第三章 外汇汇率和市场 Foreign Exchange Rat

Foreign Exchange Market

• Foreign exchange is simply another country’s money.
• Exchange rate is the price of one currency in terms of another.
• Foreign Exchange Market is where currencies are bought and sort.
  1. Function -> convert the currency of one country to the currency of another.
  2. -> provide some insurance against foreign exchange risk.
• Retail customers are made up of individuals, international investors, small business, speculators and the like who need foreign exchange for the purposes operating their businesses or tourism.
• Commercial banks ( market dealers ) and other financial institutions carry out buy\sell orders from their retail clients and buy\sell currencies on their account so as to alter the structure of their assets and liabilities in different currencies.
• Dealers making a market foreign exchange stand ready to quote bid an offer ( ask ) prices on major currencies, earning their profit by buying at their bid price and selling at a slightly higher offer price.
• Foreign exchange brokers intermediary
  • purpose -> a broker is precious source of information for the traders in markets where roe or two basis points can mean a difference of thousands of dollars on a contract.
  • brings buyer and sellers together and contribute to market efficiency.
  • make it possible for trade to remain anonymous.
• Business major nonbank participants
• Central banks buy and sell their currencies to influence the rate at which their currency is traded.
• Speculator seek all of their profit from ex.rate changes.
• Arbitragers profit from simultaneous (同时) ex.rate differences in different markets.

Spot Exchange Market, Exchange Rate Quotatios, and Foreign Exchange Arbitrage

• direct quotations is the amounts of domestic currency per unit of foreign currency (for Canadian C$ / $ )
• indirect quotations Foreign currency per unit of domestic currency ( for Canadian $ / C$)
• American terms == direct quotations A quote of the U.S. dollar price per foreign currency (US $1.61 = Pound1)
• European terms ( A$0.93 = US $1 )
• bid quote buy & ask quote sell
  • bid < ask , the bank is buying and selling the denominator (分母) currency
  • bid > ask , the numerator (分子)
• Bid-ask margin = ( ask price - bid price ) / ( ask price ) * 100
• Cross rate is a rate calculated from known bilateral exchange rate（双边汇率）.
• S_b^z/x = S_b^z/y / S_a^x/y
• S_b^z/x = S_b^z/y * S_a^y/x
• Appreciation a currency gains value relative to another currency in exchange market.
• Percentage change
  • denominator（分母）( Ending rate - Beginning rate ) / ( Beginning rate )
  • numerator（分子）( Beginning rate - Ending rate ) / ( Ending rate )
• Foreign exchange arbitrage外汇套利
  • spatial arbitrage 2
  • triangular arbitrage 3 -> S^d/e * S^e/f * S^f/d = 1
    1. < 1 => buy the currencies in the denominator
    2. > 1 => sell the currencies in the denominator

The Forward Foreign Exchange Market

later than two days in the future

• Basis point last digit of the quote
• Forward discount when the value of that currency in the Forward market is lower tan in the spot market.
• Forward discount\premium in percentage terms
  • foreign currency f = ( n ) [ F_t^d/e - S₀^d/e ] / ( S₀^d/e )
  • domestic currency f = ( n ) [ S₀^d/e - F_t^d/e ] / ( F_t^d/e )

Foreign Exchange Risk

fluctuations in the domestic value of assets, liabilities, incomes or expenditure due to unanticipated changes in ex.rates.

• Foreign exchange exposure is what is at risk.
• Transaction exposure (交易敞口) is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.
• Translation exposure (accounting exposure) (转换敞口) is the potential change in the reported financial statements(财务报表) of a company due to changes in exchange rates.
• Economic exposure (经济敞口) refers to potential changes in all future cash flows due to unexpected changes in exchange rates.

Hedging with Forward Contracts

• long position -> (Afraid of foreign currency depreciation) buy domestic currency and sell foreign currency forward
• short position-> (Afraid of foreign currency appreciation) buy foreige currency and sell domestic currency forward

Other Types of Exchange Rates

• The nominal exchange rate is the exchange rate that prevails at a given day.
• The real exchange rate is nominal exchange rate adjusted for relative changes in domestic and foreign price level. ( reflect the purchasing power)
  • expected future spot rate : S₀ [ 1+ E[p¥] ] / [ 1 + E[p$] ]
  • change of denominator : [ (Actual ex.rate ) - ( Expected ex.rate )] / ( Expected ex.rate )
  • real ex.rate : S_R^d/f = S_N^d/f / [ p^d / p^f ]
• Effective ex.rate is a measure of whether or not the currency is appreciating or depreciating against a weighted basket of foreign currencies.
  1. Chose a basket of currencies.
  2. Select a base period which serves as reference point in time.
  • e.g. EER = [0.509*0.9612+0.491*1.0625]*100 = 101.10 => stronger
  • use the real exchange rate!