国际金融英文版(托马斯.A.普格尔-著)---Chapter-3

1、Chapter 3 The Foreign Exchange MarketThe Foreign Exchange MarketThe nature of foreign exchange and exchange rateEvery nation has its own national currency or monetary unit used for transactions within its own borders. (seigniorage &Inflation Tax )A medium of exchange are usually needed for payments

2、across national borders. Exchange rates are important because they enable us to translate different countries prices into comparable terms.The Foreign Exchange MarketThe basics of currency tradingDemand and supply for foreign exchange Exchange rate systemArbitrage in the foreign exchange marketTHE B

3、ASICS OF CURRENCY TRADINGWhat is foreign exchange?Foreign exchange is the act of trading different nations moneys.Foreign exchange also refers to holdings of foreign currencies.Foreign exchange is the assets that denominated in foreign currencies and can be used to pay off foreign debts.THE BASICS O

4、F CURRENCY TRADINGThe forms of foreign exchangeForeign currency and coins (a small part)Assets (deposits in banks, bonds, stocks etc)The second part is the majority of foreign exchange (why?)THE BASICS OF CURRENCY TRADINGCharacteristics of foreign exchangeThe currencies must be convertible (converti

5、bility)The currencies must be generally accepted (general acceptability)The assets must be of high quality THE BASICS OF CURRENCY TRADINGWhat is exchange rate?Exchange rate is the price of one nations money in terms of another nations money.Exchange rate is the rate used by the market participants t

6、o convert one currency into another currency.Exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. THE BASICS OF CURRENCY TRADINGSummery : The Meaning of “Foreign Exchange” - It refers to

7、 assets denominated in the currency of another nation or group of nations. - It can be cash, funds available on credit cards and debit cards, travellers checks, bank deposits etc. -The exchange rate is a price the number of units of one nations currency that must be surrendered in order to acquire o

8、ne unit of another nations currency.THE BASICS OF CURRENCY TRADINGExchange Rate QuotingWhy is there a quotation system?See figure 3.1See p32 case study for information about euroTHE BASICS OF CURRENCY TRADINGAn exchange rate can be quoted in two waysDirect (American) terms and indirect (European) te

9、rmsIn this course we will always (unless otherwise stated) quote the exchange rate in direct termsTHE BASICS OF CURRENCY TRADINGDirect TermsPrice of foreign currency in terms of national currencyA direct quote is one made from the perspective of the home currency and treats other currencies as the c

10、ommodity to be priced in units of home currency, for instance, China RMB.How many units of national currency do we need to buy a unit of foreign currencyExample $/, $/THE BASICS OF CURRENCY TRADINGIndirect TermsPrice of national currency in terms of foreign currencyHow many units of foreign currency

11、 do we need to buy a unit of national currencyExample /$, /$THE BASICS OF CURRENCY TRADINGQuotes using a countrys home currency as the price currency (e.g., EUR 1.00 = USD 1.58) are known as direct quotation or price quotation (from that countrys perspective) and are used by most countries.Quotes us

12、ing a countrys home currency as the unit currency (e.g., AUD 0.97 = USD 1.00) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and the eurozone.direct quotation: 1 foreign currency unit = x home currency units indi

13、rect quotation: 1 home currency unit = x foreign currency unitsTHE BASICS OF CURRENCY TRADINGAn exchange system quotation is given by stating the number of units of term currency (or price currency or quote currency) that can be bought in terms of 1 unit currency (also called base currency). For exa

14、mple, in a quotation that says the EUR-USD exchange rate is 1.4320 (1.4320 USD per EUR), the term currency is USD and the base currency is EUR.THE BASICS OF CURRENCY TRADINGMarket convention from the early 1980s to 2006 was that most currency pairs were quoted to 4 decimal places for spot transactio

15、ns .The fourth decimal place is usually referred to as a pip.In other words, quotes are given with 5 digits. Where rates are below 1, quotes frequently include 5 decimal places.THE BASICS OF CURRENCY TRADINGIn 2006 Barclays Capital broke with convention by offering spot exchange rates with 5 or 6 de

16、cimal. The contraction of spreads (the difference between the bid and offer rates) arguably necessitated finer pricing and gave the banks the ability to try and win transaction on multibank trading platforms where all banks may otherwise have been quoting the same price. A number of other banks have

17、 now followed this.THE BASICS OF CURRENCY TRADINGAppreciation and Depreciation of a CurrencyA depreciation of the dollar against the euro means that the price of a euro in terms of dollars has gone upAn appreciation of the dollar against the euro means that the price of a euro in terms of dollars ha

18、s gone downTHE BASICS OF CURRENCY TRADINGAppreciation and Depreciation of a CurrencyIf the dollar depreciates against the euro this must mean that the euro has appreciated against the dollarIf the dollar appreciates against the euro this must mean that the euro has depreciated against the dollarTHE

19、BASICS OF CURRENCY TRADINGAppreciation and Depreciation of a CurrencyNote that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or becoming more valuable) then the exchange rate number decreases. Conversely if the foreign currency is strengthening, the exchange rat

20、e number increases and the home currency is depreciating.THE BASICS OF CURRENCY TRADINGAppreciation and Depreciation of the Exchange RateAn exchange rate depreciation means the domestic currency has depreciated and an exchange rate appreciation means the domestic currency has appreciatedIf the excha

21、nge rate depreciates then eIf the exchange rate appreciates then eTHE BASICS OF CURRENCY TRADINGHow many kinds of exchange rate are there?Spot exchange rate and forward exchange rateBid rate , ask rate , mean rate and cash rateFixed rate and floating rateSingle rate and multiple ratesNominal rate an

22、d real rateBilateral rate and effective rateBasic rate and cross rate THE BASICS OF CURRENCY TRADINGThe spot exchange rate refers to the rate used in a spot transaction. (The rate of a foreign-exchange contract for immediate delivery. Also known as benchmark rates, straightforward ratesor outright r

23、ates. )The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.THE BASICS OF CURRENCY TRADINGThe Bid rate is the rate at which you can sell. The Ask (or offer) rate is the rate at which you can buy.Bid/Ask SpreadThe

24、difference between the bid and ask prices. In thinly traded markets, this spread may be wide.The mean is the average of bid and ask rate.The cash rate is the exchange rate used in cash transaction.THE BASICS OF CURRENCY TRADINGIf a currency is free-floating, its exchange rate is allowed to vary agai

25、nst that of other currencies and is determined by the market forces of supply and demand. A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi(RMB) was pegged to t

26、he United States dollar at RMB 8.2768 to $1. China was not the only country to do this; from the end of World War II until 1966, Western European countries all maintained fixed exchange rates with the US dollar based on the Bretton Woods system.THE BASICS OF CURRENCY TRADINGMultiple exchange rates T

27、he system by which a countrys currency has more than one exchange rate with any foreign currency. The rate which applies to any transaction may depend on the holder of the currency, or on the purpose for which it is being used. Multiple exchange rates may discriminate between resident and foreign ho

28、lders of the currency, between export and import of different types of goods and services.Single rate The system by which a countrys currency has only one exchange rate with any foreign currency. The rate applies to any transaction.THE BASICS OF CURRENCY TRADINGThe nominal exchange rate e is the pri

29、ce in domestic currency of one unit of a foreign currency. The nominal exchange rate is defined as the number of units of the domestic currency that can purchase a unit of a given foreign currency. A decrease in this variable is termed nominal appreciation of the currency. (Under the fixed exchange

30、rate regime, a downward adjustment of the rate is termed revaluation.) An increase in this variable is termed nominal depreciation of the currency. (Under the fixed exchange rate regime, an upward adjustment of the rate is called devaluation.)THE BASICS OF CURRENCY TRADINGThe real exchange rate is d

31、efined as the ratio of the domestic price level and the price level abroad, where the latter is converted into domestic currency units via the current nominal exchange rate. Formally, = ePf / P, where the domestic price level is denoted as P and the foreign price level as Pf. THE BASICS OF CURRENCY

32、TRADINGIn practice, changes of the real exchange rate rather than its absolute level are important. In contrast to the nominal exchange rate, the real exchange rate is always floating, since even in the regime of a fixed nominal exchange rate e, can move via price-level changes.THE BASICS OF CURRENC

33、Y TRADINGReal Exchange Rate Appreciation/DepreciationIf we say that the real exchange rate has depreciated if either e P or PfIf we say that the real exchange rate has appreciated if either e P or PfTHE BASICS OF CURRENCY TRADINGCompetitivenessIf the real exchange rate depreciates, the price of fore

34、ign goods relative to the price of domestic goods increases and exports become more competitive while imports become more expensive.If the real exchange rate appreciates, the price of foreign goods relative to the price of domestic goods decreases and exports become less competitive while imports be

35、come cheaper.THE BASICS OF CURRENCY TRADINGBilateral exchange rate involves a currency pair, while effective exchange rate is weighted average of a basket of foreign currencies, and it can be viewed as an overall measure of the countrys external competitiveness. A nominal effective exchange rate (NE

36、ER) is weighted with trade weights. a real effective exchange rate (REER) adjust NEER by appropriate foreign price level and deflates by the home country price level. THE BASICS OF CURRENCY TRADINGBasic rate is the exchange rate between the domestic currency and the countrys key currency.Cross rate

37、is the exchange rate between the domestic currency and the currencies other than the key currency of the country.THE BASICS OF CURRENCY TRADINGThe foreign exchange market is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of for

38、eign currencies. FX transactions typically involve one party purchasing a quantity of one currency in exchange for a quantity of another.The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate.THE BASICS OF

39、 CURRENCY TRADINGNow, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments and other institutions. The average daily volume in the global foreign exchange and relat

40、ed markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. foreign exchange market turnoverTHE BASICS OF CURRENCY TRADINGWho is participating the foreign

41、 exchange market?The banks who are permitted to conduct foreign exchange transactionsThe clients (customers) of the banksThe central bankThe foreign exchange brokersTHE BASICS OF CURRENCY TRADINGForeign exchange market brokers are one of the major participants in the foreign exchange market. They ar

42、e specialist companies playing the role of intermediaries between different banks. They have online links with banks throughout the world to recognize which bank has the highest bid i.e. which bank has the highest buying rate for currency and on the other hand which one has the lowest offer rate. Th

43、is helps in making it possible for the banks to take up the best deal. The foreign exchange market broker provides the service of financial intermediary for a commission. THE BASICS OF CURRENCY TRADINGThe advent of electronic broking systems (or automated order matching systems) since 1992 has captu

44、red a good deal of market share in spot transactions and buyers and sellers have substituted it for conventional telephone-based (voice-based) foreign exchange market brokers. Using the electronic mode of broking, traders can keep a broader watch on the bid and offer rates of potential counter parti

45、es. Also these systems are regarded as more reliable. The profession of a foreign exchange market broker has become highly competitive with the splurge of foreign exchange market transactions and speculation. Brokers compete not only among themselves but also against banks and dealer institutions. T

46、op 10 currency traders % of overall volume, May 2008RankNameVolume1Deutsche bank21.70%2UBS AG15.80%3Barclays Capital9.12%4Citi7.49%5Royal Bank of Scotland7.30%6JPMorgan4.19%7HSBC4.10%8Lehman Brothers3.58%9Goldman Sachs3.47%10Morgan Stanley2.86%THE BASICS OF CURRENCY TRADINGThe structure of the forei

47、gn exchange marketThe retail market (the transactions between clients and banks)The interbank part of the market (the transactions between banks) (functions of the interbank market: to keep the information up to date; to readjust its position quickly and at low cost; to catch the opportunity of gett

48、ing profit) (how is a interbank transaction conducted: conducted directly between the traders of different banks; conducted through foreign exchange brokers )The transactions between commercial banks and the central bankTHE BASICS OF CURRENCY TRADINGSome characteristics of the foreign exchange marke

49、tThis market is a 24-hour marketThis market is participated by the banks around the world, but banks located in London and New York is outstanding.This market is a global marketThe total volumes traded in the foreign exchange market are enormous.Most foreign exchange trading involves the exchange of

50、 U.S. dollars for another currency. The dollar is called a vehicle currency.See p34 case study to learn something about foreign exchange tradingRankCurrencyISO 4217 code(Symbol)% daily share(April 2007)1United States dollarUSD ($)86.3%2EuroEUR ()37.0%3Japanese yenJPY ()16.5%4Pound sterlingGBP ()15.0

51、%5Swiss francCHF (Fr)6.8%6Australian dollarAUD ($)6.7%7Canadian dollarCAD ($)4.2%8-9Swedish kronaSEK (kr)2.8%8-9Hong Kong dollarHKD ($)2.8%10Norwegian kroneNOK (kr)2.2%11New Zealand dollarNZD ($)1.9%12Mexican pesoMXN ($)1.3%13Singapore dollarSGD ($)1.2%14South Korean wonKRW ()1.1%Other14.5%Total200%

52、THE BASICS OF CURRENCY TRADINGThe networks that is often used to conduct foreign exchange transactionsThe Society for Worldwide Interbank Financial Telecommunications (SWIFT)The Clearing House International Payments System (CHIPS)Demand and supply for foreign exchange (from the point of view of the

53、U.S. )U.S. exports of goods and services will create a supply of foreign currency and a demand for U.S. dollars to the extent that foreign buyers have their own currencies to offer and U.S. exporters prefer to end up holding U.S. dollars and not some other currency.U.S. imports of goods and services

54、 will create a demand of foreign currency and a supply for U.S. dollars to the extent that U.S. buyers have dollars to offer and foreign exporters prefer to end up holding their own currencies.Demand and supply for foreign exchangeU.S. capital outflows will create a demand for foreign currency and a

55、 supply of U.S. dollars to the extent that the investors begin with dollars and a desire to invest in foreign financial assets that must be paid for in foreign currencies.U.S. capital inflows will create a supply of foreign currency and a demand of U.S. dollars to the extent that the investors begin

56、 with foreign currencies and a desire to invest in U.S. financial assets that must be paid for in U.S. dollars .Demand and supply for foreign exchangeEquilibrium Exchange RateIf the rate of return on dollar assets is greater than the dollar rate of return on euro assets there will be an excess deman

57、d for dollar assets.If the rate of return on dollar assets is less than the dollar rate of return on euro assets there will be an excess demand for euro assets.Only when the rate of return on dollar assets is equal to the rate of return on euro assets will the exchange rate be in equilibrium.Floatin

58、g exchange rateWhat is a floating exchange rate system?A floating exchange rate system is an exchange rate system under which the exchange rate is determined by the market demand and the market supply of the foreign exchange without intervention by government.A floating rate system is an exchange sy

59、stem under which the market demand and supply set the equilibrium rate that clears the market without intervention by government.Floating exchange rateExchange rate determination under a floating rate systemThe slope of the demand and supply curveAs long as a lower exchange rate raises the quantity

60、demanded, the demand curve will slope downward. (under direct quotation system)The shift of the demand and supply curve If for any reason other than the change of the exchange rate the demand for foreign currency increases, the demand curve shifts to the right. For example, the domestic demand for f