English for banking and finance

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.

Hanoi, 20th August 2015

MA. Pham Thi Bich Diep


TABLE OF CONTENTS
Page
Table of contents................................................................................................. ii
List of abbreviations........................................................................................... vi
Unit 1: The Rate of Exchange...........................................................................
I. An overview of exchange rates........................................................................
1. Definition...................................................................................................
2. Classification of exchange rates................................................................
3. Economic rationale....................................................................................
II. Determinants of exchange rates......................................................................
1. Review of theories.....................................................................................
2. Factors influencing the supply and demand of a currency......................
III. Exchange rate intervention............................................................................
1. Direct instruments.....................................................................................
2. Indirect instruments...................................................................................
IV. Summary.......................................................................................................
V. Discussion questions......................................................................................
VI. Practice..........................................................................................................

1
1

1
1
3
5
5
6
8
8
8
9
9
9

Unit 2: The Foreign Exchange Market.........................................................
I. An overview of the foreign exchange markets................................................
1. The concept of foreign exchange..............................................................
2. Description of the foreign exchange market.............................................
II. The roles of the foreign exchange market......................................................
III. The forex market features and benefits of forex trading forms....................
1. The forex market features..........................................................................
2. The benefits of forex trading forms...........................................................
IV. The forex market participants.......................................................................
1. Central banks.............................................................................................
2. Other banks................................................................................................
3. Interbank brokers.......................................................................................
4. Commercial companies.............................................................................
5. Retail brokers.............................................................................................
6. Hedge funds...............................................................................................
7. Investors and speculators...........................................................................
V. Basic principles in forex transaction............................................................

1. Concepts...................................................................................................
2. The bid/ask spread...................................................................................
3. Factors affecting the market.....................................................................
VI. Summary.......................................................................................................

15
15
15
15
16
16
16
19
21
22
23
23
23
24
24
24
25
25
26
28
29


VII. Discussion questions....................................................................................
VIII. Practice........................................................................................................

29
29

Unit 3: Balance of Payments.............................................................................
I. An overview of balance of payments...............................................................
1. Definitions................................................................................................
2. The roles of balance of payments.............................................................
II. Principles in the compilation of the balance-of-payment statement...............
III. Components of balance of payments.............................................................
1. Current account........................................................................................
2. Capital and financial account...................................................................
IV. Summary.......................................................................................................
V. Discussion questions......................................................................................
VI. Practice.........................................................................................................

34
34
34
34
35
38
38
42
44
44
45

Unit 4: Commercial Banks................................................................................
I. Definitions........................................................................................................

II. The roles of commercial banks.......................................................................
1. Lending and deposit business...................................................................
2. Securities issuing......................................................................................
3. Asset management....................................................................................
4. Foreign exchange trading.........................................................................
III. Functions of commercial banks and the scope available...............................
1. Functions..................................................................................................
2. The scope available to banks.....................................................................
IV. Commercial bank services............................................................................
1. Lending services.......................................................................................
2. Deposit accounts......................................................................................
3. Online and electronic banking options.....................................................
4. Other services...........................................................................................
V. Types of loans granted by commercial banks................................................
1. Secured loans............................................................................................
2. Unsecured loans........................................................................................
VI. Commercial bank assets................................................................................
1. Cash..........................................................................................................
2. Securities..................................................................................................
3. Loans........................................................................................................
VII. Summary......................................................................................................
VIII. Discussion questions...................................................................................
IX. Practice.........................................................................................................

51
51
51
53
54
55

56
57
57
58
59
59
59
60
60
60
60
62
64
64
64
65
67
68
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Unit 5: International Payment..........................................................................
I. Introduction to international payment..............................................................
II. Payment instruments.......................................................................................
1. Bill of exchanges.....................................................................................
2. Promissory notes.....................................................................................
3. Cheque.....................................................................................................
4. Transfer...................................................................................................
5. Bank cards...............................................................................................
6. Letters of credits......................................................................................

III. Methods of payments....................................................................................
1. Remittance...............................................................................................
2. Documentary collections.........................................................................
3. Open account...........................................................................................
IV. Summary........................................................................................................
V. Discussion questions.......................................................................................
VI. Practice..........................................................................................................

76
76
76
76
77
77
78
78
79
81
81
85
87
90
90
90

Unit 6: Trade Finance.......................................................................................
I. Definition..........................................................................................................
II. Trade finance techniques................................................................................
1. Export working capital financing.............................................................
2. Export factoring........................................................................................

3. Forfeiting..................................................................................................
4. Export credit insurance............................................................................
III. Summary.......................................................................................................
IV. Discussion questions.....................................................................................
V. Practice ………...............................................................................................

96
96
96
96
99
101
104
106
107
107

Word Lists…....................................................................................................... 113
References............................................................................................................ 123


LIST OF ABBREVIATIONS
ABA
ACH
ADB
ATM
BIS
BOP
C
CPI

D/C
ECI
EFTS
ET
EU
FDI
FX
GAAP
GDP
GMT
IBRD
IMF
LC
MIGA
MPC
MT
NLP
OMO
OTC
PIN
ROA
ROE
SBV
SWIFT
T
TT
WB

American bankers Association
automated clearing house

Asian Development Bank
automatic teller machine
Bank for International Settlements
balance of payment
commodity (currency)
consumer price index
documentary collection
export credit insurance
electronic funds transfer system
electronic transfer
European Union
foreign direct investment
foreign exchange
generally accepted accounting principles
gross domestic product
Greenwich mean time
International Bank for Reconstruction and Development
International Monetary Funds
letter of credit
Multilateral Investment Guarantee Agency
monetary policy committee
mail transfer
non-performing loans
open market operation
over the counter
personal identification number
return on assets
return on equity
State Bank of Vietnam
Society for Worldwide Interbank Financial Telecommunication

terms (currency)
telegraphic transfer
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
1


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
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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
3


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
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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.

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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.
Economic policy:
This comprises government fiscal policy (budget/spending practices) and monetary
policy (the means by which a government’s central bank influences the supply and
‘cost’ of money, which is reflected by the level of interest rates).
Economic conditions:
(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

6


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
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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
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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
card

deposit
unavailable

account
debit card

bank
PIN code

cash withdraw
saving

A Sorry, could you help me please? I had some problems with the ATM.
My credit (1) ......................... has been swallowed.
B Hi, do you have an (2)............................. here?
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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.

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.

10

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)
b)
c)
d)
e)
f)
g)
h)
i)
j)

k)
l)

the rate quoted at the end of a business day
popular newspapers, magazines
average ration between selling and buying prices
not exact indication
difference
the movement of a currency depends on
a feature
USD, FRF, GBP, JPY are...
result from
be over
be appreciate
opposite of appreciate

B. Decide if the following statements are True or False.
11

..…………
..…………
..…………
..…………
..…………
..…………
..…………
..…………
..…………
..…………
..…………

..…………


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.
12


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.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
…………………………..............................................................................................
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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.
.………………………………………………………………………………………
……………………………………………………………………………………….
………………………………………………………………………………………
………………………………………………………………………………………
2. Ngân hàng Nhà nước cũng dẫn lại rằng, thực tế trong cả năm 2012 và những
tháng đầu năm 2013, mặc dù thị trường tài chính quốc tế có nhiều biến động, tỷ giá
và thị trường ngoại hối trong nước diễn biến khá ổn định tạo điều kiện Ngân hàng
Nhà nước mua ngoại tệ tăng mạnh dự trữ ngoại hối nhà nước.
………………………………………………………………………………………
……………………………………………………………………………………......
………………………………………………………………………………………
3. Sau một năm rưỡi duy trì tỷ giá bình quân liên ngân hàng ổn định ở mức 20.828

VND/USD, việc điều chỉnh tỷ giá lần này nhằm phản ánh chính xác hơn cung cầu
ngoại tệ trên thị trường, tạo sự ổn định vững chắc cho thị trường ngoại tệ.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………

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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 nonresidents; (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.,
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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 24hour 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.
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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 in 1998). Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5
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.

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