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1、FOREIGN EXCHANGE CHAPTER 2 Main contentsnForeign-exchange market nTypes of Foreign-exchange TransactionsnInterbank tradingnReading foreign-exchange quotationsnForward and futures marketn Foreign-currency OptionsnExchange-rate determinationnNominal and Real exchange ratesnArbitrage(interest arbitrage
2、)2pOrganizational settingnIndividuals nBusinessesnGovernmentsnBanks Buy and sell foreign currencies and other debt instrumentsForeign-Exchange MarketoThe Foreign-Exchange Market is the Largest and most liquid market in the worldnEstimated worldwide amount is about 4 trillion a day. In less than five
3、 days the amount of money traded in the foreign exchange market is a little larger than the value of U.S.nIndividual trades of 200-500 million dollar is very common.nQuoted prices change as often as 20 times a minute.nAbout the most active exchange rates can change up to 18000 times during a single
4、day. 4Foreign-Exchange MarketoDominated by a few currenciesnU.S. dollar: being involved in almost 90% of all transactions. The number constantly flux.nEuro: the second most.nJapanese yennCanadian dollarnBritish poundnSwiss franc5Foreign-Exchange Marketosorts, In the 2010 global marketnSpot exchange
5、40% percent of tradingnForward exchange 13% percentnForeign exchange swaps 47%For all of this foreign exchange trading in 2010, the U.S. dollar was involved in 85% percent of all trades, the euro in 39%, the Japanese yen in 19%, the british pound in 13%, the australian dollar in 8%, and the swiss fr
6、anc in 6%.6Foreign-Exchange Market-2010o2010- the where:nUnited kingdom 37%nUnited states 18%nJapan 6%nSingapore 5%nSwitzerland 5%nHong Kong 5%nOther coutries 20%7Foreign-Exchange Marketo2010- by who:nMost foreign exchange trading is done by and through a network of several hundred banks worldwide,
7、banks that actively “make a market”nAccording to Euromoney magazine, in 2011, four banks conducted nearly half of the global trading in foreign exchange:Deutsche Bank, about 16%Barclays Capital, about 11%UBS(瑞银), about 11%Citigroup, about 9%8Foreign-Exchange Market9Top ten banks by share of foreign-
8、exchange market, 2002rankBank or institute name1Citygroup 花旗2UBS Warburg 瑞银3Deutsche Bank 德意志银行4Goldman Sachs 5JP Morgan Chase 摩根大通6Credit Suisse First Boston 瑞士信贷第一波士顿7Morgan Stanley 摩根斯坦利8ABN Amro 荷银9S-E-Banken10Barclays Capital 巴克莱10Top ten banks by share of foreign-exchange market, 200911Forbes
9、2013 global top 2000 enterprises top twelverankcompanycountry1中国工商银行ICBCChina2中国建设银行CBCChina3摩根大通JPMorgan ChaseU.S.4通用电气General ElectricU.S.5埃克森美孚Exxon MobilU.S.6汇丰控股HSBC HoldingsBritain7皇家荷兰壳牌集团Royal Dutch ShellNetherland8中国农业银行Agricultural Bank of ChinaChina9伯克希尔哈撒韦Berkshire HathawayU.S.10中国石油Petr
10、oChinaChina11中国银行Bank of ChinaChina12富国银行Wells FargoU.S.oThe status of RMB -2013.9 nRMBs daily trading quantity is about 120 billion dollars, the ninth largest currency in the world. About 2.2% 12Foreign-Exchange MarketoAt present there are three large RMB offshore center.Hongkong, 2003 November, 82
11、%, Singapore, 2011 January, 7% London, 2012 April, 11%Data source:the Yangtze River Securities statistics, as of 2013 August13RMB offshore MarketoThe status of RMB ? nMaybe is considered economic uncertaintynCannot be exchanged freely(under current account freely, negative under capital and financia
12、l account) nInternationalization of RMB is on the way.14Foreign-Exchange MarketoThree of the largest FE market nLondon (international currency market)nNew York(the largest market in future)nTokyo(the largest in Asia)oOthersnParis, Zurich, Cayman Islands, virgin islands, Frankfurt, Hongkong, singapor
13、e15Foreign-Exchange Market16Foreign-Exchange MarketCayman Islands17Foreign-Exchange MarketBermuda IslandsThe FE market is a 24 hours MarketThe opening time Local time Beijing timenSydney 9:00-17:00 6:00-14:00nTokyo 9:00-15:30 8:00-14:30nHongkong 9:00-16:00 9:00-16:00nSingapore 9:30-16:30 9:30-16:30n
14、Frankfurt 9:00-16:00 15:00-22:00nLondon 9:30-15:30 17:30-1:30(next day) nNew York 8:30-15:00 21:30-4:00(next day)oThe functions of FE marketnIn the Transactions between commercial banks and their commercial customersnIn the domestic interbank market conducted through brokers (or middleman)nIn active
15、 trading in foreign exchange with banks overseas20Foreign-Exchange MarketThe purpose of brokersoThe purpose of a broker is to permit the trading banks to maintain desired foreign-exchange balances. If a bank does not have the proper FE balances, it can turn to a broker to buy additional foreign curr
16、ency or sell the surplus. Brokers are paid a commission for their services. The Exchange Rate of RMB to dollarTime Exchange rate1970s1.5RMB/USD19853.2RMB/USD19935.8RMB/USD19948.45RMB/USD1999(almost 10 years)8.28RMB/USD20086.83RMB/USD2013.36.2140RMB/USD2013.9.296.1179RMB/USDUSDCNYUSDCNYDINIDINIPer 10
17、0 different currency can exchanged RMB-2013/3/18 CurrencyMiddle pricebid priceOffer priceRate for cashUSD621.60620.36622.84615.38THB21.0120.9321.1020.26JPY6.56256.53956.58556.3374HKD80.1079.9480.2679.30EUR801.83798.62805.04772.96GBP937.87934.12941.62904.11CAD606.79604.36609.22584.952013.9.23 Cross r
18、ate some calculations-1oOne day, the exchange rate of USDCNY is One day, the exchange rate of USDCNY is 6. 1125/6. 1175. If you need exchange 6. 1125/6. 1175. If you need exchange 100 dollars to RMB, how many RMB 100 dollars to RMB, how many RMB could you get? If you need exchange 100 could you get?
19、 If you need exchange 100 RMB to dollars, how many dollars could RMB to dollars, how many dollars could you get?you get? some calculations-2oOne day, On the New York foreign One day, On the New York foreign exchange market, the exchange rate of exchange market, the exchange rate of CHFUSD CHFUSD spo
20、t ratespot rate is 1.1050/1.1070, three is 1.1050/1.1070, three months forward points 130/125(pip), if you months forward points 130/125(pip), if you need exchange 10 million US dollars for need exchange 10 million US dollars for three months forward Swiss francs, how three months forward Swiss fran
21、cs, how many CHF will you get?many CHF will you get?nIf the left number is bigger than the right, you If the left number is bigger than the right, you should use reduction;should use reduction;nIf the left number is smaller than the right, you If the left number is smaller than the right, you should
22、 use surplus;should use surplus;Computing processoCHFUSD spot rate 1.1050/1.1070 CHFUSD forward rate is 1.1050/1.1070 -130/ - 125 1.0920/1.0945 (forward rate)Computing processThen, USDCHF forward rate is million CHFThen, if , I can get 9.1366 CHF.Types of Foreign-Exchange Transactions1.Spot transact
23、ion 2.Forward transaction3.Swap transaction34Types of Foreign-Exchange Transactions1.Spot transaction nMake an outright purchase or sale of a currency now, as in “on the spot” within two working days after the deal is strucknSimplest way to meet ones foreign currency requirementsnGreatest risk of ex
24、change rate fluctuations35Types of Foreign-Exchange TransactionsoForward transactionnReceiving or paying an amount of foreign currency on a specific date in the future At a fixed exchange ratenProtects against unfavorable movements in the exchange ratenWill not allow gains to be made if the exchange
25、 rate move in your favor 36Types of Foreign-Exchange TransactionsoCurrency swapnConversion of one currency to another currency at a time pointWith an agreement to reconvert it back to the original currency at a specified time in the futureThe rates of both exchanges are agreed to in advance3738Distr
26、ibution of foreign-exchange transactions by U.S. banksThe data came from Federal Reserve Bank of New York, 2007The largestA swap exampleoSuppose a Chinese company need 10 million dollars for a three-month investment in U.S.oSo this company may agree to swap RMB into dollars with another company in n
27、eed of RMB according to the spot rate of USDCNY.oAfter three months, the Chinese company returns the dollars and gets back the RMB. 39Interbank TradingoRetail transactions：Bank purchases from or sales to their customers less than 1 million currency unitsoWholesale transactions：More than 1 million cu
28、rrency units between banks or with large corporate customers40How do banks earn profits in FE transactions in the inter-bank market?nBid rate : price that the bank is willing to pay for a unit of foreign currencynOffer rate: price at which the bank is willing to sell a unit of foreign currencynSprea
29、d - difference between the bid and the offer ratenA banks bid quote its offer quote41How do banks earn profits in FE transactions in the inter-bank market?nAttempt to profit by anticipating correctly the future direction of currency movements.4243Foreign exchange quotations (a)P3444Foreign exchange
30、quotations (b)TABLE 2.4P34Three kinds of quotation methodoDirect quotation: such as USDCNY to usoIndirect quotation: such as CNYUSD to usoUS dollar quotation: use USD as the against currency Reading Foreign-Exchange QuotationsoExchange rate: Price of one currency in terms of another. Number of units
31、 of foreign currency required to purchase one unit of domestic currencyoExchange rate reported: The midrange between the bid and offer pricesoCurrency depreciation: It takes more units of a nations currency to purchase a unit of some foreign currency46Reading Foreign-Exchange QuotationsoCurrency app
32、reciation nIt takes fewer units of a nations currency to purchase a unit of some foreign currencyoCross exchange rate nExchange rate between any two currencies (such as the franc and the pound) derived from the rates of these two currencies in terms of a third currency (the dollar)47Forward and Futu
33、res MarketsoSpot market nForeign exchange bought and sold for delivery immediatelyoForward market nForeign exchange bought and sold for future delivery48Forward and Futures MarketsoFutures marketnContracting parties agree to future exchanges of currenciesnAnd set applicable exchange rates in advance
34、nOnly a limited number of leading currencies are tradednTrading takes place in standardized contract amounts and in a specific geographic location4950Forward contract versus futures contractForward Contract Futures ContractIssuer TradingContract sizeDate of delivery Contract costs SettlementCommerci
35、al bank “Over the counter” by telephoneTailored to the needs of the exporter/importer/investor; no set sizeNegotiable Based on the bidOn expiration date only, at prearranged price /offer spreadInternational Monetary Market (IMM) of the Chicago Mercantile Exchange and other foreign exchanges such as
36、the Tokyo International Financial Futures ExchangeOn the IMMs market floorStandardized in round lotsOnly on particular datesBrokerage fees for sell and buy ordersProfits or losses paid daily at close of tradingP36Forward and Futures MarketsoOpen nPrice at which the currency was first sold when the m
37、arket opened in the morningoHighnContracts highest price for the dayoLownContracts lowest price for the dayoSettlenContracts closing price for the day51Forward and Futures MarketsoChange nCompares todays closing price with the closing price as listed in the previous days papern(+) means prices ended
38、 highern(-) means prices ended lowero Open interest nTotal number of contracts outstanding (No deal)5253Foreign currency futures, May 13, 2009: selected examplesP37未平仓数量Foreign-Currency OptionsoOptionnAgreement between a holder (buyer) and a writer (seller) nHolder has the right, but not the obligat
39、ion, to buy or sell financial instruments at any time through a specified date54Foreign-Currency OptionsoForeign-currency options nOptions holderRight to buy or sell a fixed amount of foreign currency At a prearranged price, within a specified dateCan choose the exchange rate to guaranteeCan choose
40、length of the contractoCall option nGives the holder the right to buy foreign currency at a specified price55Foreign-Currency OptionsoPut optionnGives the holder the right to sell foreign currency at a specified priceoStrike price (exercise price)nPrice at which the option can be exercised oPremiumn
41、Fee the writer of the options contract receives 56Exchange-Rate DeterminationoExchange rate in a free market nDetermined by both supply and demand conditionsoDemand for foreign exchangenDerived demand(派生需求goods-currency)nDriven by foreigner demand for domestic goods and assets nCorresponds to the de
42、bit items on a countrys balance of payments57Exchange-Rate DeterminationoSupply of foreign exchangenAmount of foreign exchange that will be offered to the market nAt various exchange rates, all other factors held constantoEquilibrium exchange rate nDetermined by the market forces of supply and deman
43、d58The equilibrium exchange rate is established at the point of intersection of the supply and demand schedules of foreign exchange. The demand for foreign exchange corresponds to the debit items on a nations balance-of-payments statement; the supply of foreign exchange corresponds to the credit ite
44、ms.59Exchange-rate determinationP40Exchange-Rate DeterminationoIncrease in the demand for poundsnShift rightwardnThe dollar will depreciate against the poundoDecrease in demand for poundsnShift leftwardnThe dollar will appreciate60Change in DemandExchange-Rate DeterminationoIncrease in the supply of
45、 poundsnRightward shiftnThe dollar appreciate against the poundoDecrease in the supply of poundsnLeftward shiftnDollar depreciation62Change in supply64Advantages and disadvantages of a strengthening and weakening dollarP41Nominal and Real Exchange RatesoExchange-rate indexnAlso called Effective exch
46、ange rate; trade-weighted currency nWeighted average of the exchange rates between the domestic currency And the nations most important trading partnersWith weights given by relative importance of the nations trade with each of these trade partners65Nominal and Real Exchange RatesoNominal exchange-r
47、ate index of the U.S. dollarnAverage value of the dollarNot adjusted for changes in price levels In the U.S. and its trading partnersnif increasing Dollar appreciation relative to the currencies of the other nations in the index;Loss of competitiveness for the U.S.66Nominal and Real Exchange RatesoN
48、ominal exchange-rate index of the U.S. dollarnIf decreasingDollar depreciation relative to the other currencies in the index Improvement in U.S. international competitivenessnBased on nominal exchange rates that do not reflect changes in price levels in trading partners67Nominal and Real Exchange Ra
49、tespReal exchange-rate index of the U.S. dollarnEmbodies the changes in prices in the countries in the calculationnNominal exchange rate adjusted for relative price levelsnAverage value of the dollar based on real exchange ratesnAn appreciation of the dollar - higher index 6869Exchange rate indexes
50、of the U.S. dollar(March 1973 = 100)*P42ArbitrageoExchange arbitragenSimultaneous purchase and sale of a currencyIn different foreign-exchange markets To profit from exchange-rate differentials in the two locations (law of one price)nBrings about an identical price for the same currency in different
51、 locations nResults in one market70ArbitrageoTwo-point arbitragenTwo currencies are traded between two financial centersoThree-point arbitragenTriangular arbitragenThree currencies and three financial centersnSwitching funds among three currencies in order to profit from exchange-rate inconsistencie
52、s71CalculationsoIf in Hongkong Market, 1dollar=6.1068RMB; in New York market 1 dollar =6.1315RMBoIF IN New York :1EUR=1.26USD IN London :1EUR=0.79GBP IN Frankfurt :1USD=0.61GBPThe process of three-point arbitrageoCompare the product of the follow with 1, If the product is more than 1, then you could
53、 change A currency into B currency, change B into C, finally change C into A.If it is less than 1, the direction of exchange is contrary, from A to C, C to B, B to A.If it equals 1, then there is no space for arbitrage.The Forward MarketoForward marketnCurrencies are bought and sold now for future d
54、eliverynThe exchange rate is agreed on at the time of the contractnPayment is made when the future delivery actually takes placeoForward rate nRate of exchange used in the settlement of forward transactions7475Forward exchange rates: selected examplesP45The Forward MarketoAt a premiumnWhen a foreign
55、 currency is worth more in the forward market than in the spot marketoAt a discountnWhen a foreign currency is worth less in the forward market than in the spot market76The Forward MarketoRelation between the forward rate and spot rate77The Forward MarketoManaging your foreign exchange risknForward
56、foreign-exchange contractnAnd engage in hedgingoHedgingnProcess of avoiding or covering a foreign-exchange riskoSome firms do not hedgenCurrency fluctuations even out over the long term78Exchange-rate risk: the hazard of investing abroadoExchange-rate fluctuations nCan substantially change the retur
57、ns on assets denominated in a foreign currencyoInterest rates nKey role in determining the relative attractiveness of assets denominated in domestic and foreign currenciesoEffects of exchange-rate changes nCan swamp (lower) the effects of interest-rate differentials 7980Return on a three-month Germa
58、n investmentP52Interest ArbitrageoInterest arbitrage refers nMoving funds into foreign currencies To take advantage of higher investment yields abroadoUncovered interest arbitrage nWhen an investor does not obtain exchange-market cover To protect investment proceeds from foreign-currency fluctuation
59、s81Interest ArbitrageoA U.S. investors extra rate of return nOn an investment in the United Kingdom as compared to the U.S. = interest-rate differential adjusted for any change in the value of the pound8283uncovered interest arbitrage: an exampleP53Interest ArbitrageoCovered interest arbitrage nInve
60、stor exchanges domestic currency for foreign currency - at the current spot rateAnd uses the foreign currency to finance a foreign investmentnInvestor contracts in the forward market To sell the amount of the foreign currency that will be received as the proceeds from the investmentWith a delivery d
61、ate to coincide with the maturity of the investment84Interest ArbitrageoForward discount or premium nReflects the difference in the short-term interest rates between the two nationsnForward discount: The currency of the higher-interest-rate nationnForward premium:The currency of the lower-interest-r
62、ate nation8586Covered interest arbitrage: an exampleP55Suppose that the current spot rate be 1GBP=2USD, while the three-month forward pound sells for 1.99 dollarsContinue to discount until it equals -1%International Fisher equationoAlso called Fisher effect: S1: spot ER s2: forward ER id: interest i
63、n domestic country if: interest in foreign country Foreign-Exchange Market SpeculationoSpeculationnAttempt to profit by trading on expectations about prices in the futurenDeliberate assumption(bearing) of exchange riskoStabilizing speculation nGoes against market forces (even out the fluctuation) by
64、 moderating or reversing a rise or fall in a currencys exchange rate;nUseful function for bankers and business people, who desire stable exchange rates88Foreign-Exchange Market SpeculationoDestabilizing speculation nGoes with market forces by reinforcing fluctuations in a currencys exchange ratenCan
65、 disrupt international transactionsHigh cost of hedging impeding international tradeDisrupt international investment activity89How to play the falling domestic currencyoDepreciating domestic currencynPurchase foreign currencynPurchase bonds denominated in a foreign currencynPurchase stocks of foreig
66、n corporations, denominated in foreign currenciesnSavings account denominated in a foreign currencynVariety of currency derivatives the method to play the rising is inverse90Foreign Exchange Trading as a CareeroForeign exchange traders nCommercial BanksnCompaniesnCentral BanksnProfessional traders nAmateurs speculating in foreign currencies91homework1.Translate the key concepts and terms of chapter 2 into Chinese.2.Finish the study questions after text. Question number: 1,2,6,11.3.Finish practice problems of chapter2 .(choice, T/F) 92
