Currency trade, part of financial market
The currency trade is very attractive business, for corporations and for individual players (traders) taking money with “FOREX”, specified variety of financial market, intended for that trade. In comparison with other sectors in world financial system, this market has special features, like:
- Ability of fast reacting to the influence, from many and always changing, outside factors.
- Accessibility for all traders, working with the main currencies.
- Guaranteed quality and liquidity of main currencies.
- Heightened attention about currencies.
- Non-stop functioning, allowing traders to work out of their usual work time or in time of national celebrations in their countries, using working in this time foreign markets.
- Extremely high profitability, in compares with other financial markets.
The purpose of this manual is to introduce the all main aspects of currency trade, useful for trader practice and to give answers of most important questions (Why currency is a trade object? Who are the traders? What currencies do they trade? Why are the prices changes? What financial instruments are used for trade? ).
As a result of acquire the content of the parts; the user may take individual trade decisions to make sure of their correctness and at the end to use the recommended methods for taking personal earnings.
Short historical facts for currency trade
Trade with currency, has ancient history, which starts from the time of the Far East. The currency market have started to form in the period of Middle Ages, when the international banks started to use exchangeable funds, which helped for increasing the number of currencies deals.
The contemporary currency market, which is characterized with periodical changing of periods of rise, voluntary of the prices and their relative stability, is approved in 20th century. Until the middle of 30th years London is leading center of currency trade, and British pound was the currency of payments and making the currency reserves.
In this time with currency is traded with help of telex or telegraph, the British pound had the generally acknowledged name cable.
In 1930 in Switzerland in Basel is founded a Bank for international, payments, used to look for the financial activity of new independent countries, came after world war 1 and to make currency help, for the countries, with temporally financial hardness.
After World War 2, when the economic of Great Britain is collapsed and the USA are the only country, which didn’t hurt economical from the war, the American dollar became the main currency of whole over the world. In nowadays the currencies in world are valued with American dollar.
Improvement of currency market on contemporary stage
The main moments in the “FOREX” development for the last decades are:
- The signet Breton – Woodsky agreements.
- Making of the international currency fond.
- The spring up of the market with currencies with free sailing curses.
- Making of the currency reserves.
- Making of European currency union and the fond of European currency collaboration.
Breton – Woodsky agreements are signet in 1944 from USA, Britain and France, which are come to an agreement for the measures for stability of currencies. To be achieved that, was admitted the necessity of artificially mooring of the currency courses (pegging) and forming of International Currency fund.
In agreement of Breton – Woodsky agreements, main traded currencies are moored with American dollar; a change of their value is admissible but not more than 1% for the dollar. When got out of this range, called “positions of intervention” the central bank is obligated to buy or sell own currency to return its value to the established range. The American dollar is moored to the value of the gold – 35$ per ounce.
In that way, the American dollar becomes the world reserve currency.
On the international currency fund is assigned to implement a reciprocal consultations in interest of continuing the stability of the running system for buying and selling currency.
The international currency fund defines credits of the countries – members of the fund, which have difficulty with carrying out for the financial duties with other members of the international currency fund. As main tasks, ICF has taken the follows:
- To cooperate to the international collaboration for creating for its members needed conditions for consultation and interaction about the problems of the international financial activity.
- To contribute for developing the international trade and to give it’s contribution for rising the level of the employment, rising the real earnings of the population of the members of the fund.
- To contribute for keeping the stability of the rates and the execution of the currency contracts and to prevent bad devaluation of the currencies.
- To develop multilateral system of the international payments and to find ways for elimination of the currency restrictions preventing the growing of the international trade.
- To secure available financial resources for the members of the fund on time basic and when there are guarantees, to give opportunity to these countries to make payment duty without using criterions bad for the national economics and the international safety.
For executing of the purposes ICF uses tools as secondary trenches allowing the countries to use the reserves of their own member quotas when reaching the timelines for paying of the credit lines and agreements from the type stand by. The credit lines and stand by agreements are standard forms of loans of ICF for difference of such as compensation financial support that is intended for extension of the financial help for countries with temporary problems conditioned of lowing down the capacity of the export, filling the reserve girds used for help for making primary stock resources; for purposes of securing the stability of the prices of particular group of stocks and advanced support for helping of countries which have financial difficulties which size or duration is bigger than the capacity of the other kinds of help.
Since 1978 ICF officially sanction the floating rate of currencies. This means that with a currency can be trade by every one, its price is set as a function of the current demand and supply on the market, and special positions of intervention requiring permanent control are missing.
Of course the Federal reserve system of USA, periodical makes interventions for correcting the value of the dollar but there aren’t earlier settled levels. There is higher demand for floating currencies.
For the population and the corporations instrument for protection of the investments in period of economical or political instability are the currency reserves necessary for international deals. After the World War II world reserve currency becomes the American dollar. There are other reserve currencies – Euro and Japanese yen. The wallet of the reserve currencies can change according to the current international situation, for example the wallet can include Swiss franc.
The creation of EU and what followed
Creating the European Union is a result of continue and permanent efforts for settling of tighter economical co-operation between the European countries. Official purposes for making the EU were improving the in-European economical cooperation, creating regional provinces of financial stability and executing the function of regional pole of the stability of the world financial markets. First steps about this were in 1950 when it’s created the European payment union for encouragement of the in-European contracts for international trade operations. Purpose of this organization is showing cooperation of the in-European trade and removal of the restrictions of the trade of coals and gray steel.
In 1957 with the Rome contract is created European Economical Union (EEU) with the same participants as in European commission for coals and steel. Statute purposes of EEU are liquid of the duties and all other barriers on the way of the financial streams, rendering of services and the migration of people between the member countries of the union. On the outer borders of EEU starts settling of tariff barriers.
European Union has four executive and legislative bodies:
- European commission – executive body of making and controlling the general politic. As long as it doesn’t have own control mechanism this commission is forced to rely when there are checks and making of politic of the Union of local governments. The commission is made by 23 sections like the foreign policy, competition and the agriculture. Every country chooses its representatives in the commission with 4 year mandate. Commission is settled in Brussels and has 17 members.
- Council of the ministers makes the main political decisions. Includes representatives of 12 member countries if EU. It is headed by every of its members for a month in alphabetical order. Conferences of the council of ministers are made in Brussels or the capital of the country that is leading in the moment.
- European parliament – checks and accepts legislative decisions and has power for accepting or declining of suggestions about the budget. Consist 518 chosen deputies. It is located in Luxemburg, but the conferences are made in Strasburg or Brussels.
- European judge – makes decisions about disputable questions between EU and the member countries. It has 13 members and it is located in Luxemburg.
In 1963 is signed contract for cooperation between France and FGR. This contract aims not to put end of centuries of war but to set after war consent between the two traditional opponents. The contract says that West Germany in the period of “The cold war” will get opportunity for economical development and France as a center of diplomatically initiatives will take the political leadership. It is obvious that the conditions of the contract response to the situation that was defined as an expectation of continue and permanent period of “Cold war” and dissent of Germany.
The conference of the presidents in 1969 defines the aims of the creating of the currency union in the margins of European Union. It was considered that this aim will be reached in 1980 when it was planned in Europe to be led in the general currency ECU. The reason for making the decision for general currency was the striving for stimulating the in-European trade and reaching fusion of the economics of the member countries of EU for successful opposing to the competition with USA and Japan.
In 1978 nine member countries if EU accept another plan for securing the stability – on the way of creating the European currency system. Practically the new system starts working in 1979. Seven countries become its members – FGR, France, Nederland, Belgium, Luxemburg, Denmark and Ireland. Great Britain doesn’t participate in all these contracts and Italy joins them in certain conditions. In 1981 Greece joins them and in 1986 – Spain and Portugal. In 1990 Great Britain joins the contract for mechanism of the currency price forming.
European fund for currency cooperation is formed for managing of the credit activity of the European currency system. For raising the attractiveness of the ECU to the countries that have biggest girds of currency ECU or making payments of leans in capacities exceeding such girds are accounted percents on the difference. The size of the percents is settled as an average weighted of the stakes under review of all members of the European currency system.
In 1998 as a general European currency is led in the Euro (EUR).
These rates was proposed by the commission and accepted by the committee of the financial ministers of the EU on 31.12.1998 before going in circulation of the Euro at midnight on 01.01.1990. Factual start of the circulation of the Euro is on Monday 04.01.1999. The exchange rates have the following look:
- 1 EUR = 40.3399 BEF
- 1 EUR = 0.787564 ESP
- 1 EUR = 13.7603 ATS
- 1 EUR = 1.95583 DEM
- 1 EUR = 1936.27 ITL
- 1 EUR = 200.482 PTE
- 1 EUR = 166.386 ESP
- 1 EUR = 40.3399 LUF
- 1 EUR = 5.94573 FIM
- 1 EUR = 6.55957 FRF
- 1 EUR = 2.20371 NLG
(BEF – belgium franc, DEM – german mark, ESP – spanish pesseta, IEP – irish pound, FRF – french franc, ITL – italian lyre, LUF – Luxemburg franc, NLG – dutch gulden, ATS – austrian shiling, PTE – portugese escudo, FIM – finish mark)
Euro is released in bills with nominal of 5, 10, 20, 50, 100 and 200 and coins with nominal 1 and 2 Euro and 50, 20, 10, 5, 2 and 1 eurocent.