried out at the spot OFFER rate, and the sale is carried out at the outright rate BID . The difference between spot and forward rates is called swap rate.

Example 8

The trader carries out a monthly swap for the purchase/sale of 10 thousand euros for dollars at the spot rate of 1.35 USD/EUR and the forward rate of 1.36 USD/EUR. Buying spot and selling forward gives the trader a swap contract with a rate of 0.01 with a volume of 0.01 10,000 = $100.

The motives for a swap transaction can be: exchange rate insurance when investing liquid funds or receiving a loan in foreign currency; prolongation; covering the need for liquidity for payment purposes or in case of delay in payment in foreign currency; equalization of an open position, especially in interbank trading.

Traditional participants in swap transactions are central banks, which buy foreign currency from each other with a return delivery in the future at a set rate. The demand for such a transaction for the central bank is due to the need to conduct foreign exchange interventions in the domestic foreign exchange market to compensate for any fluctuations in the exchange rate of the national currency.

Currency swaps must be distinguished from interest rate swaps, where floating rate debt is exchanged for fixed rate debt. Currency swaps, as well as combined interest rate currency swaps, unlike pure interest rate swaps, are accompanied by real capital movements.

Currency swap transaction (currency swap) is an operation in which a cash (on spot) purchase (sale) of currency is carried out A in exchange for currency B with simultaneous sale (purchase) of the same amount of currency A in exchange for currency IN for a period (on forward terms). Let's depict this transaction in a diagram:

I. Sale of currency A.

• 1. Conclusion of a forward for the sale of currency A.
• A , its conversion into currency IN
• 3. Currency supply A for settlement in foreign currency IN.
• A.

II. Buying currency A.

• 1. Conclusion of a forward for the purchase of currency A.
• 2. Obtaining a loan in foreign currency IN, its conversion into currency A and storage on deposit until the forward contract expires.
• 3. Currency supply A under a forward contract for settlement in foreign currency IN.
• 4. Loan settlement in foreign currency IN.

For the client, the second operation is a simple forward transaction (outright transaction). The bank simultaneously carries out two exchange operations: at the exchange rate, it buys foreign currency and at the same time sells it at the forward rate. This operation is called a short-term currency swap.

In this case, for a future purchase from a client of the amount P in foreign currency, the bank borrows this amount and exchanges it for an amount in national currency:

Where R s is the spot rate for purchasing foreign currency on the interbank market.

When placing this amount on deposit for a period t days the amount will be received:

Where i B – annual interest rate on currency IN in relative units; T – estimated number of days in a year.

The amount in foreign currency that will need to be repaid on the loan with interest at the annual rate i A , will be:

If the forward currency purchase rate from the client is equal to:

then when exchanging interest on a deposit in national currency at the same rate for an additional amount in foreign currency, used together with the amount received from the client R To repay the loan, the bank will repay it in full with interest without receiving any income.

Thus, this forward rate for purchasing currency from a client is a non-profitable (break-even) rate for the bank, also called the theoretical forward rate. To receive income from the operation, the bank must buy foreign currency from the client at a slightly cheaper price. The reduction in the purchase rate should also compensate for the possible difference between the theoretical forward rate and the real current rate at which the bank will exchange interest on a deposit in national currency IN.

When making such calculations, it should be taken into account that in global financial practice, the estimated number of days in each month and year when calculating income can be determined in the following ways:

• each month is equal to 30 days with 360 days a year (30/360) (German practice);
• the duration of each month is taken according to the calendar with 360 days a year (fact/360) (French practice);
• The duration of each month is taken according to the calendar with 365 days a year (fact/365) (English practice).

Example 9

A Russian investor wants to sell the US dollars received from foreign investments to the bank in 3 months. in exchange for rubles. The dollar to ruble exchange rate on the foreign exchange market is 25.65–26.02; rates on the money market for three months are equal (% per annum): for the ruble 45–55; in US dollars 10–18. The forward purchase rate of US dollars should provide the bank with a profit of 1% of the transaction amount in dollars.

To eliminate its currency risk, the bank will carry out a swap operation with the ruble by borrowing US dollars, converting them into rubles and placing the received rubles on deposit while simultaneously concluding a forward transaction to purchase dollars.

The theoretical forward purchase rate for the 30/360 calculation method would be:

Profit rate of 1% for 3 months. in terms of the annual interest rate will be: i A = 1,360/90 = 4% per annum, which will be equivalent to the additional forward margin:

FM A = 0.04 31.51 90/360 = 0.31 rub. per dollar

Since the bank must buy dollars cheaper than the theoretical break-even rate to make a profit, the forward dollar purchase rate it sets will be equal to:

R f = R s – FM A = 31.51 – 0.31 = 31.20 rub. per dollar

The forward exchange rate for the sale of currency by a bank to a client can be calculated in a similar way. At the same time, the theoretical forward rate should be slightly increased to ensure the bank's income.

Futures contracts (futures contracts). Currency futures as a derivative are closest to a forward and are an exchange contract to exchange one currency for another at a predetermined price at a certain period in the future. The first currency futures appeared in 1972 in Chicago (Chicago Mercantile Exchange) on a specially created international money market, and later also on exchanges in Philadelphia (Philadelphia Board of Trade) and New York (New York Cotton Exchange). Currently, many currency exchanges around the world trade currency futures.

Futures contracts are concluded between the buyer (seller) and the exchange. In other words, for each transaction essentially two contracts are written: one for the purchase of currency in the future, the second for sale. To ensure that contract owners fulfill their obligations, they must make a corresponding contribution to the exchange clearing house - the starting guaranty margin. Typically, the initial margin ranges from 1 to 10% of the contract price, depending on the type of asset in question and the location of the exchange. In addition, exchanges establish a supporting margin - a minimum level below which the amount in the margin account of the contract owner, taking into account his possible losses, should not fall. The maintenance margin on various exchanges is usually 70-80% of the initial margin, although it can be equal to the initial margin.

A futures contract differs little in form from a forward contract, but in essence there are serious differences between them (Table 6.5).

Table 6.5

Key differences between futures and forward contracts

As practice shows, futures contracts are rarely used for physical delivery of the corresponding asset (currency). Most of their holders close their positions before the expiration date in order to hedge or benefit from movements in exchange rates.

The futures price is quoted per unit of the asset, i.e. per unit of foreign currency. For example, on September 18, 2006, on the MICEX it was possible to conclude futures contracts for 1000 US dollars for September 2007 (expiration date September 17, 2007) at a price of 26.2975 rubles. for 1 dollar. This means that the buyer of the contract undertakes to buy, and the seller of the contract - to sell 1000 US dollars at a price of 26.2975 rubles. for 1 dollar September 17, 2007

Currency futures, unlike currency forward contracts, are standardized exchange-traded contracts. On the largest futures platform, the Chicago Mercantile Exchange (CME), futures contracts for euros, pounds sterling, Japanese yen and Swiss francs are traded. Quotes of currency futures on CME are usually published in the following form (Table 6.6).

Table 6.6

Futures contract quotes

From this data it is clear that on CME it was possible to purchase a standard contract to buy or sell 62,500 GBP (a multiple of approximately 100,000 USD) in September. The price at the opening of trading was 1.6635, and at closing – 1.6665 USD per SVR. The highest and lowest prices of the day were 1.6720 and 1.6575 USD per GBP, respectively. The change in closing price compared to the previous trading day was 0.0125 USD per GBP. The number of open contracts at the end of the day was 38,223 futures.

Futures prices change throughout the trading day and from one day to the next. As a result, all positions in open futures contracts are reset to reflect the new market price at the end of each trading day. If the price of the asset increases, the buyer of the contract immediately receives cash in his account in the amount of the winnings. In case of a loss, its amount is debited from the account of the contract owner. Calculations for the futures currency contract for 62,500 GBP (settlement in US dollars) are given in table. 6.7.

Table 6.7

Futures Contract Margin Account

If the positions had been closed on the fifth day of trading with the seller's account balance being $9,376, the buyer of the contract's before-tax income and the seller's loss would have been $624 ($10,000–$9,376) per contract. The rate of return of the contract buyer for 5 days based on the average invested capital was:

Example 10

According to the results of trading on the MICEX on November 13, 2006, the price of a futures contract for 1000 US dollars for delivery in February 2007 was 26.6644 rubles. for a dollar. According to the results of trading on November 23, the futures price was 26.6732 rubles. for a dollar. The buyer of the contract received a profit: 26.6732–26.6644 = 0.0088 rubles. per dollar, or 0.0088 1000 = 8.8 rubles. per contract. The seller of the currency under the futures contract received a loss of 8.8 rubles at the end of the day. per contract.

If the guarantee margin was 0.50 rubles. per dollar, the current return on investment in the futures contracts in question from November 13 to November 14, 2006 was:

If the futures contract holder's account falls below the maintenance margin, he must make an additional deposit before the start of the next trading day. If this is not done, the broker closes the contract holder's position. This is possible due to the fact that the currency futures market is highly liquid, and an existing position can be closed at any time with a reverse transaction. However, as with commodity futures, very few contracts are executed with actual delivery of currency at their expiration date.

The existing international computer trading system GLOBEX provides round-the-clock trading and allows you to open a position on one exchange and close it on another exchange.

Futures contracts are widely used for hedging.

Example 11

On March 8, the entrepreneur purchases six June futures contracts for the purchase of euros at the rate of 1.3520 USD/EUR, amounting to 100 thousand EUR. Net long position in June will be 6,100,000 ( S – 1.3520), where S – spot rate in June. The trader will make a profit only if the exchange rate exceeds 1.3520, for example 1.3620.

In order to hedge profits, the entrepreneur buys the same amount of futures for the sale of euros at the rate of 1.4020 USD/EUR. The net short position will be 6,100,000 (1.4020 – S ), Where S – spot rate in June.

Thus, the entrepreneur bought futures for the purchase and sale of euros. By the time the contracts are executed, his net position will be:

6 100 000 (5 – 1,3520) + 6 100 000 (1,4020 – S ) = 6,100,000 (1.4020–1.3520) = $30,000

Currency options (Sirrepsu option ). Currency options are not a completely new type of foreign exchange transaction. Attempts to create an over-the-counter options market for currencies were made back in the 1920s and 1940s. However, the currency options market became most popular in 1982, when the European Options Market was created in Amsterdam and Montreal (Montreal Exchange). Today, the main centers for trading currency options are Chicago (Chicago Mercantile Exchange - CME) and Philadelphia (Philadelphia Stock Exchange). In addition, currency options are available in London, Singapore, Bangkok, Sydney and Vancouver.

Under an option agreement, one broker (dealer) writes and transfers an option, and another buys it and receives the right, within the period specified in the terms of the option, or to buy at a set rate (strike price) a certain amount of currency from the person who wrote the option (buy option) , or sell this currency to him (put option). Thus, the seller of the option is obliged to sell (or buy) the currency, but the buyer of the option is not obliged to do this, i.e. he may or may not buy (sell or not sell) currency.

Thus, an option is a form of foreign exchange risk insurance that protects the buyer from the risk of an unfavorable change in the exchange rate above the agreed strike price, and gives him the opportunity to profit if the exchange rate moves in a direction favorable to him above the strike price.

The increase in the exchange (i.e. current) rate compared to the strike price is called upside (from the English. upside - upper side). A reduction in the exchange rate compared to the strike price is called a downside. downside - down side).

There are three types of options:

• 1) buy option, or call option. This option means the option buyer has the right (but not the obligation) to buy a currency to protect against (or in anticipation of) a potential increase in its exchange rate;
• 2) put option, or put option. This type of option means the option buyer has the right (but not the obligation) to sell the currency to protect against (in anticipation of) its potential depreciation;
• 3) double option put-call option ), or optional rack rack ). This type of option means the option buyer has the right to either buy or sell the currency (but not buy and sell at the same time) at the underlying price.

The option indicates the expiration date. An option's expiration date is the date (or period of time) after which the option cannot be exercised.

There are two styles of options: European and American. European style means that the option can only be exercised on a fixed date. American style means that the option can be exercised at any time within the option period.

The option has its own rate. Options rate ( option price ) is the strike price (from English. strike price – price). The option rate is the price at which you can buy (call) or sell (put) a currency, i.e. option asset.

The buyer of the option pays the seller of the option, or the person who wrote the option, a commission called a premium. Premium is the price of an option. The risk of the buyer of the option is limited by this premium, and the risk of the seller of the option is reduced by the amount of the premium received.

Owning an option allows its owner (i.e., the person who purchased the option) to react flexibly in the event of uncertainty about future obligations. The option transaction is not binding on the owner of the option, so if the option is not exercised, the owner can either resell it or leave it unexercised. Foreign exchange options are traded on foreign exchange markets around the world, including markets in the United States, London, Amsterdam, Hong Kong, Singapore, Sydney, Vancouver and Montreal. There are three types of currency options traded in all these markets.

• 1. European off-exchange options. Such options are written by banks for their clients - exporters and importers in accordance with their needs in terms of the size of the contract and the date of its execution. The bank that wrote the option typically enters into a forward contract with another bank or an options contract with an exchange to hedge its risk.
• 2. Stock exchange currency options, which first began to be traded in the early 1980s. on the Philadelphia Stock Exchange.
• 3. Option contracts for currency futures, traded, for example, on the Chicago Board of Trade.

In table 6.8 shows the forms of data on quotes of currency options published in the press.

Table 6.8

Quotation of options contract rates

Symbol R means that trading on this option was not carried out on this day, the symbol S – that this option does not exist. From the above data it can be seen that at the current pound sterling exchange rate of 160.44 cents per pound, it was possible to buy options to buy or sell £31,250. with a strike price of 158 to 164 cents per pound. At the same time, not all existing options were traded on this day, and there were no June options with an exercise price of 163 cents per pound on the exchange.

Example 11

The currency exchange offers an option to buy US dollars with the following parameters:

Transaction volume: USD 10,000

Duration 3 months

Option rate (strike price) 27 RUR/USD. USA

Premium 0.5 rub./dollar. USA

European style

Purchasing this option allows its owner to buy 10,000 US dollars in 3 months at the rate of 27 rubles. for 1 dollar, i.e. the cost of purchasing currency will be 270,000 rubles. ($10,000 27 rubles).

When concluding an option contract, the buyer of the option pays the seller of the option a premium of 5,000 rubles. ($10,000 0.5 rub.). The total cost of purchasing the option and the currency for it is 275,000 rubles. (270,000 + 5).

By purchasing an option, the buyer provides himself with complete protection against an increase in the exchange rate. In our example, the buyer has a guaranteed currency purchase rate of 27 rubles. for 1 US dollar. If on the day the option is exercised the spot rate is higher than the option rate, the buyer will still buy the currency at the rate of 27 rubles/dollar. USA and will benefit from the appreciation of the currency in the market. If on the day the option is exercised the spot rate is lower than the option rate, then the buyer can abandon the option and buy dollars in the cash market at a rate lower than the option rate. Thus, he benefits from the depreciation of the exchange rate.

In an options contract, the premium paid by the buyer plays an important role. According to the Black–Scholes formula, the option price (premium) depends on the following factors:

• execution prices (strike): the more profitable the exercise price is for the buyer at the time the price is set, the greater the likelihood of the option being exercised at a loss for the seller, therefore, the higher the option premium;
• volatility (instability, price volatility ), which is a measure of the volatility of an asset's price. The higher the price volatility, the more likely it is that the option will have value to the buyer at some point in time;
• validity period: the longer the option's life, the more likely it is that it will be of value to the buyer, as the period over which price changes can occur increases;
• interest rates : The premium is paid in advance. Therefore, the value of the option will depend on the current value of the strike price, and therefore on the interest rate;
• type of option : An American option is more expensive because it provides a greater degree of choice for the buyer.

Basic terms and concepts

Assets(assets) - in international financial reporting standards, assets are interpreted as resources controlled by an economic entity as a result of events in past periods, from which it expects economic benefits in the future. The economic benefit contained in assets represents the potential that will enter directly or indirectly into the cash flow of an economic entity.

Arbitrageurs– carry out financial transactions while simultaneously conducting opposite transactions on another market in order to make a profit from the difference in rates on different markets in different regions.

Volatility(instability, variability) is a widely used criterion for the degree of risk of assets, associated with the range of expected rates of return and their probability.

Speculators– they enter into transactions with the aim of making money on favorable exchange rate movements; they have no intention of insuring their transactions.

Hedgers– carry out hedging operations designed to protect foreign exchange earnings from the effects of currency exchange rate risk. Using derivatives market instruments, purchasing forward contracts, futures, options or performing swap transactions.

Currency transactions essentially represent specific forms or types of manifestation of any currency relations in economic activity. In the narrow sense, they are operations related to the fact that ownership rights are transferred to currency values ​​that are used in the form of means of payment in global circulation, for example, the import/export of currency territorially or beyond their borders.

Types and essence of foreign exchange markets on a global scale

According to its economic essence, the financial market is a system of certain relations and a specific mechanism that collects and redistributes financial resources between states, regions, institutional units, industries, etc.

All foreign exchange markets are conventionally divided into the following main types:

— traditional financial markets (national),

- international financial,

- international currency

- and offshore banking.

The listed markets are extremely interconnected and have a huge impact on the placement and movement of financial resources.

Globally, these markets determine the value of currencies, which balances the risk of assets with the required level of return. The essence of these markets is that they provide an opportunity to assess future changes in exchange rates and rates, and also finance balance of payments shortfalls for individual countries.

Video: Types and specifics of foreign exchange markets

Main types of international currency transactions carried out in the financial market and their essence

The foreign exchange market remains one of the largest markets in terms of scale. This type of market plays a very significant role in ensuring the interaction of various components of the world’s financial markets. Let us consider the main types of speculative transactions (operations) carried out in this segment of the world financial market by its main participants.

Let's start with the fact that the main product in the foreign exchange market is any of the financial requirements, mainly denominated in foreign currency. The main type of speculative operations in this market is the exchange of deposits denominated in the currency of one country for deposits denominated in the currency of another country.

There are main types (forms) of transactions with currencies according to the timing:

- forward transactions,

- cash transactions,

— combined transactions (terms and cash).

To combined transactions, include swap operations.

For forward transactions, include options, futures and forwards. Cash transactions are spot transactions that represent the sale/purchase of currency within no more than 2 days from the moment the contract was concluded.

Video: Futures and options trading

Spot markets can serve both private requests and all kinds of speculative operations of companies and banks. The rules of spot markets are not fixed in international and special conventions, but absolutely all their participants strictly obey these rules. Such rules include conducting transactions through computer trading with mandatory confirmation of the advice note (electronic notification) within the next day, payments are made without charging interest on the value of the delivered currencies within 2 business days.

Trading on such a market is carried out directly on the basis of the established exchange rate, and also the cross rate (the ratio of two currencies, which is a derivative of their rates in relation to a third currency). For example, the cross rate of the Japanese currency against the Swiss franc can be calculated based on the rate of the Swiss currency to the US dollar and the Japanese currency to the American one.

Also in this process, an important role is played by the spread – i.e. the difference between the sale/purchase rates of any currency, expressed in percentage and basis points. Currencies are quoted up to a basis point, i.e. 4th decimal place, or 5th for small denomination currencies, for example, Turkish lira, Japanese yen, etc.

Of no small importance when making transactions is the date when the funds unconditionally come into the personal possession of the parties to the transaction, i.e. value date. The standard date, as mentioned above, is the second day. But there may also be non-standard solutions that shorten the terms of spot transactions, while the amounts of supplied currencies are adjusted.

The following type of foreign exchange transactions– a currency exchange forward contract, which is an agreement between the client and the bank for the sale or purchase in the future, on a certain date, of a certain amount of the required foreign currency, but mandatory.

In such contracts, the payment date, exchange rate, amount and name of the currency are fixed at the conclusion of the transaction. The term of such transactions can last for several days and even years. , are considered banking, and they do not have standards and their conditions are negotiated with each client personally.

In forward markets, exchange rates are also quoted and calculated ( <= Подробнее по ссылке ). The main purpose of any forward transaction is to hedge the risks that accompany any foreign exchange transactions on global markets. In other words, bank clients fix a certain exchange rate and exchange dates for themselves, thereby shifting the risks of unfavorable changes to counterparties (banks).

The next type is futures operations. The essence of these transactions is very similar to forward contracts. Just like the conclusion of the latter, futures involve the supply of the required currency over a certain time period, only here it is fixed - a maximum of three days from the moment of the immediate conclusion of the transaction. The cost of execution of such contracts is also determined at the time of their signing. The purpose of concluding futures contracts is again to hedge against upcoming currency risks.

But besides the similarities between futures and forwards, there are also significant differences...

One of the main differences, is the place where these transactions are concluded. Forward contracts are concluded on interbank markets, and futures on exchange markets. This difference is the reason why futures contracts are permanently tied to specific expiration dates, i.e. dates, for example, the second Friday of each month, and they are also standardized in terms of delivery conditions and volumes. When concluding a forward contract, as we said above, all conditions are negotiated individually with a specific client.

Next difference– limitation of futures transactions by the number of currencies. As a rule, when making these types of transactions, they operate only with $, British pound, Japanese yen and Euro. When concluding a forward, the range of currencies being operated is much wider. Finally, futures markets are available not only for participation by large clients, but also for small investment institutions and small individual investors. Access to forward markets is limited for small firms.

And another type of foreign exchange transactions– . This type of transaction differs from the previous ones in that it is a contract that gives the right to sell or buy a certain currency in the required quantity for the future at prices fixed at the current time.

The essence of options is as follows: their direct owners can choose to either sell them at a fixed price or refuse to sell them completely. In other words, option holders have rights, not obligations, to take certain actions.

Financial market and exchange rate - direct relationship

The exchange rate is a key parameter of the financial market. Of course, foreign exchange markets are an environment in which transactions are carried out involving the purchase of one currency and the simultaneous sale of another currency, or vice versa, one currency is sold and another is bought. In fact, it is the process of exchanging currency in certain proportions. Such proportions depend on the exchange rate, which is a specific price that determines the ratio of monetary units of the participating countries.

Today, the world monetary system has greater flexibility compared to what it was originally under the Jamaican agreements. And now, according to the method of setting national currency rates, there are 3 groups of countries.

And the first group includes countries with a fixed (pegged) rate. These states fix the value of the national currency with minimal deviation limits (max 1%), or even with zero possibility of deviation from other foreign currencies or combined currencies. The leaders of such reference currencies are the Euro, the US dollar and the SDR (Special Drawing Right).

The second group consists of countries with limited exchange rate flexibility. The exchange rates of such countries move freely and change depending on supply or demand factors.

The currency of such countries is divided into several forms (subcategories):

— managed fluctuating;

— freely floating (freely fluctuating);

- periodically adjusted.

The second group includes countries with developed industry (Great Britain, Switzerland, Japan, EU countries, USA, etc.).

The third group includes states that determine the range of fluctuations of their own exchange rate in relation to a certain currency basket. The national currency fluctuation limit is revised in direct proportion to the state of the main basket currencies.

Foreign exchange investments and their participants

The financial market for currencies involves the participation of investors, who are brokerage firms, individuals, manufacturing and trading companies, funds, financial companies, banks, currency exchanges, international monetary, transnational companies, etc. organizations.

But at the same time, it must immediately be said that the bulk of participants in foreign exchange markets are commercial banks, which are their main intermediaries. It is these banks that account for the largest share of foreign exchange transactions in the aggregate.

Foreign exchange investments are a kind of independent line of business that covers various areas (services, international trade, tourism, currency speculation, cash transactions, etc.).

Current economic development is also characterized by an integration process that has a significant impact on financial markets. And the strengthening of financial (currency) dependence requires close coordination in monetary policy from various states in order to prevent the occurrence of economic international shocks.

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Introduction

1. General characteristics of the foreign exchange market and foreign exchange transactions

2. Classification of operations on the global foreign exchange market

2.1 Currency transactions with immediate delivery

2.3 Option

2.5 Currency arbitrage

3. Foreign exchange market and foreign exchange transactions in Russia

3.1 Exchange and interbank foreign exchange market

3.2 Futures market

3.3 Market for cash foreign exchange transactions

Conclusion

Bibliography

INTRODUCTION

Historically, international transactions have distinguished between two main payment methods: tracing and remittance. In tracing, the creditor issues a draft to the debtor in his currency (for example, a creditor in New York makes a demand on a debtor in London for payment of a debt in pounds sterling) and sells it on his foreign exchange market at the buyer's bank rate. In tracing, the creditor is an active person: he sells the bill in the debtor's currency on his foreign exchange market. When remitting, the debtor is an active person: he buys the creditor's currency on his foreign exchange market at the seller's rate. The various payment methods used in international transactions before the First World War and, to a lesser extent, during the interwar period, based on remittance and tracing and servicing foreign exchange transactions, gradually became obsolete as an independent method of payment.

After the Second World War, various types of foreign exchange transactions became widespread. During the period of the spread of foreign exchange restrictions until the end of the 50s in industrialized countries, foreign exchange transactions with immediate delivery of currencies (“spot”) and urgent (“forward”) transactions prevailed, and the latter were often the object of foreign exchange regulation. The liberalization of currency legislation at the turn of the 50s and 60s led to the development of currency swap transactions instead of the previously practiced exchange of deposits in different currencies. The further development of forward currency transactions was associated with the liberalization of capital movements, which created the need for hedging (risk insurance) in addition to traditional operations to cover risks in trading operations.

Increased control by supervisory authorities over the state of bank balance sheets also contributed to the replacement of previously practiced foreign exchange transactions for insuring risks reflected in balance sheets with forward foreign exchange transactions and swap transactions, since they are accounted for in off-balance sheet accounts.

Since the 70s, futures and options currency transactions have been developing - a new form of speculative transactions and hedging against currency risks, especially when the commodity transaction that creates the risk is possible, but not secured (for example, when participating in trading). Banks began to carry out foreign exchange transactions in combination with swap operations with interest rates. Cash foreign exchange transactions are carried out by most banks, forward transactions and “swap” transactions are carried out mainly by larger banks, regular option transactions are carried out by the largest banks.

Due to the widespread development of international currency markets and the emergence of an increasing number of foreign exchange transactions, the relevance of this topic is very high. At this stage, many developed and developing countries are moving to a single international currency, with the help of which international trade is carried out. Operations in the foreign exchange market ensure successful interaction between countries participating in international relations, regulate prices for foreign currency, and play an important role in the country’s economy.

The purpose of this work is to study foreign exchange transactions carried out on the global foreign exchange market. To achieve this goal, the following tasks can be identified:

Consideration of the foreign exchange market, its concept and essence;

A detailed study of the entire range of foreign exchange transactions,

Analysis of the state of the foreign exchange market of the Russian Federation, operations carried out on the Russian foreign exchange market.

21 sources were used as an information base, including various periodicals, textbooks, and teaching aids.

1. GENERAL CHARACTERISTICS OF THE CURRENCY MARKET AND CURRENCY OPERATIONS.

1.1 Concept and essence of the foreign exchange market

International relations - economic, political and cultural - give rise to monetary claims and obligations of legal entities and citizens of different countries. The specificity of international payments lies in the fact that foreign currencies are usually used as the currency of price and payment, since there is still no generally accepted global credit money that is obligatory for acceptance in all countries. Meanwhile, every sovereign state uses its national currency as legal tender. Therefore, a necessary condition for settlements on foreign trade, services, loans, investments, interstate payments is the exchange of one currency for another in the form of purchase or sale of foreign currency by the payer or recipient.

Foreign exchange markets are official centers where the purchase and sale of foreign currencies into national currencies takes place at the rate determined on the basis of supply and demand.

International payment turnover associated with the payment of monetary obligations of legal entities and individuals from different countries is serviced by the foreign exchange market.

The foreign exchange market in the broad sense of the word is the sphere of economic relations that arise during the implementation of transactions for the purchase and sale of foreign currency, as well as operations for the movement of capital of foreign investors. In the foreign exchange market, the interests of investors, sellers and buyers of currency values ​​are coordinated. Western economists characterize the foreign exchange market from an organizational and technical point of view as a total network of modern communication means connecting national and foreign banks and brokerage firms.

Currency exchange transactions have existed since time immemorial in the form of money changers in the ancient world and the Middle Ages. However, currency markets in the modern sense emerged in the 19th century. This was facilitated by the following prerequisites:

Development of international economic relations;

Creation of a global monetary system that imposes certain obligations on participating countries in relation to their national monetary systems;

Widespread use of credit facilities for international payments;

Strengthening the concentration and centralization of banking capital, developing correspondent relations between banks of different countries, spreading the practice of maintaining current correspondent accounts in foreign currency;

Improving means of communication - telegraph, telephone, telex, which made it possible to simplify contacts between foreign exchange markets and reduce the degree of credit and currency risks;

Development of information technology, high-speed transmission of messages about exchange rates, banks, the status of their correspondent accounts, trends in economics and politics.

As national markets and their mutual connections developed, a single global foreign exchange market emerged for the leading currencies in the world's financial centers. Modern world currency markets are characterized by the following main features.

1. Internationalization of foreign exchange markets based on the internationalization of economic relations, the widespread use of electronic means of communication and the implementation of transactions and settlements on them.

2. Operations are carried out continuously throughout the day, alternately in all parts of the world. Work on the foreign exchange markets in accordance with the calendar day based on time zones from the prime meridian passing through Greenwich -- Greenwich Meridian Time (GMT), begins in New Zealand (Wellington) and passes successively time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt am Main, London, New York and Los Angeles.

3. The technology of foreign exchange transactions is unified; settlements are carried out using correspondent accounts of banks.

4. Widespread development of foreign exchange transactions to insure currency and credit risks. At the same time, previously practiced foreign exchange transactions reflected in bank balance sheets are replaced by forward and other foreign exchange transactions, which are accounted for off-balance sheet items.

5. Speculative and arbitrage transactions far exceed foreign exchange transactions associated with commercial transactions; the number of their participants has increased sharply and includes not only banks and TNCs, but also other legal entities and even individuals.

6. Instability of currencies, the exchange rate of which, like a kind of exchange commodity, often has its own trends that do not depend on fundamental economic factors. The world foreign exchange market is the most powerful and liquid, but extremely sensitive to economic and political news.

From a functional point of view, foreign exchange markets provide:

Timely execution of international payments;

Insurance of currency and credit risks;

Interrelation of world currency, credit and financial markets;

Diversification of foreign exchange reserves of banks, enterprises, and the state;

Regulation of exchange rates (market and state);

- receipt of speculative profit by their participants in the form of differences in exchange rates;

Carrying out a monetary policy aimed at state regulation of the economy, and more recently as an integral part of a coordinated macroeconomic policy within a group of countries (G7, OECD, EU). In terms of volume of transactions, the foreign exchange market significantly exceeds other segments of the financial market. Thus, the daily volume of transactions in 1997 on the stock market was estimated at 100-150 billion dollars, on the bond market - 500-700 billion dollars, and on the foreign exchange market - 1.4 trillion. dollars (versus 205 billion dollars in 1986).

The instruments of transactions in the foreign exchange market have undergone significant changes; during the period of free competition capitalism under monometallism, non-cash international payments using credit means of international settlements prevailed, which received significant development. Gold mainly served as the final means of repaying international obligations when the exchange rate reached gold points and it became profitable for the debtor to pay in gold rather than in mottos. The instruments of foreign exchange transactions have long been commercial bills of exchange (drafts) - claims issued by an exporter or creditor to an importer or debtor. With the development of banks, they began to be replaced by bank bills and checks, and from the second half of the 19th century. -- translations. A bank bill is a bill issued by a bank of a given country to its foreign correspondent. Having purchased these bills from national banks, debtors (importers) send them to creditors (exporters), thus paying off their debt obligations. The bank bill is gradually being replaced by the bank check. Bank check - a written order from the bank that owns holdings abroad to its correspondent bank to transfer a certain amount from its current account to the holder of the check. Exporters, having received such checks, sell them to their banks.

Credit means of circulation, replacing gold in international payment circulation, contribute to savings in circulation costs and the development of mutual non-cash payments between banks and countries.

In modern international payment transactions, bank transfers are widely used - postal and especially telegraphic. Transfer is an order from a bank to a correspondent bank in another country to pay, at the direction of its client, a certain amount in foreign currency from its account. When making a transfer, the bank sells the client foreign currency for national currency. Telegraphic transfers allow you to speed up settlements, reduce the use of credit and protect against currency losses that arise during the period of sending a bill, check, or postal order. The use of a special code (“key”) for telegraphic transfers eliminates abuse (fictitious transfers) and guarantees against errors. With the development of the SWIFT system, electronic means began to be used for transfers. Foreign exchange transactions are increasingly losing their material basis and exist in the form of entries in correspondent accounts.

From an institutional point of view, foreign exchange markets are a collection of banks, brokerage firms, corporations, especially TNCs. Banks carry out 85-95% of foreign exchange transactions among themselves on the interbank market, as well as with commercial and industrial clients. In accordance with national banking or currency legislation, the rights of banks to carry out international operations and currency transactions during crises are limited or special permission (license) is required. This may apply to all foreign exchange transactions or some of them, for example, foreign exchange transactions with residents for banks in offshore zones.

Banks that are granted the right to conduct foreign exchange transactions are called authorized, motto or foreign exchange. Not all bank banks can participate equally in foreign exchange market operations. The size of the bank, its reputation, the degree of development of the foreign network of branches and affiliates, the volume of international payments made through the bank - these factors largely determine its role in the foreign exchange markets. A certain role is played by periodically introduced currency restrictions, the state of telex and telephone communications in the places where the bank is located, as well as its policies. Therefore, the largest volume of foreign exchange transactions falls on the share of transnational banks (TNB): Citibank, Chase Manhattan Bank, Deutsche Bank, Dresdner Bank, Barclays Bank, Union Bank of Swizeriand, Sumitomo, Bank, Mitsubishi Bank, ABN Amro, etc. These banks carry out transactions for very large amounts (100-500 million dollars), while a standard transaction from 1 to 10 million dollars has a significant impact on the state of the foreign exchange market and has a competitive advantage in the fight for profitable transactions. Having a network of overseas branches, they carry out foreign exchange transactions alternately through their overseas branches 24 hours a day.

A new participant in the foreign exchange market has become investment funds that carry out diversified management of asset portfolios, placing currencies in highly liquid and reliable securities of governments and corporations of various countries. The most famous are the Quantum fund of George Soros, the Dean Witter fund, and the international hedge fund Long-Term Capital Management. In the context of liberalization of foreign exchange markets, their appearance is associated with the need to insure increased currency and credit risks. As a rule, TNB and investment funds take part in their creation. Therefore, significant sums are concentrated in hedge funds, allowing not only to insure risks, but also to enter into large speculative transactions that can reduce the exchange rate of small countries.

Participants in foreign exchange markets include the central banks of countries, which through these markets manage foreign exchange reserves, maintain the exchange rate of the national currency, conduct foreign exchange intervention, and regulate interest rates on investments in the national currency. The central banks of the USA (Federal Reserve System), Germany, and Great Britain have the greatest influence on world currency markets.

Non-banking institutions (insurance and pension funds, investment companies) participate in the foreign exchange market. However, these institutions use brokerage firms as intermediaries in the market, which are another important participant in the foreign exchange market, performing intermediary functions between sellers and buyers of currency. The advantages of working through a broker include anonymity of transactions, continuity of the quotation process, and the ability to offer your own prices. The volume of foreign exchange transactions of brokers is constantly growing, covering about 30% of foreign exchange transactions, in the London market - 35%, and slightly higher for transactions with the dollar. In the mid-90s, electronic brokers appeared. The leading positions among broker-dealer firms are occupied by Merrill Lynch Pierce Fenner & Smith, E.F. Hutton, Goldman Sachs, and Morgan Stanley.

Although some countries (Germany, France, Japan, Benelux countries, Scandinavia) have retained currency exchange rates, their role is insignificant, and their functions are organizing currency trading, mobilizing free resources, and fixing reference exchange rates.

Large banks, primarily TNB, have currency departments equipped with computers, telephone and telex communications with other banks, intermediary brokerage firms and global financial centers. They are connected by video link to a telegraph agency (Reuters, etc.), which constantly reports on the most important political and economic events, as well as exchange rates.

Since the 70s, some currency transactions have been carried out on commodity exchanges (for example, currency futures and options transactions on commodity exchanges in Chicago and New York).

In Russia, currency exchanges play a significant role in the foreign exchange market. Among the eight currency exchanges, the Moscow Interbank Currency Exchange dominates. MICEX was created in January 1992. on the basis of the center for conducting interbank foreign exchange transactions of the Central Bank. The MICEX shareholders are the Bank of Russia, 28 commercial banks, the Ministry of Finance, the Moscow Government, and the Association of Russian Banks. The main volume of transactions on the Russian foreign exchange market in 1992-1996. was carried out on the MICEX (75% of exchange currency trading), and based on the results of these trades, the Central Bank established the official exchange rate of the ruble to the US dollar. The subject of transactions are 11 currencies, including CIS countries, whose banks participate in trading through Reuters dealing. Since mid-1997, a system of electronic lot trading in foreign currencies has been in practice, combining the advantages of the exchange and over-the-counter foreign exchange market, which is rapidly developing.

The specificity of currency exchanges in Russia is that they carry out not only foreign exchange but also stock transactions, mainly with government short-term bonds and also with non-government securities. A nationwide system of exchange trading in government securities has been created on the basis of the MICEX trading and depository complex.

In connection with the increasing interconnection between the foreign exchange, credit, financial and gold markets, the largest banks have introduced the concept of a currency room, which combines transactions in these markets carried out in various departments of the bank. This achieves more complete information, close contact between dealers on interrelated operations of different market segments, a coordinated strategy and tactics of action on them. Positions in foreign currencies, investments in gold and securities are considered as alternative forms of liquid investment of bank funds. At the same time, investments in foreign securities and currency and interest rate arbitrage can be supported by currency hedging, creating combined operations in several market sectors. The use of computers makes it possible to monitor bank positions in various currencies every minute, as well as transactions with individual banks. Automated processing of transactions increases the possibilities of turnover, guarantees the accuracy and timeliness of transfers and control over the receipt of currency. The development of a telecommunications system based on SWIFT makes it possible to carry out transactions and transfers on them faster and at lower costs, in particular, to receive confirmation of currency receipts in the morning the next day after the transaction, i.e. before it is actually credited to bank accounts. The electronic Reuters dealing system allows banks to instantly establish contact and make transactions with interested banks connected to this system, reducing the time it takes to search for a partner on the market. However, expensive electronic and computer equipment is available only to large banks that dominate the foreign exchange market. The cost of equipment for a currency room, subscription to the Reuters and Telerate systems, computers and transaction software amounts to millions of dollars, and for large rooms - tens of millions. The world's largest banks have begun to introduce the concept of virtual banks, allowing their clients to carry out a certain set of operations to manage their own account from a remote terminal, buy and sell currencies on global foreign exchange markets without leaving home.

In the second half of the 90s, existing dealing systems (REUTERS dealing 2000, Telereuter, TENFORE, etc.) were supplemented by electronic brokerage systems, which are intensively used for electronic trading in currency pairs. Unlike the traditional currency exchange, where trading is conducted on the floor and by voice, electronic exchanges have appeared - in Chicago, Frankfurt am Main, Tokyo, Singapore and other world markets, the equipment of which not only allows you to receive comprehensive information about exchange rates and interest rates on world markets, make transactions on them, but also conduct analytical work, predict the dynamics of exchange rates.

The dealer staff of foreign exchange departments reaches several dozen, in some cases more than a hundred employees. Among them are dealers, economists-analysts, and managers. Dealers are specialists in buying and selling currencies. The distribution of work between them is carried out by currencies and types of transactions (with commercial and industrial clients, interbank, cash, urgent, etc.). More experienced dealers - senior, main - have the right to carry out arbitrage operations and create speculative positions in currencies. Economist analysts predict the movement of exchange rates and interest rates based on studying trends in economic development, politics, and international payments. They develop econometric models for assessing currency risks and the most effective ways to insure them, which are used to make recommendations in relationships with clients. The main part of the forecasting is carried out on the basis of econometric models using a computer. Determining trends in the movement of currency rates, their fluctuations at certain exchange points on the basis of statistical graphs (charts) plays a big role in the actions of dealers, taking into account “points of resistance”, overcoming which marks the possibility of significant changes in rates. The general management of foreign exchange transactions is entrusted to managers who are guided by the foreign exchange policy approved by the foreign exchange committee - the working body of the bank. In small banks, the dealer simultaneously acts as an expert and operator.

When forecasting and determining trends in the short-term and medium-term dynamics of exchange rates, factors influencing the situation in the foreign exchange market are analyzed - GDP volume, industrial production growth, unemployment rate, wholesale and retail price index, the state of the main items of the balance of payments, and the dynamics of interest rates. Based on the data obtained, a strategy and tactics for conducting foreign exchange transactions are developed. However, the reliability of forecasts is usually low, since foreign exchange transactions are subject to objective and subjective risks. The objective basis of risk is due to the fact that in the long term, exchange rates depend on the economic indicators of various countries, and in the short term - on political events, decisions of government bodies on economic issues, rumors and expectations. The subjective factor is associated with the fact that, within the rights of the dealer, the decision on the volume of transactions in the exchange rate at which the purchase and sale is made depends on his discretion. Since deals worth tens of millions of dollars are concluded in minutes, poor decisions by dealers combined with objective factors, especially on large transactions, can cause significant losses.

The interbank market is divided into direct and brokerage. Therefore, brokerage firms are an integral part of the institutional structure of the foreign exchange market, through which approximately 30% of foreign exchange transactions pass. Brokerage firms charge a commission for brokerage (up to $20 for every million dollars or equivalent bought or sold). With the development of electronic means of interbank communication and foreign exchange transactions (Reuters-dealing, Telerate), the role of brokerage firms in the interbank market has decreased, although they continue to play a significant role in the transactions of individuals and small firms.

In international practice, a system has been adopted for calculating brokerage commissions, the payment of which is divided equally between the buyer and seller of the currency and is not included in the quotation. It is paid by counterparties directly to the broker, usually on a monthly basis. Only in the US currency markets was the brokerage commission added to the sellers' rate for a long time, and after the sale of the currency was paid to the broker. Since September 1978, by decision of the Association of Currency Brokers of New York, the existing international practice of charging brokerage commissions has been introduced in the American foreign exchange markets.

TNCs play a leading role in the foreign exchange market. Transactions with foreign currency occupy an important place in their activities. This is explained by their policy of diversifying foreign currency assets, improving the management of their liquid funds, the desire to reduce the risk of losses from the depreciation of assets in unstable currencies, and to profit from speculation on differences in exchange rates. If the exchange rate of a currency tends to fall, then TNCs transfer assets into more stable monetary units, helping to strengthen them by further deteriorating the position of the weakened currency. Transactions of TNCs in the foreign exchange market serve as one of the factors in changing the exchange rates of leading currencies.

1.2 Types of transactions carried out on the foreign exchange market

Under a spot cash transaction, currency is delivered no later than two business days after its conclusion. It is typical for this transaction that the moment of its conclusion practically coincides with the moment of execution. The delivery date of the currency is called the “value date”. The seller usually transfers the sold currency by telegraph to the account specified by the receiving bank. In case of spot currency transactions, the telegraphic transfer rate is applied, the cash transaction rate is published in quotation bulletins.

The second type of transactions is forward currency transactions. Payment for them is made more than two business days after their conclusion. Interbank forward transactions are called forward transactions. At the time of their conclusion, the rate and amount are fixed, but until the due date (usually 1-6 months) the amounts are not made on the accounts.

Term transactions can serve a variety of purposes. First of all, by carrying out transactions for a period of time, it is possible to cover, or hedge, currency risk, be it a risk of a commercial (trading) or financial nature. In connection with foreign exchange market transactions, we encounter a swap transaction, which combines a spot purchase with a simultaneous short sale (or vice versa). In order not to confuse forward transactions when considering transactions for a period of time, the term purchase and sale “outright” is used for a simple forward transaction, i.e. transaction that does not form part of a swap transaction. “Outright” transactions (simple forward transactions) can serve to hedge against exchange rate fluctuations; however, if they are not of a commercial or financial nature, then we can talk about speculative transactions.

Before going into more detail about the different types of forward transactions, let us first consider how forward rates are expressed.

Rates for term transactions - forward rates - are not quoted as such. In fact, bank dealers work only with differences (differentials), expressed in decimal shares of the quote currency, between spot and forward rates, i.e. with premiums and discounts. Another term for this differential is “swap rate.” Because there may be confusion when talking about swap rates in connection with forward transactions that are not swap transactions, the expression “premium” and “discount” is used.

Quoting forward differentials (agios or discounts), rather than rates in long-term transactions, has its reasons. First, forward differentials very often remain unchanged over time, while spot rates fluctuate. As a result, the quotation of premiums and discounts is subject to less changes than the quotation of forward rates. Secondly, the rate in long-term transactions is not of interest in many cases: for example, in swap transactions, only the swap rate matters, while the spot rate and forward rate do not matter much. In this regard, we use the expression “simple forward outright rate”, or simply “outright rate”, to emphasize that we are talking about the price of a long-term transaction, and not about the swap rate.

The next type of forward exchange currency transactions are futures, which have been carried out since 1972. Their main feature is trading in standard contracts, in which all conditions are regulated in detail - amount, term, calculation method, etc. Almost 99% of transactions are completed by offsetting reverse transactions, since the main goal is hedging (risk insurance) and speculation. A small security deposit is paid in cash at the conclusion of the transaction. The contract amount on derivatives exchanges is less than the average value of interbank transactions (for example, only 25 thousand pounds sterling in British currency). Currently, futures transactions play a significant role only in the US market, where they account for up to 15% of the volume of transactions. It is necessary to pay special attention to the fact that the term “futures” is intended to distinguish forward exchange transactions from forward ones - urgent interbank transactions (by telephone, telex), which are concluded for any amounts and terms, i.e. without standard conditions. When making futures transactions, hedging is used - a form of insurance of price or profit. When hedging, transaction participants have the opportunity to insure themselves against possible losses from price changes during the transaction period.

A type of forward transaction is option transactions: their object is the right to buy (option call) or sell (option put) currency in the future at the rate fixed at the time of the transaction, i.e. This is a transaction with a non-fixed currency delivery date. A small premium is paid to acquire the right to buy or sell currency. If the exchange rate moves favorably during the transaction period, this right is used; otherwise, the paid premium is lost and the currency transaction is not completed (i.e., the option is beneficial if exchange rate fluctuations exceed the size of the premium). The object of the option can be futures contracts. Options are traded both on the interbank market (for example, in London) and on stock, commodity and specialized exchanges (in Amsterdam, Philadelphia, etc.) Option transactions contain a high risk for the bank, so it sets a less favorable rate for client.

Another type of foreign exchange transaction, combining cash and forward transactions; is the swap operation. “Swap” is a foreign exchange transaction that includes the purchase and sale of two currencies on the basis of immediate delivery with a simultaneous counter-transaction for a certain period with the same currencies. In this case, two partners (banks, corporations, etc.) agree on counter payments. For swap transactions, a cash transaction is made at the spot rate, which in a counter (forward) transaction is adjusted to take into account a premium or discount depending on the movement of the exchange rate. At the same time, the client saves on margin - the difference between the rates of the seller and the buyer for a cash transaction. Swap operations are convenient for banks: they do not create an open position (the purchase is covered by the sale), and they temporarily provide the necessary currency without the risk associated with changes in its exchange rate.

Since the 60s, swap operations have been used by central banks of industrialized countries to temporarily bolster their foreign currency reserves during currency intervention.

The next type of currency transactions is currency arbitrage. Currency arbitrage is the use of differences in quotes on international and national currency markets, the principle of currency arbitrage is to buy a currency cheaper and sell it at a higher price. There are several types of arbitrage - with goods, securities, currencies.

Currency arbitrage is a special type of currency transactions, the main purpose of which is to make a profit and avoid possible currency losses by taking advantage of favorable conditions in the currency markets. Types of currency arbitrage:

Leveling is divided into direct and indirect. Direct arbitrage is the use of exchange rate differences between the currencies of the debtor and creditor. Indirect equalization arbitrage involves a third currency that is bought at a very low rate and sold in lieu of payment;

Interest - capital flows to those countries where there are high interest rates. It is associated with operations on the loan capital market and includes two transactions: obtaining a loan on the foreign loan capital market, where rates are lower; placing the equivalent of foreign currency borrowing on the national capital market, where interest rates are higher;

Currency interest is a type of interest. It is based on the bank's use of interest rate differences on transactions carried out at different periods.

Since the meaning of arbitrage is to buy cheaper in one place and sell more expensive in another, the consequence of this is an increase in demand at the place of purchase and an increase in supply at the place of sale.

The difference between currency arbitrage and ordinary currency speculation is that with currency arbitrage, the dealer focuses on the short-term nature of the operation and tries to change his tactics depending on exchange rate fluctuations in the short period between transactions.

1.3 Regulation and control of foreign exchange transactions

When conducting foreign exchange transactions, banks bear various risks. First of all, these risks are associated with the possible presence of uncovered transactions in certain currencies - long or short positions. In forward transactions, there is a risk of non-fulfillment of the contract, for example due to the bankruptcy of the counterparty. In addition, depending on the different start and end times of settlements in individual currencies for a number of foreign exchange transactions, banks, having made a transfer of the sold currency, only find out the next day whether a counter payment was made for the currency they purchased. This occurs due to time differences, for example when a bank sells Japanese yen against Western European and US currencies, as well as Western European currencies against the US dollar.

In order to limit the risk of non-transfer, banks set limits on foreign exchange transactions with other banks based on the size of their capital and reserves, reputation and other criteria. As payments are received for previously concluded transactions, the limits are released. Limits on forward currency transactions are usually lower than on transactions with immediate delivery, since the risk of non-payment under a transaction increases depending on the length of the period from its conclusion to execution, i.e. receiving currency.

Foreign exchange transactions are the subject of government and banking supervision and control. In countries with partially convertible currencies and restrictions on financial transactions, the size of banks' foreign exchange position serves as one of the objects of foreign exchange control. During periods of significant currency instability, currency position limits may be reduced; Limits can also be set for urgent currency transactions - in amounts and terms. However, even with the introduction of full currency convertibility in Western European countries, supervision over foreign exchange transactions of banks remains. Moreover, since the 80s, there has been a strengthening of this control to prevent banks from concentrating foreign exchange risks in their balance sheets and off-balance sheet items. The need for this was demonstrated by the difficulties and bankruptcy of a number of major banks due to losses in foreign exchange transactions. The general trend of regulation is to increasingly link currency risks with the size of banks' own funds.

2. TYPES OF OPERATIONS AND TRANSACTIONS ON THE WORLD CURRENCY MARKET

2.1 Currency transactions for immediate delivery (“spot”)

These transactions are the most common and account for up to 90% of all foreign exchange transactions. Their essence consists in the purchase and sale of currency on the terms of its delivery by counterparty banks on the second business day from the date of conclusion of the transaction at the rate fixed at the time of its conclusion. In this case, working days are counted for each of the currencies involved in the transaction, i.e. if the next day after the transaction date is a non-working day for one currency, the delivery time of the currencies - the value date (value data) - is increased by one day, but if the subsequent day is a non-working day for another currency, then the delivery time is increased by another day. For transactions concluded on Thursday, the normal delivery time is Monday, on Friday - Tuesday (Saturday and Sunday are non-working days).

Preliminary approval of the terms of the transaction - a mandatory condition for its implementation - involves the dealer requesting a quote for a specific amount of the base currency from the partner bank indicating the value date. The key requirement for the counterparties of the transaction is their agreement with all the details of the transaction, such as the amount of the purchased currency, quotation, exchange rate, value date, payment details, name of the company making the request. Once confirmed, the deal is considered concluded and can only be terminated by mutual agreement of the dealers.

Under spot transactions, currency is delivered to accounts specified by the recipient banks. The two-day period for transferring currencies was previously dictated by the objective difficulties of carrying it out in a shorter period of time. The widespread use of electronic communications (SWIFT), electronic clearing settlement systems (CHIPS in the USA, CHAPS in England, etc.), computer processing of transactions makes it possible to carry out transactions much faster.

Foreign exchange transactions with immediate delivery are the most mobile element of a foreign exchange position and involve a certain risk. The technique for performing them includes several stages. Before the foreign exchange markets of a given country begin to operate, dealers become familiar with the closing rates of the previous day in markets that close after the end of the trading day. Thus, the foreign exchange market in New York, due to the time difference, operates for another 5 hours after the closure of Western European currency markets. In addition, dealers analyze the movement of rates in markets that open earlier (Tokyo, Hong Kong, Singapore, Bahrain), studying the reasons for their changes, events, including expected ones, that may affect exchange rate relationships. Finding rates relative to critical points in the graphs of changes in currency exchange rates to the dollar is also of considerable importance. Key rates have been historically and statistically determined, after which the currency enters a “new zone” of rate changes. On this basis, dealers, taking into account their existing currency position, use a computer to determine the average exchange rate of their currency against foreign currencies. This course is necessary for the first transactions with banks and companies in your country.

For currencies used in the world foreign exchange market (dollar, yen, mark, pound sterling, etc.), the rate at the opening of the national foreign exchange market for this currency initially reflects the previous rate in other markets, taking into account the round-the-clock nature of transactions with such currencies on world foreign exchange markets .

Based on their own analysis and assessments of other banks and brokers, dealers develop a direction for foreign exchange transactions: a preference for a long or short position in the specific currency with which they transact. As new information appears throughout the day, dealers’ assessment of foreign exchange market trends and the direction of foreign exchange transactions they choose may change several times. In this case, commercial demand, incoming information about economic and political events, currency intervention by central banks and other factors play a role.

The next stage is the direct conduct of foreign exchange transactions using a telephone, telex machine or other means of communication. Each dealer has a television screen from which he can obtain information about the exchange rates quoted by individual banks. The algorithm for the conditions of a conversion transaction can be expressed as follows: the bank dealer made a request for the dollar to pound sterling exchange rate, the bank, having reported the spot rate at the moment, thereby undertakes to buy or sell the amount specified in the request at the named rate. Since the market conditions change every second, the dealer who received the quote must make a decision within 1-3 seconds to conclude a deal or refuse it, informing the partner about this with the keyword “sell” or “buy”. After receiving the keywords “sell” or “buy,” the dealer of the quoting bank confirms the transaction with the words “ok” or “all agreed.”

When concluding currency transactions with immediate delivery, banks give instructions to transfer the sold currency and to use the purchased one, without waiting for written confirmation from the counterparty. When selling, for example, European currency for US dollars, they will only know 5 hours after paying for the sold currency whether the amount of purchased dollars has been credited to their account due to the time difference. With large turnover of foreign exchange transactions, the risk of non-transfer of currency can reach enormous proportions, and the limits of unfinished transactions for counterparties become of great importance. Therefore, banks are reluctant to set such limits in significant amounts to little-known banks or banks located in countries with a bad reputation.

Registration of completed currency transactions, including sending confirmations, accounting processing, accounting for currency positions, sending payment orders, is carried out on the basis of entering data on transactions into a computer and sending confirmations and orders through the SWIFT system, and electronic methods are used to monitor the receipt of purchased currency in accounts information on accounts, including receiving statements via SWIFT and directly receiving information on the account by directly connecting via code to the computer of the bank in which the nostro account is maintained. This arrangement of work is typical for reputable banks in developed countries.

Using the “spot” operation, banks meet the needs of their clients in foreign currency, transfer capital, including hot money, from one currency to another, and carry out arbitrage and speculative operations.

In addition to the risk of an open foreign exchange position, which poses a risk to the bank due to fluctuations in exchange rates in the foreign exchange markets, during spot transactions there is a risk of non-transfer of coverage. The difference in the operating hours of various foreign exchange markets leads to the fact that the bank often transfers currency before receiving information about the crediting of the amount of purchased currency to its account. In this regard, banks set limits on pending transactions for their clients on the market, i.e. the total amount of foreign exchange transactions for which there is no data on currency transfer yet. The use of electronic media and communications minimizes the gap between funds being credited to the bank's account and the bank receiving information about it. Banks can receive information directly from the computer of the correspondent with whom their account is maintained, and even in the event of unfavorable information in time, they will have information about all amounts received in the morning of the next day. This, however, implies significant transaction costs. Therefore, only large banks can effectively provide a large volume of transactions in the foreign exchange markets.

2.2 Futures transactions with foreign currency

Urgent currency transactions (forward and futures) are currency transactions in which the parties agree on the delivery of a specified amount of foreign currency within a certain period after the conclusion of the transaction at the rate fixed at the time of its conclusion. Two features of urgent foreign exchange transactions follow from this definition:

1. There is a time interval between the moment of conclusion and execution of the transaction. Before the First World War, forward transactions were usually concluded on the terms of delivery of currency in the middle or at the end of the calendar month. In modern conditions, the deadline for the transaction, i.e. currency supply is defined as the end of the period from the date of the transaction (period 1-2 weeks, 1, 2, 3, 6, 12 months and up to 5 years) or any other period within the period.

2. The exchange rate for forward foreign exchange transactions is fixed at the time the transaction is concluded, although it is executed after a certain period.

The exchange rate for futures transactions differs from the rate for spot transactions. Although usually the direction of the dynamics of rates for cash and forward transactions coincides, this does not exclude a certain autonomy in changing rates for forward transactions, especially during periods of crises and speculative transactions with certain currencies. The difference between the exchange rates for spot and forward transactions is defined as a discount (discount) from the spot rate when the forward transaction rate is lower, or a premium if it is higher. A premium means that a currency is quoted more expensive in a term transaction than in a cash transaction. For example, if the forward exchange rate (110 USD) is higher than the spot rate (100 USD), the premium is 10 USD per unit of the other currency (10%). A discount indicates that the exchange rate for a forward transaction is lower than for a cash transaction.

In general, the size of the discount or premium is relatively more stable than the spot rate. Therefore, when quoting the rate of a futures transaction on the interbank market, only the premium or discount is often determined, which, in the case of direct quotation, are respectively added to or subtracted from the spot rate. When quoting currencies indirectly, the discount is added and the premium is subtracted from the spot rate.

Exchange rates for futures transactions that are quoted in digital terms (rather than using the premium and discount method) are called “outright” rates. The difference between the rates of the seller and the buyer, i.e. the margin on futures transactions is greater than on spot transactions. The margin on futures transactions for 1-6 months is usually 1/8-1/4% per annum of the spot rate in terms of the term of the transaction, and for transactions for a period of a year or more it reaches 1/2% per annum and higher.

The quotation of currencies for futures transactions using the premium or discount method depends both on the predicted dynamics of the exchange rate in the period from conclusion to execution of the transaction, and on the difference in interest rates on time deposits in these currencies. In certain periods, one or the other factor predominates. Under normal circumstances, the difference between the spot rate and the forward rate is determined by the capitalized difference in interest rates on deposits in the currencies involved in the transaction. However, during a period of sharp speculative pressure on a currency, its rate for futures transactions may break away from the spot rate. An increase in a discount or premium causes a sharp increase in rates on deposits in a currency that is the object of speculation for a fall (in the foreign exchange market this is accompanied by an increase in demand for such currency for sale on spot terms).

The influence of interest rates on the exchange rate is determined by the fact that in order to purchase the necessary currency, you must take out a loan or withdraw the amount from the deposit by paying interest on the loan or losing interest on the deposit. At the same time, placing the purchased currency on deposit earns interest.

The definition of the outright rate is presented in Table 1:

Table 1 - Determination of the outright exchange rate from London to New York (indirect quotation).

In an indirect quote from London to New York, the bid and seller rates are set by the English banks, who sell and buy dollars in this example in a 3-month deal at a premium that is deducted from the spot rate.

If in New York the pound sterling is quoted against the dollar on futures transactions with a discount, then the discount for direct quotation is deducted from the spot rate, the data is presented in table 2:

Table 2 - Determination of the outright exchange rate from New York to London (direct quote).

From the above examples, a practical rule emerges that is used in determining the outright rate for direct and indirect quotes: if the first number of differences between the spot and forward rates is greater than the second, then these differences are subtracted from the spot rate accordingly; if the first number is less, the differences are added. Under this condition, the margin on the buyer's and seller's forward rates will be higher than at the spot rates.

The size of the premium and discount in terms of annual interest corresponds to the difference in interest rates on deposits in the Eurocurrency market. This is explained by the fact that this difference is equalized using currency and deposit arbitrage. A deposit is attracted in one currency, which is sold for another currency, and the purchased currency is placed on deposit for the same period. To avoid currency risk, the purchased currency is sold for a period. If the premium on the currency exchange rate on a forward transaction is higher than the negative difference in interest rates, or the discount is lower than the positive difference, then the bank will make a profit. Carrying out such an operation leads to a change in the ratio of supply and demand in the deposit and foreign exchange markets and, accordingly, interest rates, premiums and discounts, again equalizing them. Positive or negative differences in interest rates serve as the basis for discounts and premiums on the cash rate.

Currency A is quoted at a premium to currency B if the interest rate on time deposits in currency A is lower than the interest rate on deposits in currency B. Conversely, currency A is quoted at a discount if the interest rate on deposits in that currency is higher than on deposits in currency B, data are presented in table 3:

Table 3 - New York to London (direct quote)

In such conditions, for transactions for a period of a month, the pound sterling exchange rate is quoted at a premium of 2.5% per annum (6% - 3.5%) against the dollar, or the dollar is quoted at a discount of 2.5% against the pound sterling, i.e. the pound sterling premium will be

2,5 * 8,8900

Premium = ___________ = 0.0185 US Doll.

12 * 100

In order to extract exchange rate profits, the bank sets the seller's premium at 0.0380, the buyer's premium at 0.0300. This means that the seller’s rate for a transaction for a month will be:

8,8900 + 0,0380 = 8,9280.

At the same time, the buyer's rate is:

8,8800 + 0,0300 = 8,9100.

The gap in rates for cash and futures transactions is calculated as a percentage using the formula:

X= (Kss-Kns)/Kns (1),

where Kss is the rate for futures transactions;

Kns - course on cash transactions;

T - transaction term.

For futures transactions with pounds sterling, not only a different formula is applied, since interest on euro-sterling deposits is calculated based on actual calendar days in the year, while for other currencies, a year of 360 days is conventionally taken as the base for calculating interest. A period of sharp fluctuations in exchange rates in anticipation of a sharp decrease or devaluation of a currency, its rate for futures transactions may sharply decrease compared to the spot rate. The gap on futures transactions for a short period (1-2 weeks) can reach several percent of the cash rate. In the second half of the 80s and early 90s, the situation on the foreign exchange markets stabilized somewhat. This was facilitated by the monitoring of the state of the foreign exchange and money markets by leading countries.

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