Buying (Going Long) Oats Futures to Profit from a Rise in Oats Prices

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Finance English practice: Unit 34 — Futures

  • Complete the sentences below. Use the key words if necessary.
    • Commodity futures

    are agreements to sell an asset at a fixed price on a fixed date in the future. are traded on a wide range of agricultural products (including wheat, maize, soybeans, pork, beef, sugar, tea, coffee, cocoa and orange juice), industrial metals (aluminium, copper, lead, nickel and zinc), precious metals (gold, silver, platinum and palladium) and oil. These products are known as .

    Futures were invented to enable regular buyers and sellers of commodities to protect themselves against losses or to against future changes in the price. If they both agree to hedge, the seller (e.g. an orange grower) is protected from a fall in price and the buyer (e.g. an orange juiced manufacturer) is protected from a rise in price.

    Futures are contracts — contracts which are for fixed quantities (such as one ton of copper or 100 ounces of gold) and fixed time periods (normally three, six or nine months) — that are traded on a special exchange.

    Forwards are individual, contracts between two parties, traded — directly, between, two companies of financial institutions, rather than through an exchange. The futures price for a commodity is normally higher than its — the price that would be paid for immediate delivery. Sometimes, however, short-term demand pushes the spot price above the future price. This is called .

    Futures and forwards are also used by speculators — people who hope to profit from price changes.

    More recently, have been developed. These are standardized contracts, traded on exchanges, to buy and sell financial assets. Financial assets such as currencies, interest rates, stocks and stock market indexes — continuously vary — so financial futures are used to fix a value for a specified future date (e.g. sell euros for dollars at a rate of €1 for $1.20 on June 30).

    and are contracts that specify the price at which a certain currency will be bought or sold on a specified date.

    are agreements between banks and investors and companies to issue fixed income securities (bonds, certificates of deposit, money market deposits, etc.) at a future date.

    fix a price for a stock and fix a value for an index (e.g. the Dow Jones or the FTSE) on a certain date. They are alternatives to buying the stocks or shares themselves.

    Like futures for physical commodities, financial futures can be used both to hedge and to speculate. Obviously the buyer and seller of a financial future have different opinions about what will happen to exchange rates, interest rates and stock prices. They are both taking an unlimited risk, because there could be huge changes in rates and prices during the period of the contract. Futures trading is a , because the amount of money gained by one party will be the same as the sum lost by the other.

  • British English or American English?
    • aliminium
      • British English
      • American English

    • aluminum
      • American English
      • British English

  • Match the definitions with the words below.
    • 1. the price for the immediate purchase and delivery of a commodity — . . .

      How Stock Futures Work

      Futures Contracts 101

      When you buy or sell a stock future, you’re not buying or selling a stock certificate. You’re entering into a stock futures contract — an agreement to buy or sell the stock certificate at a fixed price on a certain date. Unlike a traditional stock purchase, you never own the stock, so you’re not entitled to dividends and you’re not invited to stockholders meetings [source: Thachuk]. In traditional stock market investing, you make money only when the price of your stock goes up. With stock market futures, you can make money even when the market goes down.

      Here’s how it works. There are two basic positions on stock futures: long and short. The long position agrees to buy the stock when the contract expires. The short position agrees to sell the stock when the contract expires. If you think that the price of your stock will be higher in three months than it is today, you want to go long. If you think the stock price will be lower in three months, then you’ll go short.

      Let’s look at an example of going long. It’s January and you enter into a futures contract to purchase 100 shares of IBM stock at $50 a share on April 1. The contract has a price of $5,000. But if the market value of the stock goes up before April 1, you can sell the contract early for a profit. Let’s say the price of IBM stock rises to $52 a share on March 1. If you sell the contract for 100 shares, you’ll fetch a price of $5,200, and make a $200 profit.

      The same goes for going short. You enter into a futures contract to sell 100 shares of IBM at $50 a share on April 1 for a total price of $5,000. But then the value of IBM stock drops to $48 a share on March 1. The strategy with going short is to buy the contract back before having to deliver the stock. If you buy the contract back on March 1, then you pay $4,800 for a contract that’s worth $5,000. By predicting that the stock price would go down, you’ve made $200.

      What’s interesting about buying or selling futures contracts is that you only pay for a percentage of the price of the contract. This is called buying on margin. A typical margin can be anywhere from 10 to 20 percent of the price of the contract.

      Let’s use our IBM example to see how this plays out. If you’re going long, the futures contract says you’ll buy $5,000 worth of IBM stock on April 1. For this contract, you’d pay 20 percent of $5,000, which is $1,000. If the stock price goes up to $52 a share and you sell the contract in March for $5,200, then you make $200, a 20 percent gain on your initial margin investment. Not too shabby.

      But things can also go sour. If the stock price actually goes down, and ends up at $48 a share on April 1, then you have to sell the $5,000 contract for $4,800 — a $200 loss. That’s a 20-percent loss on your initial margin investment. If the stock drops considerably, it’s possible to lose more than the price of the initial investment. That’s why stock futures are considered high-risk investments.

      When buying on margin, you should also keep in mind that your stockbroker could issue a margin call if the value of your investment falls below a predetermined level called the maintenance level [source: Money.net Inc.]. A margin call means that you have to pay your broker additional money to bring the value of the futures contract up to the maintenance level.

      Now let’s look at some of the most common investment strategies using stock futures.

      Текст книги “Английский для экономистов (учебник английского языка)”

      Представленный фрагмент произведения размещен по согласованию с распространителем легального контента ООО “ЛитРес” (не более 20% исходного текста). Если вы считаете, что размещение материала нарушает чьи-либо права, то сообщите нам об этом.

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      Оплатили, но не знаете что делать дальше?

      Автор книги: Денис Шевчук

      Жанр: Иностранные языки, Наука и Образование

      Текущая страница: 13 (всего у книги 19 страниц) [доступный отрывок для чтения: 13 страниц]

      5.What are the goals of international banking regulation?

      6.What do you know of the activities of the Central Bank of the Republic of Belarus? 7.Comment on the following: “A banker is a man who lends you umbrella when the weather is fair, and takes it away from you when it rains.”

      8. Money is more convenient means of exchange, but barter still exists. Why?

      9. Find the information about the development of banking industries in England, Germany, France, your country and prepare a 10-15 minute report.

      10.“Money is a resource because a person who has money can put it to productive use. The same is true of a nation’s money.” Do you agree?

      11.If you possess a large sum of money, what are the pros and cons of the following: -putting it into a sock; – buying a lottery ticket; – taking it to (local) Las Vegas; – putting it in a bank; – buying gold; buying a picture by Van Gogh; – investing in property; – buying shares?

      12.What financial barriers might confront people who live in different societies with different monetary systems and who wish to trade with one another? Would it be advantageous if the entire world used a common currency? What do you think are some of the reasons we do not have a world currency?

      13.Summarize the information of the unit to be ready to speak on “Money”. The first step to be done is to write the plan of your future report.

      14.Choose any question (problem, topic) relating to Banking and make a 10-12 minute report in class. Refer to different additional sources to make your report instructive, interesting and informative.

      UNIT 7
      FINANCE

      What the government gives it must first take away.

      Finance – management of money

      – capital involved in a project

      – loan of money for a particular purpose

      – money resources of a state, company or person

      Finance house (company)

      – organization providing finance for hire-purchase agreements.

      – accountant whose primary responsibility is the management of the finances of an organization and the preparation of its annual accounts.

      – a person who offers financial advice to someone else, especially one who advises on investment.

      – organization, usually a merchant bank, which advises the board of a company during a take-over.

      – the liquid as opposed to physical assets of a company.

      – futures contract in currencies or interest rates.

      – an organization that collects funds from individuals, other organizations or government agencies and invest these funds or lends them on to borrowers.

      – formal financial document.

      – bank, building, society, finance house, insurance, company, investment trust etc. that holds funds borrowed from lenders in order to make loans to borrowers.

      – person or organization that sells insurance but is not directly employed by an insurance company.

      – any year connected with finance, e.g. a company’s accounting period or a year for which budgets are made up.

      – specific period relating to corporation tax.

      – ratios between particular groups of the assets or liabilities of an enterprise and corresponding totals of assets or liabilities; or between assets and liabilities and flows like turnover or revenue.

      – person who uses his one money to finance a business deal or venture or who makes arrangements for such a deal.

      You’ve studied the definitions taken from a dictionary. Refer to some other sources to find more information about the concepts mentioned above.

      Ex. 1. Think of the nouns that are most commonly used with these verbs. Give your own sentences with the combinations of words.

      to generate, to adopt, to utilize, to perform, to involve, to seek, to provide, to facilitate.

      Ex. 2. Give Russian equivalents to the following.

      Grant loans, accept deposits, facilitate securities transfers, raising corporate funds, obtain funds, dividend policies, merger and acquisition activities, leasing, the realm of the capital budget, the cash budget, security trading, portfolio managers, stocks, bonds, stock and index options, warrants, financial futures, bank teller, financial analyst, a loan officer, depository institution, mortgage servicing specialist, insurance company, accounts payable staff, treasurer, brokerage house, investment counselor.

      Ex. 3. Match the word with its definition.

      rate, portfolio, quotation, option, warrant, exchange rate, brokerage, deposit, merger, mortgage, counselor, interest rate.

      1. The value of a currency expressed in terms of another currency.

      2. Numerical proportion between two sets of things.

      3. Charge made for borrowing a sum of money, expressed as a percentage of the total sum loaned.

      4. Indication of the price at which a seller might be willing to offer goods for sale.

      5. Person giving professional guidance on personal problems.

      6. Range of investments held by a person, company, etc.

      7. Broker’s fee or commission, which is usually calculated as a percentage of the sum involved in the contract.

      8. Combining of two or more commercial organizations into one in order to increase efficiency and to avoid competition.

      9. Right in property created as security for loan.

      10. Money left with a bank for safe keeping or to earn interest.

      11. Finance security that offers the owner the right to subscribe for the ordinary shares of a company at a fixed price.

      12. Right to buy or sell a fixed quality of a commodity, currency, or security at a particular date at a particular price.

      Ex. 4. Match each word on the left with its opposite on the right hand side.

      Ask your partner as many questions as you can using the words above.

      Ex. 5. Insert prepositions.

      Financial planning process

      Financial planning is an important aspect … the firm’s operation and livelihood since it provides road maps … guiding, coordinating and controlling the firm’s actions in order to achieve its objectives. Two key aspects … the financial planning process are cash planning and profit planning. Cash planning involves the preparation of the firm’s cash budget; profit planning is usually done … means of proforma financial statements.

      The financial planning process begins … long-run, or strategic, financial plans that in turn guide the formulation of short-run, or operating, plans and budgets. Generally, the short-run plans and budgets implement the firm’s long-run strategic objectives.

      Long-run (strategic) financial plans are planned long-term financial actions and the anticipated financial impact of those action. Such plans tend to cover periods ranging … two … 10 years. Long-run financial plans consider proposed fixed-assets outlays, research and development activities, marketing and product developing actions and major sources of financing.

      Short-run (operating) financial plans are planned short-term financial actions and the anticipated financial impact … those actions. These plans most often cover a one – to two-year period. Key inputs include the sales forecast and various forms of operating and financial data. Key outputs include a number … operating budgets, the cash budget and proforma financial statements.

      Read the text once again and answer the following questions: What are two key aspects of financial planning? What do short-run and long-run plans include?

      Ex. 6. Join the halves. Translate the sentences into Russian.

      1. Financial markets provide the mechanism for

      2. Investment analysis focuses on

      3. When a company obtains capital from external sources

      4. Equity financing and debt financing provide

      5. Working capital refers to

      6. Financial management is concerned with

      7. Transactions is short-term debt instruments that

      8. Major securities traded in the capital market

      9. When prices rise,

      10. Finance involves

      11. More experienced individuals would be eligible for

      a. the funds used to keep business working or operating.

      b. carrying out the allocation of financial resources.

      c. take place in the money market.

      d. include bonds and both common and preferred stock.

      e. the financing can be either on a short-term or a long-term arrangement.

      f. how individuals or portfolio managers select appropriate financial and real assets.

      g. important means by which a corporation may obtain its capital.

      h. how firms acquire and allocate funds.

      i. loan officer, branch manager, or senior analyst.

      j. the securing of funds for all phases of business operations.

      k. the same goods, cost more in terms of dollars, and the dollar’s value in term of those goods falls.

      Ex. 7. Translate the text into Russian in written form.

      Financial institutions and markets create the mechanism through which funds flow between savers (fund suppliers) and investors (fund demanders). The level of funds flow between suppliers and demanders can significantly affect economic growth. Growth results from the interaction of variety of economic factors, such as the money supply, trade balances, and economic policies, that affect the cost of money – the interest rate or required return. The level of this rate acts as regulating device that controls the flow of funds between suppliers and demanders. In general, the lower the interest rate, the greater the funds flow and therefore the greater the economic growth and vice versa.

      The interest rate or required return represents the cost of money. It is the rent or level of compensation a demander of fund must pay a supplier. When funds are lent, the cost of borrowing the funds is the interest rate. When funds are invested to obtain an ownership (or equity) interest, the cost to the demander is commonly called the required return. In both cases the supplier is compensated for providing either debt or equity funds. Ignoring risk factors, the nominal and actual interest (cost of fund) result from the real rate of interest adjusted for inflationary expectations and liquidly preferences – general preferences of investors for shorter-term securities.

      In a perfect world in which there is no inflation and in which funds suppliers and demanders are indifferent to the terms of loans or investment because they have no liquidity preference and all outcomes are certain, at a given point in time there would be one cost of money – the real rate of interest. The real rate of interest creates an equilibrium between the supply of savings and the demand for investment funds.

      Ex. 8. Give the Russian equivalents to the following.

      Tax, taxation, taxable income, taxation brackets, tax avoidance, tax base, tax burden, tax evasion, tax exemption, tax-free, tax haven, tax holiday, taxman, tax relief, tax return, tax shelter, lump-sum tax, excise tax, heavy tax, payroll tax.

      Ex. 9. Match the following expressions with the correct definition.

      Ex. 10. What is the English for?

      Взимать налог; не платить налоги; облагать налогом; освобождать от налога; платить налоги; подлежать налогооблoжению; снижать налоги; удерживать налоги; уклоняться от уплаты налогов; до вычета налогов; после удержания налогов.

      WHAT IS FINANCE?

      The field of finance is broad and dynamic. It directly affects the lives of every person and every organization, fi–nancial and non-financial, private or public, large or small, profit -seeking or non-profit. Finance can be defined as the art and science of managing money. All individuals and organizations earn or raise money and spend or invest money. Finance is concerned with the process, institutions, markets, the instruments involved in the transfer of money among and between individuals, businesses and governments.

      Finance can be defined at both the aggregate or macro le–vel and the firm or micro level. Finance at the macro level is the study of financial institutions and financial markets and how they operate within the financial systems. Finance at the micro level is the study of financial planning, asset management, and fund raising for business firms and financial institutions.

      Finance has its origin in the fields of economics and accounting. Economists use a supply-and-demand framework to explain how the prices and quantities of goods and services are set in a free-enterprise or market-driven economic system.

      Accountants provide the record-keeping mechanism for showing ownership of the financial instruments used to facilitate the flow of financial funds between savers and borrowers. Accountants also record revenues, expenses, and profitability of organizations involved in the production and exchange of goods and services.

      Large-scale production and a high degree of specialization of labourcan function only if there exists an effective means of paying for productive resources and final products. Business can obtain the money it needs to buy capital goods such as machinery and equipment only if the institutions and markets have been established for making savings available for such investment. Similarly, the federal government and other governmental units can carry out their wide range of activities only if efficient means exist for raising money, for making payments, and for borrowing.

      Financial markets, institutions orintermediaries, and business financial management are basic elements of well-developed financial systems. Financial markets provide the mechanism for carrying out the allocation of financial resources or funds from savers to borrowers. Financial institutions such as banks and insurance companies, along with other financial intermediaries, facilitate the flow of funds from savers to borrowers. Business financial management involves the efficient use of financial capital in the production and exchange of goods and services. The goal of the financial manager in a profit-seeking organisation is to maximize the owners’ wealth through effective financial planning and analysis, asset management, and of financial capital. The same financial management functions must be performed by financial managers in not-for-profit organizations, such as governmental units or hospitals, in order to provide the desired level of service at acceptable costs.

      1. What is finance?

      2. Where does finance have its origin?

      3. What are the basic elements of financial system?

      One of the primary considerations when going into business is money. Without sufficient funds a company cannot begin ope–rations. The money needed to start and continue operating a busi–ness is known as capital. A new business needs capital not only for ongoing expenses but also for purchasing necessary assets. These assets – inventories, equipment, buildings, and property – represent an investment of capital in the new business.

      How this new company obtains and uses money will, in large measures determine its success. The process of managing this acquired capital is known as financial managing/management. In general finance is securing and utilizing capital to start up, operate, and expand a company.

      To start up or begin a business, a company needs funds to purchase essential assets, support research and development, and buy materials for production. Capital is also needed for salaries, credit extension to customers, advertising, insurance, and many other day-to-day operations. In addition, financing is essential for growth and expansion of a company, because of competition in the market, capital needs to be invested in developing new product lines and productions techniques and in acquiring assets for future expansion.

      In financing business operations and expansion, a business uses both short-term and long-term capital. A company, much like an individual, utilizes short-term capital to pay for items that last relatively short period of time. An individual uses credit cards for buying such things as clothing or food, while a company seeks short-term financing for salaries and office expenses. On the other hand, an individual uses long-term capital such as bank loan to pay for a home or car – goods that will last a long time. Similarly, a company seeks a long-term financing to pay for new assets that are expected to last many years.

      When a company obtains capital from external sources the financing can be either on a short-term or a long-term arrangement. Generally, short-term financing must be repaid in less than one year, while long-term can be repaid over a longer period of time.

      Finance involves the securing of funds for all phases of business operations. In obtaining and using this capital, the decisions made by managers affect the overall financial success of a company.

      Read the text and be ready to speak on:

      1. the funds the capital of a business consists of;

      2. the classification of capital;

      3. the types of financing.

      The capital of a business consists of the funds used to start and run the business. The funds may be either the owner’s (equity capital) or creditor’s (debt capital). Equity capital consists of those funds provided to the business by the owner(s). These funds come from the personal savings of the owner. Debt capital consists of borrowed funds that the business owner owes to the lender. With debt capital the entrepreneur doesn’t have to share ownership, but has a legal obligation to repay the borrowed money (principal) plus interest at a future data even if the business does not make profit.

      Capital is also classified, depending on it use, as fixed or working. Fixed capital refers to items bought once and used for a long period of time. These items include real estate, fixtures, equipment. With a grocery, for example, the real estate consists of the store itself and the land on which it is built. The fixtures include such objective as counters, refrigerators, shelves. Equipment covers such articles as cutting machines, knives, scales. Working capital refers to the funds used to keep a business working or operating. It pays for merchandise, inventory and operating expenses such as rent, utilities (light and heat), taxes, wages. Cash on hand and accounts receivable are also considered working capital. Therefore, working capital is cash, or anything that can easily and quickly be turned into cash.

      Equity financing (obtaining owner funds) can be exemplified by the sale of corporate stock. In this type of transaction, the corporation sells units of ownership known as shares of stock. Each share entitles purchaser to a certain amount of ownership. For example, if someone buys 100 shares of stock from Ford Motor Company, that person has purchased 100 shares worth of Ford resources, material, plants, production and profits. The person who purchases shares of stock is known as a stockholder or shareholder.

      All corporations, regardless of their size, receive their starting capital from issuing and selling shares of stock. The initial sales involve some risk on the part of the buyers because corporation has no record of performance. If the corporation is successful, the stockholder may profit through increased valuation of the shares of stock, as well as by receiving dividends. Dividends are proportional amounts of profit usually paid quarterly to stockholders. However, if the corporation is not successful, the stockholder may take losses on the initial stock investment.

      Often equity financing does not provide the corporation with enough capital and it must turn to debt financing, or borrowing funds. One example of debts financing is the sale of corporate bonds. In this type of agreement, the corporation borrows money from investor in return for bond. The bond has maturity date, a deadline when the corporation must repay all of the money it has borrowed. The corporation must also make periodic interest payment to the bondholder during the time the money is borrowed. If these obligations are not met, the corporation can be forced to sell its assets in order to make payments to the bondholders.

      All businesses need financial support. Equity financing (as in the sale of stock) and debt financing (as in the sale of bonds) provide important means by which a corporation may obtain its capital.

      Read the text. Define the main idea of each paragraph. Underline the sentences expressing these ideas.

      Financial markets provide a forum in which suppliers of funds and demanders of loans and investments can transact business directly. Whereas the loans and investments of institutions are made without the direct knowledge of the suppliers of funds (savers), suppliers in the financial markets know where their funds are being lent or invested. The two key financial markets are the money market and the capital market. Transactions in short-term debt instruments, or marketable securities, take place in the money market. Long-term securities (bonds and stocks) are traded in the capital market.

      The money market is created by a financial relationship between suppliers and demanders of short-term funds, which have maturities of one year or less. The money market exists because certain individuals, businesses, governments and financial institutions have temporarily idle funds that they wish to put in some type of liquid assets or short-term, interest-earning instruments. At the same time, other individuals, businesses, governments and financial institutions find themselves in need of seasonal or temporary financing. The money market thus brings together these suppliers and demanders of short-term liquid funds.

      The capital market is a financial relationship created by a number of institutions and arrangements that allows the suppliers and demanders of long-term funds – funds with maturities of more than one year – to make transactions. The backbone of the capital market is formed by the various securities exchanges that provide a forum for debt and equity transactions. Major securities traded in the capital market include bonds and both common and preferred stock.

      All securities, whether in the money or capital markets, are initially issued in the primary market. This is the only market in which the corporate or government issuer is directly involved in the transaction and receives direct benefit from the issue – that is, the company actually receives the proceeds from the sale of securities. Once the security begins to trade among individuals, businesses, government or financial institutions, savers and investors, they become part of the secondary market. The primary market is the one in which «new» securities are sold; the secondary market can be viewed as an «issued» or «preowned» securities market.

      During the last two decades the Euromarket – which provides for borrowing and lending currencies outside their country of origin – has grown quite rapidly. The Euromarket provides multinational companies with an «external» opportunity to borrow or lend funds with the additional feature of less government regulation.

      1. What is a financial market?

      2. What are the two key financial markets?

      3. In what do they differ?

      4. Differentiate between primary and secondary markets.

      WHAT ARE DERIVATIVE INSTRUMENTS?

      It may sound like a house of cards, but many financial instru–ments in the global economy are based on nothing more than the value of other financial instruments. Today it would be impossible to responsibly manage any significant international investment without an understanding of financial derivatives like options, financial futures, and interest rate swaps. A stock option, which allows an investor to purchase or sell a given stock at a fixed price sometime in the future, is called a derivative because its value is determined by the value of an underlying stock.

      A financial future is an agreement to buy a financial instrument – such as a stock or bond – sometime in the future at a fixed price. A stock index future, for example, allows investors to benefit from the rise in a stock index by buying, in a sense, all the shares in the index. Just as a gold future goes up in value when gold’s price rises, a future on the Standard & Poor’s 500 will increase in value when the stock index rises.

      The basic idea of a swap is to trade something you have for something you want. A swap is a trade agreement between two or more counterparties, usually banks, to exchange different assets or liabilities such as interest payments. Essentially, it allows both parties to obtain the right assets and cash flows for their own particular needs. In the case of banks, this most often means trading two loans with different interest rates or different foreign currencies. For example, a bank lending money to consumers at a fixed interest rate may be borrowing money at floating or periodically changing interest rates. In order to eliminate the risk of having borrowed and lent money at two different interest rates, the bank enters into an interest rate swap agreement with another institution to exchange one flow of interest rates for another.

      1. What is ‘a financial instrument’?

      2. What does a stock option allow?

      3. What is ‘a financial future’?

      4. What is the basic idea of a swap?

      inflation A persistent rise in the general level of prices.

      disinflation A falling inflation rate.

      zero inflation No change in the general level of prices.

      hyperinflation A rapidly rising inflation rate, often reaching hundreds of percentage points within a few months.

      deflation The opposite of inflation, in which the general level of prices declines.

      stagflation A simultaneous increase in both the inflation rate and the unemployment rate.

      purchasing power of money The amount of goods and services a unit of money can command in the market.

      price index A numerical device used to measure changes in prices.

      consumer price index A measure of inflation based on a theoretical market basket of consumer goods.

      Everyone is familiar with the way prices of goods and services behave in the mar–ketplace. They usually go up. The phenomenon of rising prices is calledinflation.Since the economy includes multitudes of prices, and all do not rise or fall at the same time, it is convenient to use the concept of an average price and describe inflation as a continuing rise in the level of the average price, or the general price level.

      The inflation rate is the rate of change (or the percentage change) in the general price level over a specified time period, usually a year. An increase in the inflation rate means that prices are rising at a faster rate. A decrease in the inflation rate means that prices in general are not rising as quickly as before; it does not mean that prices are falling. The termdisinflation is often used to describe a declining inflation rate. If prices in general do not change, a situa–tion ofzero inflationexists.

      Rapidly rising prices may lead to a situation called hyperinflation. Many countries have experienced hyperinflation, some very recently, with inflation rates reaching hundreds of percentage points in a matter of months.

      The phenomenon of falling prices is known as deflation. It is the opposite of inflation.

      Economies have also experienced a situation known asstagflation. This occurs when a high rate of inflation is accompanied by a high level of unemployment This presents a dilemma for policy makers, as attempts to cure one problem invariably make the other one worse. The cherished goal of every country has been to keep both problems under control to avoid the heavy costs they inflict on people.

      Inflation and thepurchasing power of money are inversely related. Inflation causes the purchasing power of money to fall. The purchasing power of money (also known as the value of money) is the amount of goods and services that one unit of money can buy. When prices rise, the same goods cost more in terms of dollars, and the dollar’s value in terms of those goods falls.

      Inflation is commonly measured with the aid of aprice index. A price index is a statistical device to measure price changes between a base period and a subse–quent period. Economists use many different price indices. Theconsumer price index (CPI) is the most popular index for tracking inflation in the United States. The CPI measures the average change in the prices paid by urban consumers for a fixed basket of goods and services. The statistics for this index are compiled by the Bureau of Labor Statistics of the U.S. Department of Labor, which publishes them monthly.

      1. Sum up the text in 7-10 sentences and present your summary in class. Use the key-words given before the text.

      When residents of one country trade with residents of another country, they must generally convert funds between the currencies of the two countries to facilitate payments. Currency conversion requires a rate to define the value of one curren–cy in terms of another currency. This rate is the exchange rate.

      Since multinational companies trade in many different foreign markets, that’s why portions of their revenues and costs are based on foreign currencies. Among the currencies regarded as being major (or ‘Hard’) are the British pound, the Swiss franc, the Deutsche mark, the French franc, the Japanese yen, the Canadian dollar and the US dollar. The value of two currencies with respect to each other is foreign exchange rate.

      For the major currencies, the existence of a floating relationship means that the value of any two currencies with respect to each other is allowed to fluctuate on a daily basis. On the other hand, many of the nonmajor currencies of the world try to maintain a fixed (or semi-fixed) relationship with the respect to one of the major currencies, or some type of an international foreign exchange standard.

      On any given day, the relationship between two of the major currencies will contain two sets of the figures, one reflecting the spot exchange rate (the rate on the date), and the other indicating the forward exchange rate (the rate at some specified future date).

      Two widely used systems of quoting exchange rates are known as European terms and American terms of quotation. In European terms, the value of the U.S dollar is expressed in terms of all other currencies. In American terms, the values of all foreign currencies are expressed in terms of U.S. dollars. American terms of quotation are commonly used in many retail currency transactions. In their dealings among themselves, banks use European terms of quotation except for quotes on the British pound, the Irish punt, the Australian dollar, and the New Zealand dollar. These currencies have been traditionally quoted in American terms. The Wall Street Journal reports daily exchange rates in both European terms and American terms.

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