国际金融英文课件3

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1、InternationalFinance2010Chapter3TheForeignExchangeMarketTopicscoveredIntroductiontoForeignExchangeandForeignExchangeMarketDemandandSupplyforForeignExchangeAssetsArbitragewithintheSpotExchangeMarketIntroductiontoForeignExchangeThe Need for Foreign Exchange-Everynationhasitsownnationalcurrencyormoneta

2、ryunitusedfortransactionswithinitsownborders.-Foreign currencies are usually needed for paymentsacrossnationalborders.-Exchange rates are important because theyenable us to translate different countriespricesintocomparableterms.IntroductiontoForeignExchangeThe Meaning of“Foreign Exchange”-Itrefersto

3、moneydenominatedinthecurrencyofanothernationorgroupofnations.-Itcanbecash,fundsavailableoncreditcardsand debit cards,travellers checks,bankdepositsetc.-Theexchangerateisapricethenumberofunits of one nations currency that must besurrendered in order to acquire one unit ofanothernationscurrency.Introd

4、uctiontoForeignExchangeMarketExchangeratesaredeterminedintheforeign exchange market.ThemarketinwhichinternationalcurrencytradestakeplaceThe ActorsThemajorparticipantsintheforeignexchangemarketare:CommercialbanksInternationalcorporationsNon-bankfinancialinstitutionsCentralbanksInterbank tradingForeig

5、ncurrencytradingamongbanksItaccountsformostoftheactivityintheforeignexchangemarket.lIndividual trading(retail market)IntroductiontoForeignExchangeMarketThe Worlds Largest Market-Itisbyfarthelargestandmostliquidmarketintheworld.-The estimated worldwide turnover of reportingdealers,at around$2 trillio

6、n a day(in 2004).7times the level of turnover in the US Governmentsecuritiesmarket.-Thebreadth,depth,andliquidityofthemarketaretrulyimpressive.($200$500millionperindividualtrade;20timesaminute,18,000changesperday)-ThefivemajorcentersofForextrading,arebasedinLondon,NewYork,Zurich,FrankfurtandTokyo.In

7、troductiontoForeignExchangeMarketA Twenty four hour Market-Itisabletoopenforbusinessindifferentfinancialcentresandbanksandotherinstitutionsareabletotradevariouscurrencies24hoursadayasidefrompossibleminorgapsonweekends.-The 24-hour market means that exchange ratesandmarketconditionscanchangeatanytime

8、inresponse to developments that can take place atanytime.-Itprovidesakindofnever-endingbeautycontestorhorserace,wheremarketparticipantscancontinuously adjust their bets to reflect theirchangingviews.IntroductiontoForeignExchangeMarketAn international network of dealers-Itconsistsofalimitednumberofma

9、jordealerinstitutionsthatareparticularlyactiveinforeignexchange,trading with customers and(moreoften)with each other.Mostare commercialbanksandinvestmentbanks-Althoughgeographicallydispersedinnumerousfinancialcentresaroundtheworld,thesedealerinstitutions are linked to each other throughtelephones,co

10、mputers,and other electronicmeans.ExchangeRatesandInternationalTransactionsAnexchangeratecanbequotedintwoways:Direct(直接标价）Adirectquoteisonemadefromtheperspectiveofthehomecurrencyandtreatsothercurrenciesasthecommoditytobepriced in units of,for instance,China RMB.For example,fromtheChinasviewpoint,adi

11、rectquoteontheUSdollarisRMB6.834/US$.Thatis,theUSdollaristhecurrencybeingpricedanditcostsRMB6.834tobuyoneUSdollar.Indirect（间接标价）Exchange Rates and International TransactionsExchange Rates and International Transactions Table 3-1Table 3-1:ExchangeRateQuotations:ExchangeRateQuotationsExchangeRatesandI

12、nternationalTransactionsDomesticandForeignPricesIf we know the exchange rate between twocountries currencies,we can compute thepriceofonecountrysexportsintermsoftheothercountrysmoney.Example:Thedollarpriceofa50sweaterwithadollarexchangerateof$1.50perpoundis(1.50$/)x(50)=$75.ExchangeRatesandInternati

13、onalTransactionsBasecurrencyandTermscurrency(基准货币和报价货币）-Everyforeignexchangetransactioninvolvestwocurrencies,anditisimportant to keep straight which is the base currency(or quoted,underlying,or fixed currency)and which is the terms currency(orcountercurrency)-The term currency is the numerator and t

14、he base currency is thedenominator.When the numerator increases,the base currency isstrengthening and becoming more expensive;when the numeratordecreases,thebasecurrencyisweakeningandbecomingcheaper.-Inoralcommunications,thebasecurrencyisalwaysstatedfirst.Forexample,aquotationfor“dollar-yen”meansthe

15、dollaristhebaseandthedenominator,andtheyenisthetermscurrencyandthenumerator.-Currency codes are used to denote currency pairs,with the basecurrencyusuallypresentedfirst,followedbyanoblique.Thus“dollar-yen”isUSD/JPY.ExchangeRatesandInternationalTransactionsTwo Quoted Prices:when quoting exchange rate

16、s,participants in thedealermarketforforeigncurrencyactuallyquotetworates:abidquoteand an offer(ask)quote.Taking dollar as the base currency as anexample:1.The bid quote is the number of units of foreign currency the dealer iswillingtogiveinordertobuyoneUSdollar.2.Theofferquoteissimilartotheaskpricea

17、ssociatedwithfinancialquotes.ItisthenumberofunitsofforeigncurrencythedealeriswillingtotakeinordertoselloneUSdollar.3.ForexampleaU.S.dollar-Japaneseyenquotationmaybeexpressedas117.65/68.TheForextraderwhoquotesthisrateissayingthatheiswillingtobuy$at117.65andiswillingtosell$at117.68.4.The difference be

18、tween the purchase and the sale rates is called thespread and represents the expected profit to the Forex trader on thetransaction.5.For most currencies,bid and offer quotes are presented to the fourthdecimalplacethatis,toone-hundredthofonepercent,or1/10,000thofthetermscurrencyunit,usuallycalleda“pi

19、p”(点）.ExchangeRatesandInternationalTransactionsTwo types of changes in exchange rates:Depreciation of home countrys currencyAriseinthehomecurrencypricesofaforeigncurrencyItmakeshomegoodscheaperforforeignersandforeigngoodsmoreexpensivefordomesticresidents.Appreciation of home countrys currencyAfallin

20、thehomepriceofaforeigncurrencyItmakeshomegoodsmoreexpensiveforforeignersandforeigngoodscheaperfordomesticresidents.ExchangeRatesandInternationalTransactionsExchangeRatesandRelativePricesImportandexportdemandsareinfluencedbyrelativeprices.Appreciationofacountryscurrency:Raisestherelativepriceofitsexp

21、ortsLowerstherelativepriceofitsimportsDepreciationofacountryscurrency:LowerstherelativepriceofitsexportsRaisestherelativepriceofitsimportsExchangeRatesandInternationalTransactionsSpotRatesandForwardRatesSpot exchange ratesApplytoexchangecurrencies“onthespot”Forward exchange ratesApplytoexchangecurre

22、nciesonsomefuturedateataprenegotiatedexchangerateForwardandspotexchangerates,whilenotnecessarilyequal,domovecloselytogether.Figure 3-1:Dollar/Pound Spot and Forward Exchange Rates,1981-2001ExchangeRatesandInternationalTransactionsExchangeRatesandInternationalTransactionsFixed exchange rate:A fixed,o

23、r pegged,rate is a rate thegovernment(central bank)sets and maintains as the officialexchangerate.Asetpricewillbedeterminedagainstamajorworldcurrency(usually the U.S.dollar,but also other major currenciessuchastheeuro,theyen,orabasketofcurrencies).Inordertomaintainthelocalexchangerate,thecentralbank

24、buysandsellsitsown currency on the foreign exchange market in return for thecurrencytowhichitispegged.FloatingExchangeRate:Unlikethefixedrate,afloatingexchangerateisdeterminedbytheprivatemarketthroughsupplyanddemand.Afloatingrateisoftentermedself-correcting,asanydifferencesinsupply and demand will a

25、utomatically be corrected in the market.Takealookatthissimplifiedmodel:ifdemandforacurrencyislow,itsvaluewilldecrease,thusmakingimportedgoodsmoreexpensiveandthusstimulatingdemandforlocalgoodsandservices.Thisinturn will generate more jobs,and hence an auto-correction wouldoccurinthemarket.Afloatingex

26、changerateisconstantlychanging.ExchangeRatesandInternationalTransactionsExchange rate$per QDSEA B270300320Figure 3-3:TheSpotExchangeMarket:FloatingandFixedExchangeRatesA.TheMarketforPoundsThedemandandsupplycurvesrepresentalldemandandsupplyfor that currency in the foreignexchange market,except forany

27、 official intervention by theofficialgovernmentmonetaryauthorities(like central banks).With a floating exchange rate,themarketreachesanequilibrium at points E.If thegovernment wishes to fix theexchange rate at a differentlevel,then it must intervene tobuyorsellthecurrencytomeetany difference between

28、 privatequantitydemandedandquantitysupplied.ExchangeRatesandInternationalTransactionsExchange rate$per SFrQSFrDSFrSSFrEA B475500575Figure 3-3:TheSpotExchangeMarket:FloatingandFixedExchangeRatesB.TheMarketforSwissFrancs(SFr)Question:How did Swiss Government intervene the market to maintain its offici

29、al rate of 0.50$/SFr?TheDemandforForeignExchangeAssetsThedemandforaforeigncurrencybankdepositis influenced by the same considerations thatinfluencethedemandforanyotherasset.AssetsandAssetReturnsDefining Asset ReturnsThepercentageincreaseinvalueanassetoffersoversometimeperiod.The Real Rate of ReturnT

30、herateofreturncomputedbymeasuringassetvaluesintermsofsomebroadrepresentativebasketofproductsthatsaversregularlypurchase.RiskandLiquiditySaverscareabouttwomaincharacteristicsofanassetotherthanitsreturn:RiskThevariabilityitcontributestosaverswealthLiquidityTheeasewithwhichitcanbesoldorexchangedforgood

31、sTheDemandforForeignExchangeAssetsTheDemandforForeignExchangeAssetsInterestRatesMarketparticipantsneedtwopiecesofinformationinordertocomparereturnsondifferentdeposits:HowthemoneyvaluesofthedepositswillchangeHowexchangerateswillchangeA currencys interest rate is the amount of thatcurrencyanindividual

32、canearnbylendingaunitofthecurrencyforayear.Example:Atadollarinterestrateof10%peryear,thelenderof$1receives$1.10attheendoftheyear.TheDemandforForeignExchangeAssetsFigure 3-2:InterestRatesonDollarandDeutschemarkDeposits,1975-1998TheDemandforForeignExchangeAssetsExchangeRatesandAssetReturnsThereturnson

33、depositstradedintheforeignexchange market depend on interest ratesandexpectedexchangeratechanges.Inordertodecidewhethertobuyaneurooradollar deposit,one must calculate the dollarreturnonaneurodeposit.TheDemandforForeignExchangeAssetsASimpleRuleThedollarrateofreturnoneurodepositsisapproximatelytheeuro

34、interestrateplustherate of depreciationofthedollaragainsttheeuro.The rateofdepreciation ofthe dollaragainsttheeuroisthepercentageincreaseinthedollar/euroexchangerateoverayear.TheDemandforForeignExchangeAssetsTheexpectedrateofreturndifferencebetweendollarandeurodepositsis:R$-R+(Ee$/-E$/)/E$/=R$-R-(Ee

35、$/-E$/)/E$/where:R$=interestrateonone-yeardollardepositsR=todaysinterestrateonone-yeareurodepositsE$/=todaysdollar/euroexchangerate(numberofdollarspereuro)Ee$/=dollar/euroexchangerate(numberofdollarspereuro)expectedtoprevailayearfromtodayTheDemandforForeignExchangeAssetsWhen the difference in Equati

36、on is positive,dollardepositsyieldthehigherexpectedrateofreturn.Whenitisnegative,eurodepositsyieldthehigherexpectedrateofreturn.TheDemandforForeignExchangeAssetsTable 3-3:Comparing Dollar Rates of Return on Dollar and Euro DepositsTheDemandforForeignExchangeAssetsReturn,Return,Risk,Risk,and and Liqu

37、idity Liquidity in in the the Foreign Foreign Exchange MarketExchange MarketThedemandforforeigncurrencyassetsdependsnotonlyonreturnsbutonriskandliquidity.There is no consensus among economists about theimportanceofriskintheforeignexchangemarket.Mostofthemarketparticipantsthatareinfluencedbyliquidity

38、factorsareinvolvedininternationaltrade.Paymentsconnectedwithinternationaltrademakeupaverysmallfractionoftotalforeignexchangetransactions.Therefore,weignoretheriskandliquiditymotivesforholdingforeigncurrencies.TheSupplyforForeignExchangeAssetsBasiceconomictheoryteachesusthatifthesupplyofagoodincrease

39、s,andnothingelsechanges,thepriceofthatgoodwilldecrease.Ifthesupplyofacountryscurrencyincreases,weshouldseethat it takes more of that currency to purchase a differentcurrencythanitdidbefore.SupposetherewasabigjumpinthesupplyoftheCanadiandollar.WewouldexpecttoseetheCanadiandollarbecomelessvaluablerela

40、tivetoothercurrencies.SotheCanadian-to-U.S.Exchangerateshoulddecrease,from67centsdownto,say,50 cents.Each Canadian dollar would give us lessAmerican dollars than it did before.Similarly,the U.S.-to-Canadianexchangeratewouldincreasefrom$1.49to$2.00,soeachU.S.dollarwouldgiveusmoreCanadiandollarsthanit

41、didbefore,asaCanadiandollarislessvaluablethanitusedtobe.Why would the supply of a currency increase?Export CompaniesForeign InvestorsSpeculatorsCentral BankersQuestions:Why would the demand for a currency increase?ArbitragewithinthespotexchangemarketDefinitionofarbitrage:Theprocessofbuyingandselling

42、tomakea(nearly)riskless pure profit,ensures that rates in differentlocationsareessentiallythesame,andthatratesandcross-ratesarerelatedandconsistentamongthemselves.Thepossibilityofarbitrage:1.Singlemarket2.Tradingoccursindifferentlocationsaroundtheworld3.The rates in the different locations are diffe

43、rent at apointintime.Examples:ifpoundswerebeingexchangeat$1.70perpoundinLondon,and$1.60perpoundatthesametimeinNewYork,andifforeignexchangetradingandmoneytransferscanbedonefreely,thenthereisanopportunitytomakearisklessprofitbyarbitragingbetweenthetwolocations.Buy pounds where they are cheap(in New Yo

44、rk)andsimultaneously sell them where they are expensive(inLondon).Foreachpoundboughtandsoldattheinitialexchangerates,thearbitrageprofitis10cents.Sucharbitragewouldoccuronalargescale,increasingthedemandforpoundsinNewYorkandincreasingthesupplyofpoundsinLondon.Thedollar-poundexchangeratethenwould incre

45、ase inNew Yorkanddecrease inLondon,and the two rates would be driven to beessentiallythesame.ArbitragewithinthespotexchangemarketExerciseWhatwouldhappeniftheexchangerateforthepoundintermsofdollarsis$1.60,theexchangerate for the Swiss franc in terms of dollars is$0.50,andthecross-ratebetweenthefranca

46、ndthepoundis3francsperpound?$1.60/3.00SF/AnswersAlthoughitismoresubtle,thereisalsoanopportunitytomake a riskless profit by arbitraging through the threeratesaprocesscalledtriangulararbitrage.Startwithsomenumberofdollars,say$150,buying300francs(100/0.50).Usethesefrancstobuypoundsatthecross-rate,andyo

47、uhave100pounds(300/3).Convertthesepoundsbackintodollarsandyouendupwith$160(100 x 1.60).The triangular arbitrage has made$10profitforeach$150youstartwith.As a large amount of this triangular arbitrage occurs,pressures are placed on the exchange rates to bringthemintolinewitheachother.ExerciseContinue

48、dYouhaveaccesstothefollowingthreespotexchangerates:25yen/kroneYoustartwithdollarsandwanttoendupwithdollarsHowwouldyouengageinarbitragetoprofitfromthesethreerates?Whatistheprofitforeachdollarusedinitially?(DollarKroneYenDollar)Asaresultofthisarbitrage,whatisthepressureonthecrossratebetweenyenandkrone

49、?Whatmustthevalueofthecross-ratebeeliminatetheopportunityfortriangulararbitrage?Assignments1.ThespotexchangeratebetweenthedollarandtheSwissfrancisafloatingrate.Whataretheeffectsofeachofthefollowingonthisexchangerate?a.ThereisalargeincreaseinSwissdemandforUSexportsasUSculturebecomesmorepopularinSwitz

50、erland.b.ThereisalargeincreaseinSwissdemandforinvestmentsinUSdollar-denominatedfinancialassetsbecauseofaSwissbeliefthattheUSeconomyandpoliticalsituationareimprovingmarkedly.c.Political uncertaintiesinEuropeleadUSinvestorstoshifttheirfinancial investments out of Switzerland,back to the UnitedStates.d

51、.US demand for products imported from Switzerland fallssignificantlyasbadpressreportsleadAmericanstoquestionthequalityofSwissproducts.AssignmentsContinuedAssume instead that the spot exchange ratebetweenthedollarandSwissfrancisafixedorpegged rate within a narrow band around acentralrate.Foreachchang

52、eshowninproblemabove,assume that just before the changeprivate supply and demand intersected at anequilibrium exchange rate within this narrowband.For each change shown in problemabove,what intervention is necessary by themonetaryauthoritiestodefendthefixedrateifthe change shifts the intersection of

53、 privatesupplyanddemandoutsidetheband?GroupAssignmentsDoresearchforthefollowingquestionsandorganizeapaperofnolessthan1000words:Centralbanksoccasionallyinterveneinforeignexchangemarkets.Discuss the purposes of such intervention.How effective isintervention?Requirements:1.Twotothreepeopleinonegroup.2.Organizethepaperinthefollowingpattern:3.-introduction4.-mainbodyincludingtheoryandanalyseswithsupportedcases5.-conclusion6.-reference7.3.Eachmemberinthegroupshouldcontributehis/hereffortsintotheassignment.8.4.Thedeadlineofthepaper:8thofMay,20099.