English for banking and finance

LIST OF ABBREVIATIONS ABA American bankers Association ACH automated clearing house ADB Asian Development Bank ATM automatic teller machine BIS Bank for International Settlements BO

HANOI OPEN UNIVERSITY

FACULTY OF BANKING AND FINANCE

ENGLISH FOR BANKING & FINANCE

MA Pham Thi Bich Diep

ENGLISH FOR BANKING & FINANCE

MA Pham Thi Bich Diep

INTRODUCTION

English for Banking & Finance is for students who are assumed to have reached a

level of at least intermediate English

The book is designed to provide topic areas relevant to the field of finance and banking The thematic units enable students to enrich their specialized vocabulary

as they provide contexts for terms, essential words and phrases in finance and banking Besides, a variety of texts complied in each unit are to encourage students

to improve their reading skills This simultaneously allows students to revise and consolidate theoretical knowledge related to their major

Topic areas are subsequently presented in six units, each of which comprises an overview to the theme, explanation of terms, particular contents, and a summary of core features mentioned The Discussion-questions section offers students chance

to revise what they have learnt so far in the unit Additionally, with the Practice section, consisting of a vocabulary exercise, two reading passages and texts for translation, students are exposed to the practical side of language use which they may encounter when possessing sources of information released by various mass media

Hopefully, students will find the thematic design with the combination of theoretical and practical sides helpful when improving English language skills and consolidating the knowledge on a specialized field, finance and banking

MA Pham Thi Bich Diep

TABLE OF CONTENTS

Page

Table of contents ii

List of abbreviations vi

Unit 1: The Rate of Exchange 1

I An overview of exchange rates 1

1 Definition 1

2 Classification of exchange rates 1

3 Economic rationale 3

II Determinants of exchange rates 5

1 Review of theories 5

2 Factors influencing the supply and demand of a currency 6

III Exchange rate intervention 8

1 Direct instruments 8

2 Indirect instruments 8

IV Summary 9

V Discussion questions 9

VI Practice 9

Unit 2: The Foreign Exchange Market 15

I An overview of the foreign exchange markets 15

1 The concept of foreign exchange 15

2 Description of the foreign exchange market 15

II The roles of the foreign exchange market 16

III The forex market features and benefits of forex trading forms 16

1 The forex market features 16

2 The benefits of forex trading forms 19

IV The forex market participants 21

1 Central banks 22

2 Other banks 23

3 Interbank brokers 23

4 Commercial companies 23

5 Retail brokers 24

6 Hedge funds 24

7 Investors and speculators 24

V Basic principles in forex transaction 25

1 Concepts 25

2 The bid/ask spread 26

3 Factors affecting the market 28

VII Discussion questions 29

VIII Practice 29

Unit 3: Balance of Payments 34

I An overview of balance of payments 34

1 Definitions 34

2 The roles of balance of payments 34

II Principles in the compilation of the balance-of-payment statement 35

III Components of balance of payments 38

1 Current account 38

2 Capital and financial account 42

IV Summary 44

V Discussion questions 44

VI Practice 45

Unit 4: Commercial Banks 51

I Definitions 51

II The roles of commercial banks 51

1 Lending and deposit business 53

2 Securities issuing 54

3 Asset management 55

4 Foreign exchange trading 56

III Functions of commercial banks and the scope available 57

1 Functions 57

2 The scope available to banks 58

IV Commercial bank services 59

1 Lending services 59

2 Deposit accounts 59

3 Online and electronic banking options 60

4 Other services 60

V Types of loans granted by commercial banks 60

1 Secured loans 60

2 Unsecured loans 62

VI Commercial bank assets 64

1 Cash 64

2 Securities 64

3 Loans 65

VII Summary 67

VIII Discussion questions 68

IX Practice 68

Unit 5: International Payment 76

I Introduction to international payment 76

II Payment instruments 76

1 Bill of exchanges 76

2 Promissory notes 77

3 Cheque 77

4 Transfer 78

5 Bank cards 78

6 Letters of credits 79

III Methods of payments 81

1 Remittance 81

2 Documentary collections 85

3 Open account 87

IV Summary 90

V Discussion questions 90

VI Practice 90

Unit 6: Trade Finance 96

I Definition 96

II Trade finance techniques 96

1 Export working capital financing 96

2 Export factoring 99

3 Forfeiting 101

4 Export credit insurance 104

III Summary 106

IV Discussion questions 107

V Practice ……… 107

Word Lists… 113

References 123

LIST OF ABBREVIATIONS

ABA American bankers Association

ACH automated clearing house

ADB Asian Development Bank

ATM automatic teller machine

BIS Bank for International Settlements

BOP balance of payment

C commodity (currency)

CPI consumer price index

D/C documentary collection

ECI export credit insurance

EFTS electronic funds transfer system

ET electronic transfer

EU European Union

FDI foreign direct investment

FX foreign exchange

GAAP generally accepted accounting principles

GDP gross domestic product

GMT Greenwich mean time

IBRD International Bank for Reconstruction and Development

IMF International Monetary Funds

LC letter of credit

MIGA Multilateral Investment Guarantee Agency

MPC monetary policy committee

MT mail transfer

NLP non-performing loans

OMO open market operation

OTC over the counter

PIN personal identification number

ROA return on assets

ROE return on equity

SBV State Bank of Vietnam

SWIFT Society for Worldwide Interbank Financial Telecommunication

T terms (currency)

TT telegraphic transfer

WB World Bank

UNIT 1 THE RATE OF EXCHANGE

I AN OVERVIEW OF EXCHANGE RATES

1 Definition

Almost all nations in the world possess their own currency The fact that nations need to clear off transactions related to international trading, investment and other financial transactions, etc leads to the buying of and/or selling of currencies at certain rates known as the exchange rate Following are popular explanations which help clarifying the concept of exchange rate

Firstly, T P Fitch (1997:169) presents the notion as ‘Exchange rate is conversion price for exchange one currency for another’ while P Collin (1996:87) states that

‘Rate of exchange or exchange rate is price at which one currency is exchanged for another’ Another author defines the term of exchange rate as ‘the price of one currency in terms of another’, K Pibean, (2006:4)

Based on Eitenam (2007:21) exchange rate means the price of one country’s currency in units of another currency or commodity (typically gold or silver) Finally, in a recent publication, Mishkin (2009:433) states that the price of one currency in terms of another is called the exchange rate’

Regardless of differences in the wording and extent of the term to be defined, the key point is prominent in all the clarifications Thus, the rate of exchange is basically understood as the price of one currency in terms of another

2 Classification of exchange rates

According to different criteria, different types of exchange rates can be named According to the time the exchange rate is quoted, the opening and closing rates are introduced, whereas the terms buying or bid rate as opposed to the selling or ask/offer rate are employed to demonstrate the trading methods According to the

means of transfer, the terms mail transfer (MT), telegraphic transfer (TT) and

electronics transfer (ET) are used As is known, ET is the latest and fastest while

the terms transfer rate and cash rate show the modes of transfer As related to the entities determining the rate of exchange, the official rate, market rate and black

market rate are listed The last two terms spot rate and forward rate are employed

to demonstrate the criterion of transaction terms

The following exchange rate regimes are introduced according to the extent the

central bank intervenes the management of the rate of exchange, or as seen from the national macroeconomic management policy a particular nation opts to practice

An exchange-rate regime is the way an authority manages its currency in relation to other currencies and the foreign exchange market It is closely related to the monetary policy and the two are generally dependent on many of the same factors

The basic types are a floating exchange rate, where the market dictates movements

in the exchange rate; a managed float, where a central bank keeps the rate from deviating too far from a target band or value; and a fixed exchange rate, which ties

the currency to another currency, mostly more widespread currencies such as the U.S dollar or the euro or a basket of currencies

A fixed exchange rate: In a fixed exchange rate system, the monetary authority

picks rates of exchange with each other currency and commits to adjusting the money supply, restricting exchange transactions and adjusting other variables to ensure that the exchange rates do not move All variations on fixed rates reduce the time inconsistency problem and reduce exchange rate volatility, albeit to different degrees Fixed rates are those that have direct convertibility towards another currency

A floating or fluctuating exchange rate: It is a type of exchange rate regime

wherein a currency’s value is allowed to fluctuate according to the foreign exchange market A currency that uses a floating exchange rate is known as a floating currency Floating rates are the most common exchange rate regime today For example, the dollar, euro, yen, and British pound all are floating currencies

A managed float rate: Since central banks frequently intervene to avoid excessive

appreciation or depreciation, these regimes are often called managed float

Managed float exchange rates are determined in the foreign exchange market

Authorities can and do intervene, but are not bound by any intervention rule, often accompanied by a separate nominal anchor, such as inflation target The arrangement provides a way to mix market-determined rates with stabilizing

intervention in a non-rule-based system Its potential drawbacks are that it doesn’t place hard constraints on monetary and fiscal policy It suffers from uncertainty from reduced credibility, relying on the credibility of monetary authorities It typically offers limited transparency

3 Economic rationale

3.1 Choice of an exchange-rate regime

There are economists who think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates As floating exchange rates automatically adjust, they enable a country to dampen the impact of shocks and foreign business cycles, and to preempt the possibility of having a balance of payments crisis

However, in certain situations, fixed exchange rates may be preferable for their greater stability and certainty This may not necessarily be true, considering the results of countries that attempt to keep the prices of their currency ‘strong’ or

‘high’ relative to others, such as the UK or the Southeast Asia countries before the Asian currency crisis

The debate of making a choice between fixed and floating exchange rate regimes is set forth by the Mundell–Fleming model, which argues that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy It can choose any two for control, and leave the third

to market forces

The primary argument for a floating exchange rate is that it allows monetary policies to be useful for other purposes Under fixed rates, a monetary policy is committed to the single goal of maintaining an exchange rate at its announced level Yet, the exchange rate is only one of many macro economic variables that monetary policy can influence A system of floating exchange rate leaves monetary policy makers free to pursue other goals such as stabilizing employment or prices

In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the currency Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float A central bank might, for instance, allow a currency price to float freely between an upper and lower bound, a price ‘ceiling’ and ‘floor’ Management by the central bank may

take the form of buying or selling large lots in order to provide price support or resistance, or, in the case of some national currencies, there may be legal penalties for trading outside these bounds

In the modern world, the majority of the world’s currencies are floating Central banks often participate in the markets to attempt to influence exchange rates Such currencies include the most widely traded currencies: the United States dollar, the euro, the Norwegian krone, the Japanese yen, the British pound, the Swiss franc and the Australian dollar The Canadian dollar most closely resembles the ideal floating currency as the Canadian central bank has not interfered with its price since it officially stopped doing so in 1998 The US dollar runs a close second with very little changes in its foreign reserves; by contrast, Japan and the UK intervene

to a greater extent

A fixed peg system fixes the exchange rate against a single currency or a currency

basket The time inconsistency problem is reduced through commitment to a verifiable target However, the availability of a devaluation option provides a policy tool for handling large shocks Its potential drawbacks are that it provides a target for speculative attacks, avoids exchange rate volatility, but not necessarily persistent misalignments, does not by itself place hard constraints on monetary and fiscal policy and that the credibility effect depends on accompanying institutional measures and a visible record of accomplishment

3.2 Fear of floating

A free floating exchange rate increases foreign exchange volatility There are economists who think that this could cause serious problems, especially in emerging economies These economies have a financial sector with one or more of following conditions, namely (i) high liability dollarization, (ii) financial fragility and (iii) strong balance sheet effects

When liabilities are denominated in foreign currencies while assets are in the local currency, unexpected depreciations of the exchange rate deteriorate bank and corporate balance sheets and threaten the stability of the domestic financial system For this reason, emerging countries appear to face greater fear of floating, as they have much smaller variations of the nominal exchange rate, yet face bigger shocks and interest rate and reserve movements This is the consequence of frequent free floating countries’ reaction to exchange rate movements with monetary policy

and/or intervention in the flexible exchange-rate system is a monetary system that allows the exchange rate to be determined by supply and demand

II DETERMINANTS OF EXCHANGE RATES

1 Review of theories

The following theories explain the fluctuations in exchange rates in a floating exchange rate regime, (in a fixed exchange rate regime, rates are decided by its government)

International parity conditions: These include relative purchasing power parity,

interest rate parity, domestic fisher effect, international fisher effect have been taken into account Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions, e.g a free flow of goods, services and capital, which seldom hold true in the real world

Balance of payment model: This model, however, focuses largely on tradable

goods and services, ignoring the increasing role of global capital flows It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit

Asset market model: This views currencies as an important asset class for

constructing investment portfolios Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets The asset market model of exchange rate determination states that ‘the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.’

None of the models developed so far succeed to explain exchange rates and volatility in the longer time frames For shorter time frames (less than a few days) algorithms can be devised to predict prices It is understood from the above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply

The world’s currency markets can be viewed as a huge melting pot In a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly No other market encompasses as much of what is going on in the world at any given time as foreign exchange

2 Factors influencing the supply and demand of a currency

Supply and demand for any given currency, and thus its value, are not influenced

by any single element, but rather by several These elements generally fall into three categories: economic factors, political conditions and market psychology

2.1 Economic factors

These include economic policy, disseminated by government agencies and central banks and economic conditions, generally revealed through economic reports, and other economic indicators

(i) Government budget deficits or surpluses: The market usually reacts negatively

to widening government budget deficits, and positively to narrowing budget deficits The impact is reflected in the value of a country’s currency

(ii) Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country’s currency to conduct trade Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation’s economy For example, trade deficits may have a negative impact on a nation’s currency

(iii) Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising This is because inflation erodes purchasing power, thus demand, for that particular currency However, a currency may sometimes strengthen when inflation rises

because of expectations that the central bank will raise short-term interest rates to combat rising inflation

(iv) Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country’s economic growth and health Generally, the more healthy and robust a country’s economy, the better its currency will perform, and the more demand for it there will be

(v) Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency Its effects are more prominent if the increase is in the traded sector

2.2 Political conditions

Internal, regional, and international political conditions and events can have a profound effect on currency markets All exchange rates are susceptible to political instability and anticipations about the new ruling party Political upheaval and instability can have a negative impact on a nation’s economy For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect Also, events in one country in a region may spur positive/negative interest in a neighboring country and, in the process, affect its currency

2.3 Market psychology

Market psychology and trader perceptions influence the foreign exchange market in

a variety of ways:

(i) Flights to quality: Unsettling international events can lead to a ‘flight to quality’,

a type of capital flight whereby investors move their assets to a perceived ‘safe haven’ There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts The U.S dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty

(ii) Long-term trends: Currency markets often move in visible long-term trends Although currencies do not have an annual growing season like physical

commodities, business cycles do make themselves felt Cycle analysis looks at longer-term price trends that may rise from economic or political trends

(iii) ‘Buy the rumor, sell the fact’: This market truism can apply to many currency situations It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction This may also be referred to as a market being ‘oversold’ or ‘overbought’ To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much

on the relevance of outside events to currency prices

(iv) Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves ‘What to watch’ can change over time In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight

(v) Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use Many traders study price charts in order to identify such patterns

III EXCHANGE RATE INTERVENTION

The rate of exchange is one of the instruments governments and central banks frequently use in the management of monetary and financial policy in order to achieve economic and financial targets In the implementation process, following methods which enable the government to intervene the exchange rate can be

utilized

1 Direct instruments

These comprise devaluation the measure is intended to make the currency depreciated, revaluation/upvaluation which results in currency appreciation and direct intervention on the forex market, namely via the open market operation

2 Indirect instruments

These include a number of measures Particularly, the practice of the rediscount rate and the introduction of tariff, quota, pricing, required foreign reserves, low interest rates on foreign currency deposits, etc., are popular

IV SUMMARY

The rate of exchange is the price of one currency in terms of another Concerning the exchange rate regime, three basic types, namely float, fixed and managed float rates, are normally listed though the most popular one is the managed float rate The exchange rate can exert great influence on aspects of the economy and it is, in turn, influenced by various factors, particularly economic, political conditions and the market psychology Also, the exchange rate can be regulated by both direct and indirect instruments implemented by the government

V DISCUSSION QUESTIONS

Question 1 What is the exchange rate?

Question 2 Differentiate types of exchange rates

Question 3 Discuss the reasons for the use of each type of exchange rate

Question 4 Analyze the factors exerting influences on the rate of exchange Question 5 Name measures utilized by governments to regulate the rate of

exchange

VI PRACTICE

1 Vocabulary: Use the given words to fill in each of the blanks

transaction deposit account bank cash withdraw

card unavailable debit card PIN code saving

My credit (1) has been swallowed

B Hi, do you have an (2) here?

2 Reading

Text 1: Read the text and answer the following questions

A rate of exchange is the rate at which banks sell or buy one currency in exchange for another The popular press frequently gives news of rate of exchange between the pound and the US dollar A rate of $1.54 to £1, for example, may be quoted as the closing rate on a particular day This would be a middle rate between the rate at which banks are selling US dollars in exchange for sterling and the rate at which banks are buying dollars for sterling, but it gives a rough indication to the public of how many dollars can be bought for £1 or how many dollars are needed to buy £1 The banks’ selling/bid rate for a currency will always be lower than their buying/ask rate and you will have to make a clear distinction between the two

A No, I am French My (3) is the ‘French Grossou Bank’

and I have got two accounts with them: a checking one and a

(4) one

B Is your card a credit card or a (5) ?

A It is a credit card and while I was making the (6) (2 words) my card got eaten up

B Did it arrive before you entered your secret (7) or after?

A Before

B Before? Are you sure?

A Yes, I am! And the screen changed telling me ‘Sorry, this ATM is

currently (8) ’ but I don’t know the meaning

B Ahhhhhh I see, come this way please It was the daily safeguarding

time I think my colleague collected your card Here it is but could you show me your identity card? That’s OK and your bank allowed the (9)

A Great!

B In five minutes you’ll be able to use the machine Take care, you’ll

have to choose withdraw and not (10) Enjoy your stay

in the States sir

A Thank you very much, bye

Profits in the market are made from charging the ask price for a currency pair and buying it from someone else at the bid price You are also probably aware that rates

of exchange fluctuate so that one currency weakens and the second currency strengthens in relation to each other

Fluctuating exchange rates presents a serious business risk to overseas traders and its management is an important aspect of foreign exchange dealings Exchange rates fluctuate continuously whenever they are allowed to respond to the pleasures

of supply and demand in the foreign exchange markets Nowadays, exchanges rate between all the world’s major currencies are allowed to fluctuate in the market, at least within certain limits

There are a number of factors which contribute towards fluctuation in exchange rates, but all of the factors are associated with supply and demand Fluctuations in exchange rates are caused by an excess of supply over demand, or vice versa For example, if demand to buy US dollars and sell Sterling exceeds the counterbalancing demand to buy Sterling and sell US dollars, sterling will lose value against the US dollar In the case, demand for buying and selling refers to demand of customers not dealers because when a customer buys, a dealer sells

A Find a word or phrase in the text which means…

a) From the middle rate, customers can know the buying price of a currency b) The closing rate is the same as the middle rate

c) The banks’ selling rate is always lower than their buying rate

d) Nowadays all currencies in the world are allowed to fluctuate

e) The fluctuation of a currency depends on only supply of and demand

for that currency

f) A currency will lose its value if its demand is in excess of its supply

Text 2: Read the text and answer the following questions

Exchange rates and Quotations

The rate of exchange is the rate (1)………… which one currency is exchanged (2)

………… another Exchange rates are expressed either (3)………….direct quotation, or indirect quotation In direct quotation, the price of a standard unit of a foreign currency is expressed (4)……… local currency Most countries use direct quotation

Where a foreign currency is exchanged for another currency, a cross rate is used A cross rate is the ratio (5)……….the exchange rates of two foreign currency expressed in terms (6)……….a third currency Cross rates are frequently used for forex arbitrage

Except (7)………….countries where the governments fixed the rates of currency exchange, the exchange rates in most countries fluctuate according (8)

………….demand and supply, subject (9) …… …….central bank intervention The fluctuation (10)………… the exchange rate of a currency is a relative phenomenon The currency is considered to fluctuate in relation (11)………… another currency When the rate of one currency (12)…………a second currency changes, the first currency may be strengthening (13)……….the second currency, which is weakening, or the first currency may be weakening against the second currency, which is strengthening Due (14)………uneven demand and supply, a currency may strengthen against one currency and weaken against another (15)………….the same time

A Fill in each gap with a suitable preposition

B Read Text 2 and answer the following questions

1 How many ways of quoting the exchange rates are mentioned in the text? What are they?

2 What is a cross rate?

3 What kind of exchange rate do almost all countries use?

4 Why is the fluctuation in the exchange rate considered a relative phenomenon?

5 What happens if there is uneven demand and supply of a currency?

3 Translation

A Translate the text below into Vietnamese

1 Inflation and deflation, in economics, are terms used to describe, respectively, a decline or an increase in the value of money, in relation to the goods and services it will buy

………

………

………

……… ……… ………

2 Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services Repetitive price increases erode the purchasing power of money and other financial assets with fixed values, creating serious economic distortions and uncertainty ………

………

………

………

3 Inflation results when actual economic pressures and anticipation of future developments cause the demand for goods and services to exceed the supply available at existing prices or when available output is restricted by faltering productivity and marketplace constraints

………

………

………

B Translate the text below into English

1 Ngân hàng Nhà nước vừa công bố điều chỉnh tỷ giá bình quân liên ngân hàng giữa đồng Việt Nam và đô la Mỹ từ mức 20.828 VND/USD lên 21.036 VND/USD .………

………

………

………

………

UNIT 2

THE FOREIGN EXCHANGE MARKET

I AN OVERVIEW OF THE FOREIGN EXCHANGE MARKET

1 The concept of foreign exchange

The foreign exchange comprises financial assets used in international transactions: (i) a foreign currency, namely coins, notes, traveler’s cheque, credit in bank accounts and other forms used as money; (ii) documents valuated in a foreign currency, gold of international standard and a domestic currency held by non-residents; (iii) foreign currencies Currently, most of transactions on the foreign exchange market are involved in the trading of currencies or foreign currencies Therefore, it could be practically understood that the foreign exchange coincide with foreign currencies Similarly, the foreign exchange and foreign currency markets coincide

2 Description of the foreign exchange market

The foreign exchange market, commonly referred as forex, FX, or currency market,

is a form of exchange for the global decentralized trading of international currencies Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends The foreign exchange market determines the relative values of different currencies

It is the market for banks, investors and speculators to exchange one currency to another, and the largest foreign exchange activity retains the spot exchange (i.e.,

immediate) between five major currencies: US dollar, British pound, Japanese yen, Euro dollar and the Swiss franc It is also the largest financial market in the world The foreign exchange market is considered an over-the-counter (OTC) or

‘Interbank’ market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network Trading is not centralized on an exchange, as with the stock and futures markets As a true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe

as the business day begins in each financial center, first to Tokyo, London, and New York Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur – day or night In comparison, the US stock market may trade $10 billion in one day, whereas the Forex market will trade up to $2 trillion in one single day

Until now, professional traders from major international commercial and investment banks have dominated the foreign exchange market Other market participants range from large multinational corporations, global money managers, registered dealers, international money brokers, and futures and options traders, to private speculators

II THE ROLES OF THE FOREIGN EXCHANGE MARKET

The foreign exchange market plays an indispensable part in the market economy First and foremost, the foreign exchange market assists international trade and investment by enabling currency conversion For example, it permits a business in the United States to import goods from the European Union member states especially Euro zone members and pay Euros, even though its income is in United States dollars That also means the market enables the needs of foreign currency supply and demand to be satisfied as it acts as the supplier of foreign currencies for governments, businesses and individual customers

Also, corporate treasurers and money managers also enter the foreign change market in order to hedge against unwanted exposure to future price movements in the currency market Last but not least, foreign currency transactions play a primary role in the regulation of the exchange rate Governments can introduce interventions on the foreign exchange market so as to implement their monetary policies, piloting the economy on their expected macro scale

III THE FOREX MARKET FEATURES AND BENEFITS OF FOREX TRADING FORMS

1 The forex market features

The foreign exchange market has its unique characteristics, including (i) its huge trading volume representing the largest asset class in the world leading to high liquidity; (ii) its geographical dispersion; (iii) its continuous operation: 24 hours a day except weekends, i.e trading from 20:15 Greenwich mean time (GMT) on Sunday until 22:00 GMT Friday; (iv) the variety of factors that affect exchange rates; (v) the low margins of relative profit compared with other markets of fixed income; and (vi) the use of leverage to enhance profit and loss margins and with respect to account size

Two of the characteristics of the foreign exchange market, size and liquidity, are

shown in detail as follows: the main foreign exchange market turnover, 1988–2007, measured in billions of US dollars The foreign exchange market is the most liquid financial market in the world Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors The average daily turnover in the global foreign exchange and related markets is continuously growing According to the

2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7

trillion was traded in outright forwards, swaps and other derivatives

Particularly, trading in the United Kingdom accounted for 36.7% of the total, making it by far the most important centre for foreign exchange trading Trading in the United States accounted for 17.9%, and Japan accounted for 6.2%

The turnover of exchange-traded foreign exchange futures and options has grown rapidly in recent years, reaching $166 billion in April 2010 Exchange-traded currency derivatives represent 4% of over-the-counter foreign exchange turnover Foreign exchange futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts

Most developed countries permit the trading of derivative products on their exchanges All these developed countries already have fully convertible capital accounts Some governments of emerging economies do not allow foreign exchange derivative products on their exchanges because they have capital

such as Korea, South Africa, and India have established currency future exchanges despite having some capital controls

Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004 The increase in turnover is due to a number

of factors, particularly the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment The growth of electronic execution and the diverse selection of execution venues have lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market By 2010, retail trading is estimated

to account for up to 10% of spot turnover, or $150 billion per day

Foreign exchange is an over-the-counter market where brokers/dealers negotiate directly with one another, so there is no central exchange or clearing house The biggest geographic trading center is the United Kingdom, primarily London, which according to The City UK estimates has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010 Due to London’s dominance in the market, a particular currency’s quoted price is usually the London market price For instance, when the International Monetary Fund calculates the value of its special drawing rights every day, they use the London market prices at noon that day

There is no unified or centrally cleared market for the majority of trades, and there

is very little cross-border regulation Due to the over-the-counter nature of currency markets, there are rather a number of interconnected marketplaces, where different

currencies instruments are traded This implies that there is not a single exchange

rate but rather a number of different rates, depending on what bank or market maker is trading, and where it is In practice the rates are quite close due to arbitrage

Due to London’s dominance in the market, a particular currency’s quoted price is usually the London market price Major trading exchanges include EBS and Reuters, while major banks also offer trading systems A joint venture of the Chicago Mercantile Exchange and Reuters, called FX opened in 2007 and aspired but failed to the role of a central market clearing mechanism The main trading centers are New York and London, though Tokyo, Hong Kong and Singapore are all important centers as well Banks throughout the world participate Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends

Fluctuations in exchange rates are usually caused by actual monetary flows as well

as by expectations of changes in monetary flows caused by changes in gross domestic product growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions Major news is released publicly, often on scheduled dates; so many people have access to the same news at the same time However, the large banks have an important advantage; they can see their customers’ order flow

2 The benefits of forex trading forms

2.1 Benefits of trading forex on the Internet

These include (i) dealing directly from live price quotes; (ii) instantaneous trade execution and confirmation; (iii) lower transaction costs; (iv) real-time profit and loss analysis and (v) full access to market information

(i) Deal directly from live price quotes: Very few on-line brokers are able to offer their clients real-time bid/ask quotes, which facilitates instantaneous deal execution – no missed market opportunities Real-time prices also allow investors to compare

an on-line broker’s dealing spread with that of other pricing services, to ensure they are receiving the best possible price on all their forex transactions

Many on-line forex brokers require their clients to request a price before dealing This is disadvantageous for a number of reasons, primarily because it significantly lengthens the execution process from just a few seconds to possibly as long as a minute In a fast paced market, this could make a significant difference in an investor’s profit potential Also, some of the more unscrupulous brokers may use

the opportunity to look at an investor’s current position Once they have determined whether the investor is a buyer or a seller, they ‘shade’ the price to increase their own profit on the transaction

(ii) Instantaneous trade execution and confirmation: Timing is everything in the fast-paced forex market On-line trades are executed and confirmed within seconds, which ensures that traders do not miss market opportunities Even the incremental extra time it takes to complete a transaction over the phone can mean a big difference in profit potential

(iii) Lower transaction costs: Simply, executing trades electronically reduces manual effort, thereby lowering the costs of doing business On-line brokers are then able to pass along the savings to their client base

(iv) Real-time profit and loss analysis: The fast-paced nature of the forex market compels traders to execute multiple trades each day It is vital for each client to have real-time information about their current position in order to make well-informed trading decisions

(v) Full access to market information: Access to timely and relevant information is critical Professional traders pay thousands of dollars each month for access to major information providers However, the very nature of the Internet affords users free access to reliable market information from a variety of sources, including real-time price quotes, international news, government-issued economic indicators and reports, as well as subjective information such as expert commentary and analysis, trader chat forums etc

2.2 Benefits of forex trading vs equity trading

Benefits of forex trading vs equity trading consist of 24-hour trading, liquidity, lower transaction costs, equal access to market information and profit potential in both rising and falling markets

(i) 24-hour trading: The main advantage of the forex market over the stock market and other exchange-traded instruments is that the forex market is a true 24-hour market Whether it’s 6 pm or 6 am, somewhere in the world there are always buyers and sellers actively trading forex so that investors can respond to breaking news immediately In the currency markets, your portfolio will not be affected by afterhours earning reports or analyst conference calls

(ii) Liquidity: With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the forex markets The liquidity of this market, especially that of the major currencies, helps ensure price stability Investors can always open or close a position, and more importantly, receive a fair market price Because of the lower trading volume, investors in the stock market and other exchange-traded markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction

(iii) Lower transaction costs: It is much more cost efficient to invest in the forex market, in terms of both commissions and transaction fees Commissions for stock trades range from a low of $7.95 – $29.95 per trade with on-line brokers to over

$100 per trade with traditional brokers Typically, stock commissions are directly related to the level of service offered by the broker For instance, for $7.95, customers receive no access to market information, research or other relevant data

At the high end, traditional brokers offer full access to research, analyst stock recommendations, etc In contrast, on-line forex brokers charge significantly lower commission and transaction fees Some charge low fees, while still offering traders access to all relevant market information

In general, the width of the spread in a forex transaction is less than 1/10 as wide as

a stock transaction, which typically includes a 1/8 wide bid/ask spread For example, if a broker will buy a stock at $22 and sell at $22.125, the spread equals 006 For a forex trade with a 5 pip wide spread, where the dealer is willing to buy EUR/USD at 9030 and sell at 9035, the spread equals 0005

(iv) Equal access to market information: Professional traders and analysts in the equity market have a definitive competitive advantage by virtue of that fact that they have first access to important corporate information, such as earnings estimates and press releases, before it is released to the general public In contrast,

in the forex market, pertinent information is equally accessible; ensuring that all market participants can take advantage of market-moving news as soon as it becomes available

(v) Profit potential in both rising and falling markets: In every open forex position,

an investor is long in one currency and short in the other A short position is one in which the trader sells a currency in anticipation that it will depreciate This means

that potential exists in a rising as well as a falling forex market The ability to sell currencies without any limitations is one distinct advantage over equity trading It

is much more difficult to establish a short position in the US equity markets, where the uptick rule prevents investors from shorting stock unless the immediately preceding trade was equal to or lower than the price of the short sale

IV THE FOREX MARKET PARTICIPANTS

Unlike a stock market, the foreign exchange market is divided into levels of access

At the top is the interbank market, which is made up of the largest commercial banks and securities dealers Within the interbank market, spreads, which are the differences between the bid and ask prices, are razor sharp and not known to players outside the inner circle The difference between the bid and ask prices widens as you go down the levels of access This is due to volume If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread

The levels of access that make up the foreign exchange market are determined by the size of the ‘line’ (the amount of money with which they are trading) The top-tier interbank market accounts for 53% of all transactions From there, smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail market makers Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in forex markets in particular, since the early 2000s

In addition, Hedge funds have grown markedly over the 2001 – 2004 period in

exchange market to align currencies to their economic needs

1 Central banks

The national central banks play an important role in the forex markets Ultimately, central banks seek to control the money supply and often have official or unofficial target rates for their currencies As many central banks have very substantial

foreign exchange reserves, their intervention power is significant Among the most important responsibilities of a central bank is the restoration of an orderly market in times of excessive exchange rate volatility and the control of the inflationary impact of a weakening currency

Frequently, the mere expectation of central bank intervention is sufficient to stabilize a currency, but in case of aggressive intervention the actual impact on the short-term supply/demand balance can lead to the desired moves in exchange rates

If a central bank does not achieve its objectives, the market participants can take on

a central bank The combined resources of the market participants could easily overwhelm any central bank

2 Other banks

The interbank market caters to both the majority of commercial turnover as well as enormous amounts of speculative trading It is not uncommon for a large bank to trade billions of dollars daily Some of this trading activity is undertaken on behalf

of corporate customers, but a banks treasury room also conducts a large amount of trading, where bank dealers are taking their own positions to make the bank profits The interbank market has become increasingly competitive in the last couple of years and the god-like status of top foreign exchange traders has suffered as equity traders are again back in charge A large part of the banks’ trading with each other

is taking place on electronic booking systems that have negatively affected traditional foreign exchange brokers

3 Interbank brokers

Until recently, foreign exchange brokers were doing large amounts of business, facilitating interbank trading and matching anonymous counterparts for comparatively small fees With the increased use of the Internet, a lot of this business is moving onto more efficient electronic systems that are functioning as a closed circuit for banks only The traditional broker box, which lets bank traders and brokers hear market prices, is still seen in most trading rooms, but turnover is noticeably smaller than just a few years ago due to increased use of electronic booking systems

4 Commercial companies

The commercial companies’ international trade exposure is the backbone of the foreign exchange markets A multinational company has exposure in accounts receivables and payables denominated in foreign currencies They can be protected against unfavorable moves with foreign exchange That is why these markets are in existence

Commercial companies often trade in sizes that are insignificant to short term market moves, however, as the main currency markets can quite easily absorb hundreds of millions of dollars without any big impact It is also clear that one of the decisive factors determining the long-term direction of a currency’s exchange rate is the overall trade flow Some multinational companies, whose exposures are not commonly known to the majority of market, can have an unpredictable impact when very large positions are covered

5 Retail brokers

The arrival of the Internet has brought us a host of retail brokers There is a numbered amount of these non-bank brokers offering foreign exchange dealing platforms, analysis, and strategic advice to retail customers The fact is many banks

do not undertake foreign exchange trading for retail customers at all, and do not have the necessary resources or inclination to support retail clients adequately The services of such retail foreign exchange brokers are more similar in nature to stock and mutual fund brokers and typically provide a service-orientated approach to their clients

6 Hedge funds

Hedge funds have gained a reputation for aggressive currency speculation in recent years There is no doubt that with the increasing amount of money some of these investment vehicles have under management, the size and liquidity of foreign exchange markets is very appealing The leverage available in these markets also allows such a fund to speculate with tens of billions at a time The herd instinct that

is very apparent in hedge fund circles was seen in the early 1990’s with George Soros and others squeezing the Great Britain pound out of the European Monetary System

It is unlikely, however, that such investments would be successful if the underlying investment strategy was not sound It is also argued that hedge funds actually perform a beneficial service to foreign exchange markets They are able to exploit economical weakness and to expose a countries unsustainable financial plight, thus forcing realignment to more realistic levels

7 Investors and speculators

In all efficient markets, the speculator has an important role taking over the risks that a commercial participant hedges The boundaries of speculation in the foreign exchange market are unclear, because many of the above mentioned players also have speculative interests, even central banks

The foreign exchange market is popular with investors due to the large amount of leverage that can be obtained and the liquidity with which positions can be entered and exited Taking advantage of two currencies interest rate differentials is another popular strategy that can be efficiently undertaken in a market with high leverage

We have all seen prices of 30 day forwards, 60 day forwards, etc., that is the interest rate difference of the two currencies in exchange rate terms

V BASIC PRINCIPLES IN FOREX TRANSACTION

1 Concepts

(i) Exchange rate: Almost all nations have their own legal tender International financial transactions require governments, organizations and investors, etc to clear off contracts, which leads to the buying/selling of one currency for another at

a certain rate called exchange rate

(ii) Commodity and terms currency: The commodity currency (C) has a fixed unit

of 1 while the terms currency (T) has a variable in value depending on the supply and demand on the market, e.g., 1 USD [C] = 20,800 VND [T]

(iii) The quoting and asking bank: The quoting bank quotes the bid and ask rate and must carry out transactions once customers wish In contrast, the asking bank just consults the rate and carries out transactions if both parties agree A bank can play both roles on the interbank market

(iv) Two-way quotation: in foreign exchange trading, banks will invariably quote two rates, including the bid rate or the price at which it buys the commodity

currency and the ask/offer rate or the price at which it sells the commodity currency The bid rate must precede the ask rate For the quoting bank, the former

is always lower than the latter

(v) Terms describing exchange rates

A number of terms are used to describe exchange rates First, the bid rate and ask rate refers to the price at which a commodity currency is bought and sold, respectively Next, the spot rate is introduced by the law of supply and demand on the foreign exchange market, agreed on the very day and the transaction is to be cleared of within two days Third, the derivative rate is applied for forward, swap, future and option contracts

Several factors are considered while the rate is set and the transaction is due after three days or longer While the opening rate is set for the first contract of a working day, the closing rate is the rate effective for the day’s last contract A day’s closing rate is not necessarily equal to the opening rate of the following day Besides, the crossed rate is the rate at which two currencies can be transacted, but that needs an intermediary currency The transfer rate is used for the exchange of foreign currencies deposited at and transacted via the bank The bank note rate is the cash rate for transactions in which foreign currencies in forms of coins, notes, traveler’s cheque and credit card accounts are involved The next two forms are electronics and mail transfer rates for transactions via electronic forms and mail, consecutively

2 The bid/ask spread

A spread is the difference between the bid and the ask price The bid price is the price at which you may sell your currency pair for The ask price is the price at which you must buy the currency pair The ask price is always higher than the bid price Profits in the market are made from charging the ask price for a currency pair and buying it from someone else at the bid price The bid/ask spread increases when there is uncertainty about what is going to happen in the market Below are some major indicators

2.1 APICS survey

The survey composites diffusion index of national manufacturing conditions The APICS survey gives a detailed look at the manufacturing sector This survey is less

well known than the ISM, but can also indicate trends in production The diffusion index does not move in tandem with the ISM index every month, but sometimes the two do move in the same direction Since manufacturing is a major sector of economy, investors can get a feel for the general economic backdrop for various investments An index level of 50 means no growth, but every 10 points signals gains of 4% in manufacturing

2.3 Chain stores sales

The information illustrates monthly sales volumes from department, chain, discount and apparel stores Sales are reported by the individual retailers Chain store sales are an indicator of retail sales and consumer spending results Consumer spending accounts for two-thirds of the economy, so if you know what consumers are up to, you will have a pretty good handle on where the economy is headed Sales are reported as a change from the same month a year ago It is important to know how strong sales actually were a year ago to make sense of this year’s sales

In addition, sales are usually reported for ‘comparable stores’ in case of company mergers

2.4 Construction spending

The information shows the dollar value of the new construction activity on residential, non-residential and public projects Data are available in nominal and real dollars Businesses only put money into construction of new factories or offices when they are confident that demand is strong enough to justify the

expansion The same goes for individuals making the investment in a home That’s why construction spending is a good indicator of the economy’s momentum

2.5 Consumer confidence

The survey indicates consumer attitudes concerning both the present situation as well as expectations regarding economic conditions conducted by The Conference Board Five thousand consumers across the country are surveyed each month The level of consumer confidence is directly related to the strength of consumer spending Consumer spending accounts for two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future The more confident consumers are about the economy and their own personal finances, the more likely they are to spend With this in mind, it’s easy to see how this index of consumer attitudes gives insight to the direction of the economy Changes in consumer confidence and retail sales don’t move in tandem month by month

2.6 Consumer sentiment

The survey presents consumer attitudes concerning both the present situation as well as expectations regarding economic conditions Five hundred consumers are surveyed each month The level of consumer sentiment is directly related to the strength of consumer spending Consumer spending accounts for two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future The more confident consumers are about the economy and their own personal finances, the more likely they are to spend With this in mind, it’s easy to see how the index of consumer attitudes gives insight

to the direction of the economy Changes in consumer sentiment and retail sales don’t move in tandem month by month

2.7 Consumer price index (CPI)

The index is a measure of the average price level of a fixed basket of goods and services purchased by consumers Monthly changes in the CPI represent the rate of inflation The CPI is the most followed indicator of inflation Inflation is a general increase in the price of goods and services The relationship between inflation and interest rates is the key to understanding how data like the CPI influence the

markets By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform

2.8 Current account

That is a measure of the country’s international trade balance in goods, services and unilateral transfers The level of the current account, as well as the trends in exports and imports, are followed as indicators of trends in foreign trade U.S trade with foreign countries hold important clues to economic trends here and abroad The data can directly impact all the financial markets, but especially the foreign exchange value of the dollar

3 Factors affecting the market

Currency prices are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability Moreover, governments sometimes participate in the forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price This is known as Central Bank intervention Any of these factors, as well as large market orders, can cause high volatility in currency prices However, the size and volume of the forex market makes it impossible for any one entity to ‘drive’ the market for any length

of time Another factor affecting the market, with an effect as important as the other factors mentioned above, is the news Once released, the news has a direct outcome on the currency price as the news is always directly related to the economic stability of the market

VI SUMMARY

The forex market enables transactions related to foreign currencies and their equivalents to be conducted, satisfying the needs of governments, organizations, institutions and individuals The forex market has its distinctive features in comparison with other financial markets A numbers of participants among whom the central banks, commercial banks non-banking institutions and brokers are prominent ones play their part in the forex market

VII DISCUSSION QUESTIONS

Question 1 Discuss the definitions and roles of the forex market

Question 2 Name the players in the forex market

Question 3 Distinguish foreign currency and foreign exchange

Question 4 Discuss factors affecting the bid/ask spread in forex trading

Question 5 Describe different types of forex rates

VIII PRACTICE

1 Vocabulary: Use the given words to fill in each of the blanks

borrow cheque debts interest overdrawn

overdraft cash point cash loan account

a) She’s spending too much money She’s already got an enormous

b) He needs some cash Is there a near here?

c) She hasn’t got any with her She’ll need to go to the bank

d) Steve’s got quite a few He’s borrowed money from the bank and several of his friends

e) If you want to buy a new car, why not get a from the bank?

f) His salary is paid straight into his at the end of every month

g) Interest rates are very low Why don’t you the money from the bank? h) He’s going to the bank to pay in this

i) She’ll have to stop spending so much money She’s already by over £300 k) If you are prepared to take more risk, you’ll get higher on your

investment

2 Reading

Text 1: Read the passage and answer the following questions

CASH FLOW POSITION AND GAPS

A forex contract must be performed ultimately through the exchange of cash flow Banking institutions must ensure that their cash flow positions are closely monitored to meet delivery requirements Currencies purchased will result in cash inflows and currencies sold, in return, will result in cash outflows

Cash inflow and cash outflow relating to a currency may not offset each other due

to different settlement dates Maturity mismatches in cash flows are called ‘gaps’ When cash inflow of a currency exceeds its cash outflow on a particular day, the position is positively gapped The position of the reverse is negatively gapped Banking institutions must ensure that there are funds in the required currencies to

be delivered on each day for the maturing contracts and funds not required temporarily are to be invested

Cash flow position is also maintained on two levels, one at the forex dealers’ level and money market dealers’ level and the other on the banking institution’s level inclusive of remittances Coordination is required to ensure that cash flows are properly managed to avoid overdrafts in the interbank or interbranch accounts Cash flow position and exchange position are different in that the former is concerned with delivery of currencies while the latter is concerned with changes in the forex rates A square forex position does not necessary mean a balanced cash flow position

A Find a word or phrase in the text which means…

B Answer the questions

a) What results in cash inflow? Cash outflow?

b) What is a positive cash flow position?

Text 2: Read the passage and answer the following questions

Foreign Exchange Market

Recent (1 innovate) ……….in financial markets have created new instruments that banks can use in (2 manage) ………their interest risk Three in particular have great (3 important) ……….to bank (4 manage) ……….: futures, options, and swaps Each allows bank management to alter interest rate (5 expose) ……… , and each has certain

……… with the other (8 take) ………together, however, they give bank managers (9 enormous) ……….improved flexibility in managing interest rate risk

A bank may hedge its interest rate risk in the futures market by (10 take)

………….a position that is the opposite of its existing portfolio position If, for example, the bank was asset sensitive, it could take a long position in the futures market to hedge risk (11 converse) ……… , a liability-sensitive bank could protect itself against interest rate (12 move) ……… by establishing a short position in the futures market

An (13 alter) ……….way of managing interest rate is to buy and sell an option on a futures contract Options on futures would be used (14 similar)

………… to the futures themselves in order to hedge interest rate exposure, although options have the advantage of smaller initial outlay in order to accomplish the interest rate risk management