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1、International Finance,3-1,Chapter 3,The Foreign Exchange Market,International Finance,3-2,3.1 Foreign Exchange and Exchange Rates,The foreign exchange market is the market in which national moneys are traded for other national moneys. In this market an exchange rate is the price of one currency in t
2、erms of another currency. Two currencies involved Timing of delivery 1. Spot 2. Forward,International Finance,3-3,Spot & forward exchange rate,Spot exchange rate 即期汇率 The price for “immediate” exchange. Forward exchange rate 远期汇率 The price now for an exchange that will take place sometime in the fut
3、ure.,International Finance,3-4,Locations of international financial centers,Note: Size of dots (squares) indicates cities relative importance,International Finance,3-5,3.2 Currency quotation,Direct quote 1单位的外币等于多少人民币,用本国货币表示外国货币的价格, The base (unchanged) currency is foreign currency; the quoted curr
4、ency is domestic currency. Eg, in China, CAD/RMB=6.3783 is direct quote, it means CAD1=RMB6.3783. Indirect quote Opposite to the direct quote CAD/RMB=6.3783 is indirect quote in Canada. USD quote The base currency is USD while other currencies as quoted currencies.,International Finance,3-6,Spot mar
5、ket quotation,Example: US dollar / Hong Kong dollar may be expressed as USD/HKD 7.7967/7.7972 The two numbers indicate the dealers buy and sell price The dealer will buy USD1 for HKD7.7967 The dealer will sell USD1 for HKD7.7972 Dealer buys low and sells high The difference between the buy and sell
6、price is the spread,International Finance,3-7,Cross rate 套算汇率（交叉汇率）,Almost all currencies are quoted against the USD (key currency, vehicle currency). When transactions occur between two non-USD currencies the cross-rate needs to be caltulated.,International Finance,3-8,Currency quotation,Internatio
7、nal Finance,3-9,3.3 Telecommunication systems,SWIFTSociety for Worldwide Interbank Financial Telecommunications环球同业银行金融电讯协会 CHIPSClearing House International Payments System纽约清算所银行同业支付系统,International Finance,3-10,3.4.1 Exchange rate determinants,Demand for currency Downward sloping demand curve (i.
8、e. devaluation of RMB results in greater demand by foreigners) A fall in the price of the RMB is equivalent to a reduction in the price of everything in China To purchase Chinese goods and services, foreigners must buy RMB (export),International Finance,3-11,3.4.1 Exchange rate determinants,Supply o
9、f currency Upward sloping supply curve (i.e. The quantity of RMB supplied to the FX market increases as the price of the RMB increases) As the RMB appreciates, the price of foreign currency falls, making foreign goods cheaper for Chinese residents The demand for foreign currency increases and theref
10、ore the supply of RMB,International Finance,3-12,3.4.1 Exchange rate determinants,Match the corresponding impact:,U.S. exports of goods & services U.S. imports of goods & services Capital outflows Capital inflows,A supply of foreign currency & a demand for $ A demand for foreign currency & a supply
11、of $,International Finance,3-13,3.4.1 Exchange rate determinants,Equilibrium exchange rate The equilibrium exchange rate is the rate at which the quantity of RMB supplied to the market is equal to the demand for RMB It shows the unique rate at which both the demanders and suppliers of RMB will be sa
12、tisfied,International Finance,3-14,3.4.2 Floating vs. Fixed Exchange Rates,Floating exchange rate system: Without intervention by governments or certral bankers. The spot price of foreign currency is market-driven, determined by the interaction of private demand and supply for that currency. Fixed e
13、xchange rate system: Officials strive to keep the exchange rate virtually fixed (or pegged) by govt intervention.,International Finance,3-15,3.4.2 Floating exchange rates,International Finance,3-16,3.4.3 Fixed exchange rates,International Finance,3-17,3.5 What is arbitrage?,The process of buying and
14、 selling to make a (nearly) riskless pure profit, ensures that rates in different locations are essentially the same, and that rates and cross-rates are related and consistent among themselves. 套汇者利用不同外汇市场在同一时刻的汇率差异，在汇率低的市场上买进， 同时在汇率高的市场卖出，通过贱买贵卖来赚取利润的活动。 Locational arbitrage 地域套汇 Triangular arbitra
15、ge 三角套汇,International Finance,3-18,Locational Arbitrage,Q:If you notice the following exchange rate, what will you do? $1.70/ in London $1.60/ in New York Buy in N.Y. and simutaneously sell them in L.D. Like: Buy 1000 (pay $1,600) in N.Y. Sell 1000 (receive $1,700) in L.D. Profit $100,International Finance,3-19,Triangular Arbitrage,Q: What would happen if the rates like these? $1.60/ , $0.50/SFr, SFr3/ Lets start with $150 and end up with $. $ SFr $ $ SFr $ 1.6/3=0.5/1 sfr is more value so begin in sfr 150=300=100=160
