International Financial Markets

The Foreign Exchange Market

The foreign exchange market is the largest financial The peculiarity market of the world and plays an important role in the co-of the foreign operation providing between the components of the world exchange market financial market.

The exchange market is the system of economic and organizational relations, related to the buy/sell transactions of foreign currency and payment documents in foreign currency, as well as transactions on investing of currency capital.

The peculiarity of this market consists in that:

• it is non-material;

• it does not have a concrete location, a single center;

• a mechanism of its functioning is an exchange of currency of one country for currency of another country;

• there is complete freedom of the instantaneous opening or closing of any position, possibility to trade round the clock in the on-line mode;

• it is an interbank market;

• it has the flexible system of organization of trade and flexible strategy of paying for the conclusion of transaction;

• it is one of the most liquid markets due to possibility of work with different currencies within it;

• it is global due to the process of telecommunication and informatics.

Main participants of foreign exchange market are commercial banks, corporations, engaged in international trade, non-bank financial institutions (firms on the management of assets, insurance companies), central banks.

The central link of the foreign exchange market is the commercial banks, as most transactions with currencies foresee exchange by bank deposits, denominated in different currencies.

The basic commodity of this market is foreign currency in different forms: currency deposits, any financial requirements, denominated in foreign currency. The currency demand deposits are the most preferential in the exchange market.

Demand deposits are the facilities, which are used in trading in currency between banks, working in the exchange market. Bank dealers hold demand deposits in foreign currency in the bank-correspondents, located in countries, where this foreign currency is national. A bank in some country can sell foreign currency, making an order to foreign employees to transfer a demand deposit the buyer. The purchase of currency is carried out in the same way. In this case, a seller transfers it to the bank, being abroad, on the buyer's account. A currency transaction takes a place as follows. For example, the American firm must pay 200 thousands of euro the German firm for the delivery of goods. A firm charges its bank to debit the dollar account and to pay this sum, by transferring it to the account of supplier in the German bank. The American bank transfers from the account of the American firm into the debit of the German bank dollars at the current exchange rate in an exchange for a deposit in Euros, which will be used for payment to the German supplier.

The foreign exchange market consists of great number of national currency markets, which in one or another degree are incorporated in the world system with three levels:

1st level: the retail trading. The transactions in one national market, when a bank-dealer directly cooperates with clients.

2nd level: wholesale interbank trade. The transactions in one national market, when two bank-dealers cooperate through mediation of currency broker.

3rd level: the international trade. The transactions between two and more national markets, when the bank-dealers of different countries cooperate with each other. Such transactions often include arbitration operations in two or three markets. Process of arbitration, when market participants buy currency the cost of which falls, and sell currency the cost of which is exceeded the exchange rate in other market centers, generates the tendency of law of one price.

Depending on the level of organization of the exchange market, it is distinguished an exchanging currency market and the non-exchanging currency market. An exchanging currency market is presented by currency exchanges, and the non-exchanging currency market - by banks, financial institutions, enterprises and organizations.

The functions of the exchanging market consist in determination of demand and supply of currency, establishment of exchange rates, forecasting of its dynamics, determination of reference rates of currencies, as well as in forming of certain strategy and tactic of the central bank of the country on a fiscal policy and system of the currency adjusting. Both the current and futures transactions are concluded on the currency exchanges. In terms of volume an exchanging market is small, as it functions mainly as a national exchange market (approximately 10% of all currency transactions are concluded).

Functioning of the interbank market is directly related to realization of currency transactions. There is an about 90% turnover of foreign currency in it.

Most currency transactions are concentrated on interbank trade. The exchange rates, published in newspapers, are interbank, that is the rates which banks are inquired for each other. Interbank "wholesale" rates are below than "retail" rates for clients. A difference between them is the profit of the bank for provided service.

In transactions with foreign currencies can take part any two currencies, however most of interbank transactions consist of exchange of currency for the U.S. dollar, which is considered to be the key currency. An important role in the foreign exchange market is played also by an euro, Japanese yen, Swiss franc, English pound sterling. Demand on these currencies exists every second, unlike other currencies.

The foreign exchange market operates the extraordinarily large amount of money. Its volume exceeds 700 bill $. per year, and a daily turnover made in 2010 about 4 bill $., in 2011 - 5 bill $., and in 2020 forecast the increase of volume of transactions to 10 bill $. per day, moreover there are about 20% of all transactions in the Asiatic market, 40% - in European and 40% - in American [65].

By the nature of transactions, an exchange market is divided into following markets: spot, forward, market of the currency futures and options.

Different types of transactions on conversion operations are concluded in the foreign exchange market. Conversion operations are transactions, concluded in the exchange market on the buy/sell of certain sum of currency of one country on currency of other country at the concerted rate upon the certain date. The purpose of conversion operations is:

• the exchange of currencies at international trade, realization of tourism, migration of capital and labor force;

• speculative operations (for generating profit from a change in the exchange rates);

• hedging (protecting from a currency risk, potential losses from the change of exchange rates), which improves the terms of conclusion of international trade and investment transactions. Thus, hedging is the stimulation of international flows of goods and capital.

There are such conversion operations as:

• operations with immediate delivery of currencies (current conversion operations) which are divided on the operation of "tod" with the date of value dating today (today), "tom" with the date of value dating tomorrow (tomorrow), "spot" with the date of value dating in two banking days (spot);

• terminal currency conversion operations, which are divided on forwards, swap deals, futures and options.

The specificity of transactions in the spot market

A spot market is a market, on which the transactions of current, terminal and immediate (or cash) exchange of currencies between two countries are carried out. Two sides negotiate about an exchange of the bank deposits and immediately carry out a transaction. Presently, at will of the client, by electronic facilities, converting of currencies takes a place in the day of conclusion of the transaction.

The rates of immediate exchange of currencies are called current (spot) rates, i.e. according to it currencies are exchanged during no more than two workings days from the moment of its accordance. And transactions form the cash foreign exchange market by themselves.

A spot transaction traditionally is a base currency transaction, and a spot rate is a base rate, on the basis of which other rates of transactions are calculated in the exchange market (cross-rates, rates of forward and future transactions.

For the exchange of foreign currencies two prices (rates) of currencies are used: the buying rate and the selling rate. When buying the currency in a bank or in a dealer, it is necessary to pay the higher price for currency, than that price for which it is possible to sell the same amount of currency to that bank or a dealer.

Bank and dealer buying rates are those prices, which both the bank and the dealer are ready to pay for foreign currency. Selling rates are prices, on which both the bank and the dealer are ready to sell foreign currency. These two rates are quoted by the pair. A difference between these rates is called the absolute spread. It serves for coverage of charges of the bank and for insurance of the currency risk. At instability of the exchange market or in the period of currency crisis, the spread can be increased from 2 to 10 times as compared to "normal" spread - 0,05-0,09% from the quoted rate.

It is possible to calculate the relative spread as a difference between quotations of salesman and buyer, calculated in relation to the selling price:

The following factors influence on the size of spread: status of the contractor and the character of relations between contractors (the size of spread is greater for the clients of the bank, than for other banks at the interbank market; at steady relations between banks-contractors the size of spread is more narrow); market conjuncture (the size of spread, as a rule, is greater at the rapid change of the exchange rate); quoted currency (the size of spread is greater at quotations of rare currencies); sum of the transaction (at transactions on large sums less spread is used).

Currency transactions with immediate delivery are most widespread and amount to approximately 60% of the volume of currency transactions of the interbank market. These transactions are subject to the obligatory implementation by sides. They are used, foremost, for the immediate receipt of currency for realization of foreign trade payments.

Using the spot transactions, banks provide the clients with necessary foreign currency, carry out flowing of capitals, and conduct arbitration and speculative transactions as well.

The nature of forward transactions

A forward market is a market, where the terminal currency transaction with foreign currency are carried out. The terminal (forward) transaction are contracts, according to which two sides negotiate about supplying with the stipulated amount of currency in a certain term after the conclusion of transaction at the rate, fixed in the moment of its conclusion. Forward transactions conclude out of the exchange and are obligatory for execution unlike the futures or options.

An interval in time between the moment of conclusion and execution of the transaction can be from 1-2 weeks, from 1 to 12 months, to 5-7 years. The exchange rate on terminal transactions is called the forward exchange rate. It is fixed in the moment of conclusion of the agreement.

The exchange rate on terminal transactions differs from a spot rate. Difference between the spot and forward rates is determined as a discount (discount - dis or deport - D) from a spot rate, if the rate of the terminal transaction is below, or the premium (pm or report - R), if it is higher than the spot rate. A premium means that currency is quoted more expensively on a terminal transaction than on the current transaction. A discount means that an exchange rate on the forward transaction is below than on a spot transaction.

The annual size of forward premium(discount) is determined on a formula:

where FR and SR - a forward rate and a spot rate accordingly; t is a term (in days) of the forward contract validity.

The exceeding of the spot rate above the forward rate is calculated in the same way, except the fact that the amount will be negative, meaning a discount. The terminal transactions are carried out for achievement of following aims:

• exchange of currency for commercial purposes, the early sale or the purchase of foreign currency in order to insure a currency risk;

• ensuring of portfolio or direct investments against a risk, related to lowering of the exchange rate;

• receipt of speculative income due to an exchange rate difference. Speculative transactions can be carried out without the presence of currency. A forward market is more narrow, than market of cash transactions (to 10% of trading in currency values). In general, terminal transactions are carried out with leading currencies, large corporations or banks with the stable credit rating.

When the forward transactions are concluded, rate expectations (increase or decrease of the rate) are not always justified. Consequently, terminal contracts not always suit or not always accessible by all types of business. Quite a bit types of business and most individuals search the alternatives to the forward contracts.

One of such alternatives is a swap transaction, which is the combination of a current (cash) and a terminal transaction. Currency swap transaction combines the purchase/sale of two currencies under the terms of immediate delivery (sale) of currency at a spot rate with a simultaneous forward transaction on the purchase of the same currency at the rate taking into account a premium or a discount depending on the change of the exchange rate. The swap transactions are used for:

• execution of commercial transactions: a bank simultaneously sells foreign currency under the conditions of spot and buys it on a term;

• the bank's acquisition of necessary currency without a currency risk;

• mutual bank crediting in two currencies.

The swap transaction is essentially hedging, that is the insurance of currency risks by creation of claims in a return and obligations in foreign currency. A market of currency swaps is approximately 20% from the whole volume of currency trade.

The specificity of currency futures

The currency futures are a contract, which notarizes an obligation to buy or sell currency on the standardized requirements in the future on the pre-arranged rate. These contracts are concluded in the exchange market. Thus, a market of the currency futures is the market of foreign exchange derivatives (obligations). Futures currency transactions are a special form of both speculating transactions and the hedging of currency risks by large banks. The transactions with the currency futures amount to about 15% of the volume of currency trade.

The currency futures in fact are forward contracts that foresee a future exchange rate. However, time limits, and most of all, the terms of exchange differ from the terms of forward contracts that allows to avoid currency risks more flexibly.

A difference consists in the following:

• transactions are concluded only on separate currencies;

• the currency futures are liquid, they can be bought and sold by most business entities in the exchange market;

• the futures contracts can be resold in the futures-trading market at any time before their execution;

• the buyer of the currency futures assumes an obligation to buy, and salesman - to sell currency during a certain term at the rate, fixed in the moment of contract conclusion;

• the futures contracts are standardized (for example, the futures contract of on the English pound sterling is concluded to the amount of 62,5 thousands of pound, on the Canadian dollar - 100 thousand dollars, on the Japanese yen - 712,5 million yen) and their implementation is assured due to guarantee payment in a calculation-clearing house (calculation-clearing pay). It is a deposit, which is brought by clients in cash;

• goods delivery takes a place only in concrete days;

• the standard sum of the futures contract is less than the sum of the forward contract. In the case of exceeding of standard sum of the contract, a buyer concludes a transaction on the purchase of a few contracts;

• the price of futures contracts is determined by demand and supply on them and on currency that is a subject of the contract.

Efficiency of the future transaction is determined by spread after every work session at the exchange. The salesman of the currency futures wins, if with the transaction maturity, he sells currency for more than the quotation rate on the day of its implementation, and carries losses, if the rate of the day of transaction conclusion will appear to be lower than the rate of its implementation.

where M - spread (positive or negative).

p=l in the process of selling; p = -1 in process of buying currency; K - the number of contracts;

C - the exchange rate on a day of the transaction conclusion;

CT - the rate of currency quotation of current work session (on the day of implementation of transaction).

For each open transaction, even if its participant did not carry out the transaction on a current work session, spread is counted.

where C„ is a rate of quotation of previous work session.

The features of currency options

A market of currency options, as well as market of the futures, is the market of foreign exchange derivatives. Currency option is a contract in obedience to which one side gives other side a right to buy or sell the standard sum of foreign currency at price fixed in a contract within defined period of time. So, as per the contract, a vendor of an option for a money bonus is under an obligation to buy or sell the certain sum of currency at set price before the end of the term of the contract. The purchaser of an option acquires a right to buy or sell currency at set price only in case if it is in his favor to do so, i.e. he is not under an obligation to buy or sell currency. Thus, if on the futures contract an exchange of currency is obligatory even in a case, when an transaction appeared for the buyer as unprofitable, an option foresees the right of choice: if a transaction is advantageous - to carry out an exchange, if a transaction is not advantageous - to refuse it. The buyer of the option has greater right less duties, and a salesman has more duties and less rights.

Currency option contracts look fairly similar to the futures contracts. The amount of currencies, the period of repayment and exercise price are determined in them. As well as futures, options, which are traded on an exchange, require the standardized form of contracts and the guarantee of their implementation. The amount of currency, with which every option operates, equals a half to that which is set for the futures contracts.

There are two basic types of options: call option (option on a purchase) and put options (option on a sale). Call option gives the buyer of option a right to purchase the standard amount of currency, and a salesman of option is under an obligation to sell it, i.e. it is assumed to make two transactions: the first one is the acquisition of the call option, the second one is the acquisition of currency from the salesman of the option in accordance with his terms, however, it is not obligatory and carried out at will of the buyer of the option. Put option gives buyers a right to sell the standard amount of currency. Two transactions are also possible here: the first one is acquisition of the put option, the second one is a sale of currency to the salesman of option, but this transaction is not obligatory and realized only at will of the buyer of the option. Thus, the buyer of an option acquires rights for a purchase (call) and right for the sale (put) of currency.

There are the option, which can be executed at any time before the deadline (the American option), and the option, which can be executed only on the deadline date (European option).

The option as type of hedging is more attractive than forward and futures contracts, but they have a high exercise price, i.e. the price, by which the supply of the standard amount of currency is carrying out. The buyer of the option must pay a high premium (raise) to options, which is fixed in an option contract. An option will bring the income to the holder in following cases:

• for a call option, when the exercise price is below than the price of standard amount of currency on the option in the market;

• for a put option, when the exercise price is higher than the price of standard amount of currency on option in the market.

Options are used for hedging of currency risks and the carrying out of speculative operations.

The difference between the speculative operations and arbitrage operations in the foreign exchange market

Speculative operations are carried out in both the spot market and the terminal market. A currency profiteer is not interested by reality of exchange rates or by consequences, which the speculative operations may lead to. To him, the currency is the same exchange commodity, as

shares, raw materials etc. A speculator is interested by possibility of receipt of maximal income as a result of change in the short-term prospect of the exchange rate. To him, the source of receipt of income is a currency risk.

The currency profiteers influence on a exchange market condition purposefully, buying or selling the currency in order to obtain the decline of the exchange rate or its increase. Playing on an increase or a decline of the exchange rate, they can get an income or bear losses. The currency speculation sometimes reaches such scales that currency interventions of central banks have nothing to do to resist, though they can be carried out on a few milliards of dollars in a day.

In the spot market, if a speculator plays on the increase of the exchange rate (buy a bull), he buys and holds it on a deposit in a bank in order to sell it at the increase of the exchange rate. The income of speculator will equal a difference between a primary low spot rate, at which he bought currency, and a higher present one, at which he sold currency.

If a speculator speculate for the decline of the exchange rate (sell a bear), he takes a loan in foreign currency on a certain term, sells it at a high exchange rate (exchange for national currency), and puts the funds received on the bank deposit in order to get dividends. On the termination of loan, if the spot rate of foreign currency fell down, a speculator bought foreign currency at a low rate for returning of loan. The income of speculator in this case equals a difference between a spot rate at a sale and a purchase of foreign currency.

Speculation it the forward exchange market is more widespread and is based on the assumption about an increase or a decrease of spot exchange rates in the future as compared to a forward rate.

If a speculator considers that the spot rate of foreign currency in 3 months will be higher as compared to its current forward rate, he conducts such operations: he buys foreign currency in the forward market with delivery in 3 months; on the condition that his forecast will come true, in 3 months he gets foreign currency at low price of the forward market and resells it at the high rate of the spot market. An income of the speculator is a difference between a forward rate and the spot rate, and if his expectations did not come true, he experienced losses.

If a speculator expects that the future spot rate of foreign currency will fall down in relation to a current forward rate, he conducts such operations: he sells foreign currency in the forward market; he buys foreign currency in the spot market at a low spot rate and resells it in the forward market at the higher rate. The income of speculator is also determined as a difference between a spot rate and a forward rate [15, p. 315].

In order to avoid the risk of mistake in relation to a future spot rate, a professional speculator makes thousands of forward exchange rate contracts, and, if the assumption about the general character of changes of exchange rates will be true, his operations will appear profitable.

The currency options are used for speculations too. Both a speculator and a buyer in one issue, as mentioned previously, can either to use an option, or to allow a term on it to over. He uses the option, when it is advantageous him, that is when an exercise price will be higher than a market one.

Speculation on the exchange rates is one of legal forms of currency business, but it often negatively influences a monetary sphere and the economy in a whole. Speculation destabilizes an economy, when speculators sell currency the rate of which is low, hoping that it will fall down more, or when speculators buy foreign currency at growth of the exchange rate and in expectant of its growth in the future.

At the same time speculative operations can be stabilizing, i.e. when they weaken the vibrations of exchange rates in time and promote the stabilizing of the exchange market. It takes a place, when speculators will: a) buy foreign currency at its internal price abatement or at its low level in expectant of growth and b) sell currency, when the exchange rate grows or is at the high level and its decline is soon expected.

In the exchange market with a speculative purpose arbitration operations are carried out too. Arbitration is the operations of purchase and sale of currency in order to get profits. In contrast with speculative operations, arbitration operations always are stabilizing, as they promote the smoothing of exchange rates in the short-term in different exchange markets.

The basic varieties of arbitration in the exchange market are currency and interest arbitrages.

A currency arbitrage (a simple one) is a purchase of currency in one market at low price with its simultaneous sale in other market at higher price in order to get the income due to the difference between the exchange rates. A currency arbitrage could be difficult in the case of the use of a few currencies in different exchange markets.

In the exchange market, where currency has a low rate relatively, arbitration operations increase the demand on it and the currency exchange rate begins to rise, and in the market, where currency has a high rate, such operations increase its supply and the rate goes down.

An arbitration operation, which is carried out by an arbitrageur, offers the possibility of income's getting almost without a risk and is unneedful of investments. A currency arbitrage is temporal and spatial. At a spatial arbitrage, an arbitrageur gets an income due to a difference in "spot" prices in markets, located in "different spaces", i.e. in two different distant markets. At a temporal currency arbitrage, the profit is received due to the difference of exchange rates in time (for example, currency is bought at the spot rate, takes a place on a certain term on a deposit and upon termination of this term is for a sale in the same market at other spot rate).

Interest arbitrage is related to the transactions in the market of capitals and is based on the use by banks the difference between interest rates in different markets. Interest arbitrage is based on the aspiration of economic entities (investors) to put money into currency, which earns a biggest profit. Interest rates in different countries rarely coincide in size. Their range in the different markets of the world are enough wide. Investors aim to move facilities from a market with a low interest rate to the market with the higher one. Which is exactly why, they carry out the transaction of interest arbitrage. If investors want to save a capital and get an income, they will make the covered (well-fixed) arbitrage, foreseeing the exchange of one currency for another one. There is a process of borrowing of money facilities in one country and converting them in currency of other country, in which these facilities are provided in terms of credit. Providing means that risk of the reverse converting in currency, in which a loan was done, for payment of loan at the maturity, is removed by the acquisition of this currency in the forward market. The simultaneous purchase of currency under the terms of spot and its forward sale, that is the swap transaction diminishes or removes an operating risk. A swap has a price. This price (costs) must be subtracted from the difference of interest rates of currencies which an arbitration is carried out with in order to get a net income.

So, interest arbitrage consists in taking in loans in one currency and allotting a credit in other one. Risks from the change of exchange rates can be decreased by the conclusion of forward contracts on the exchange of currency for the term of action of loan or deposit.

The governments interventions into the exchange markets

Governments can influence the exchange rate of the their currencies through: a) buying and selling of large parties of foreign currency in the exchange market; b) pursuing of an economic policy, influencing

on changing of demand and supply of national currency; c) concluding of international contracts, relating to the exchange rates.

The support of the exchange rate at certain level can be carried out by a central bank by means of currency intervention. For this purpose, a central bank must carry on the currency trading on the fixed rate with the private agents of the foreign exchange market. For example, in order to retain the rate of dollar to the hryvnya at the level of 7,89 UAH for a 1 USD, the National bank of Ukraine must have the opportunity to buy hryvnyas at this rate on its dollar reserves in any volumes which are dictated by a market. If it is needed to prevent growth of cost of national currency, a central bank must sell its enough amount in order to satisfy surplus demand.

To be in a position to conduct currency interventions, a country must have sufficient reserves of foreign currency, gold reserve, international money (SDR, euro). Central banks, conducting currency interventions, aim to slow the changes of exchange rates, to prevent sharp changes of the competitiveness of export sectors of economy, to prevent fluctuation of level of employment and inflationary biases.

Governments can influence the exchange rate by using two types of public macroeconomic policy:

• the monetary policy, affecting the exchange rate through the mechanism of change of money supply;

• the fiscal policy, affecting the exchange rate by means of change of the government spending and taxes.

The temporal increase of money supply is caused by depreciation of currency and by growth of the output of products. Rapid depreciation of currency results in reduction of prices of national products as compared to imported. Therefore, there is an increase of the aggregate demand on it, which must be covered by the increase of the production turnout. Permanent growth of money supply has a strong impact on the exchange rate and the output of products.

The disadvantage of the application of monetary policy in order to influence the exchange rate is that the large vibrations of money supply in a country can result in inflation or deflation. It limits possibility of the use of credit and monetary policy for adjusting of exchange rates.

A fiscal policy is a policy of change of level of taxation and governmental charges, causing budgetary deficits or surplus.

A fiscal policy can be restrictive and expansionist.

A restrictive fiscal policy is conducted by cutting of costs of government or by the increase of taxes, or by the use of these two methods. The carrying out of restrictive fiscal policy results in the increase of cost of currency. Both slowdown in expenditure of government and increase of taxes reduce the budget deficits. There is also a decrease in demand for goods and services, that is reflected in the import decrease, that, accordingly, causes the decrease in supply of currency and the growth of its cost.

Expansionist fiscal policy in the form of increase of the government spending or maintenance of taxes, or as result of any combination of these two directions, leads to the increase of the aggregate demand. It results in growth of imports and, accordingly, to greater currency supply, which causes the decline of the exchange rate.

In order to achieve the macroeconomic stabilization, a central bank at the fixed exchange rates cannot use a monetary policy. However, a fiscal policy is more effective at the fixed rates, than at floating.

To affect the exchange rate, a government can also by official statements about the intentions to conduct certain strategy in regard to the exchange rate. Purpose of these statements is to have influence on expectations and behavior of participants of the exchange market. Efficiency of such statements depends on the degree of trust of participants the exchange market to the statements of government.

In countries, where a currency exchange rate is fixed, a government from time to time makes a decision about an immediate cost change of national currency, expressed in units of foreign currency.

When a central bank promotes the cost of unit of foreign currency in national currency, the devaluation takes a place, and when a central bank reduces the exchange rate - the revaluation. Devaluation or revaluation means the willingness of the central bank without restriction to trade in national currency in an exchange on foreign one at the new exchange rate without restriction

The change of the exchange rate at the floating exchange rate, as a result of joint influence of market forces and government, designate terms "depreciation" and "rising" in the price of currency.

The nature of the Eurocurrency market

The Eurocurrency market (the Euromarket) is the specific sector of the exchange market. If the exchange market is a market, where a sale and purchase of currency is carried out in the country of its origin, an Eurocurrency market is an international market of deposit and loan operations in foreign currency outside the country of origin of this currency.

An Eurocurrency market (in broad meaning) includes the markets of eurodeposits, eurocredits, eurobonds, euroequities, eurobills etc. In practice often under the Eurocurrency market (in the strict sense) understand the mechanism of realization only of short-term operations in the Euromarket. The Euromarket is an universal international market, combining the elements of currency, credit transactions and transactions in securities.

In the Euromarket deposit and loan operations are carried out in eurocurrencies, that is the currencies which are transferred on the accounts of foreign banks and are used by them for transactions in all countries, including the issuer country of this currency.

Eurocurrencies, functioning in the world financial market, keep the form of national monetary items, and prefix of "euro" testifies only that national currency is not under control of national currency bodies.

The Eurocurrency market arose up due to the necessities of firm of investors, some countries, but not to the decisions of governments. It began to function from middle of 50s, when the eurodollar market has appeared in Western Europe. There are following preconditions of development of this market:

• possibility of branches of the American banks in Europe and European banks to pay for dollar deposits the higher percents, than in the USA. In addition, dollar credits, which were given out in Europe, costed cheaper;

• surplus of facilities in dollars at the exporting countries of oil from Middle East and from countries, which gave advantage placing of facilities in the European banks;

• demand on dollar credits from the side of developing countries;

• removal of currency limitations at moving of capital of West European countries.

It resulted in establishment in the national European exchange markets of favorable terms for realization of transactions with the deposits of nonresidents. The countries of Western Europe felt a sharp dollar deficit and in every way encouraged the wave of facilities in the accounts of nonresidents in their banks, as such deposits serve as a currency credit for countries, accepting these deposits. The accounts of foreigners were exempted from taxation and obligate reservation of the part of facilities in a local central bank. In order to distinguish the arrived in the accounts of nonresidents in the European banks "ownerless" currencies from monetary items, which are controlled by their issue central banks, they got prefix of "euro", which first began to be added to the dollars of the USA, and only after that, as far as they were mastered by the Euromarket, and to other freely in-use currencies.

The abandonment of the currency adjusting and tax legislation of this country induced international banks to the comprehensive assistance of the Eurocurrency market development.

The participants the Eurocurrency market are central banks and governments of countries, which operate mainly in the eurobonds market; commercial banks, being the main participants of this market and actively operating both in the market of short-term and long-term operations; private establishments and investors (mainly TNCs), having in an order substantial sums of facilities and playing a considerable role in the world financial market.

The specificity of the Euromarket consists in the following:

1. Multinational character of functioning.

2. An institutional feature is the category of the European banks and international bank consortia, basis of which is formed by transnational banks (TNBs).

3. Restriction of borrowers access. Major borrowers are TNCs, governments, international currency, credit and financial organizations.

4. The usage of convertible currencies of leading countries: eurodollar (60%), euroyen (6%), euro (3%) and others.

5. The use of the newest computer technologies.

6. Specificity of interest rates:

• relative independence in relation to national rates;

• the possibility to set the higher rates on eurodeposits, and the lower rates on eurocredits as compared to national rates, as the system of obligatory reserves does not spread on eurodeposits, which commercial banks are under an obligation to hold on an interest-free account in a central bank, as well as payment of tax does not spread on percents. Therefore, transactions in eurocurrencies are more profitable, than in national currencies.

7. Emission and operations with eurobonds (from 70s), eurobills (since 1981) and euroequities (since 1983).

A main attractiveness of the Eurocurrency market is the absence of government control that enables the European banks to offer on eurocurrency the deposits of higher interest rates than on holdings, done in domestic currency, and also allows banks to take from borrowers the higher percent for using eurocurrency than for a loan in domestic currency. In addition, in foreign currency transactions banks get far greater freedom of actions. At the same time, an Eurocurrency market has failings. So, at the managed banking system probability of loss of holdings at bankruptcy of bank is insignificant, and at the unregulated system, what is the Euromarket, such probability grows. In the market of currency exchange borrowing of facilities by a company in eurocurrencies can be risky. It is possible to insure from a risk, concluding a forward contract, however, it does not give an absolute guarantee.

In our days, an Eurocurrency market has got enormous scales (its annual volume about $ 700 tln.). Considerable mobility of facilities in this market due to the large scales of operations substantially influences the currency state of world financial environment. A market covers all the large international banks, financial centers of the whole world and all of convertible currencies.

There are about 50% transactions of the Eurocurrency market are carried out in Europe. The main financial center of the Eurocurrency market is London (over 20% of world volume of transactions in eurocurrencies). Over 35 centers of the Eurocurrency market are presently counted. Except London, there are such huge centers as Tokyo (about 20% of the volume of market transactions ), New York, Frankfurt-main (10% per each), Paris (7%), Zurich - Geneva (6%), Luxemburg (4%), Amsterdam, Brussels belong (3% per each).

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