国际金融复习提纲.doc

国际金融复习提纲11Chapter 1 Foreign exchange and marketForeign exchange and foreign exchange market(definition and classification)Foreign exchange is the way of payment and assets used to the international settlement(国际结算), which is denominated in foreign currencyForeign exchange market refers to large commercial banks in financial centers that trade foreign-currency-denominated deposits with each other. In a word, the FEM is the place where the foreign exchange trading proceeds.Classification:Retail market and interbank market-retail market (small amounts): trade in individuals, nonfinancial companies, financial institution and other organizations-interbank market(wholesale market): trade between banks,60% of the totalExchange rateDefinition: exchange rate is the price of one kind of money in terms of another.In another word, a kind of monetary is priced by another kind of monetary. Quotation, Direct quotation: domestic currency is expressed by unit foreign currency. Indirect quotation: foreign currency is expressed by unit domestic Currency. Bid and ask rate (in different quotation) bid rate (buying rate): the rate at which a bank will purchase the foreign exchange.Ask (offer) rate (selling rate): the rate at which the bank will sell the foreign exchange.Ask rate is more expensive than bid rateNote:When talking about the bid price and ask price, it will be very different in different quotation.Cross rate and arbitrage（出计算题）Cross rate: By knowing any two exchange rates, we will be able to infer a third exchange rate.Arbitrage: is an activity. Its purpose is to obtain the profit opportunities for simultaneously buying a currency in one market while selling it in another.DepreciationDepreciation is a decrease in the value of a currency relative to another currencyAppreciationAppreciation is an increase in the value of a currency relative to another currency. Overvalued Overvalued: the actual exchange rate is higher than the equilibrium value.UndervaluedUndervalued: the actual exchange rate is lower than the equilibrium value.Central Bank InterventionIn the case of a depreciating domestic currency, central banks can sell foreign currencies in exchange for domestic currency to halt the depreciation.Alternatively, by demanding (buying) assets denominated in foreign currency and by supplying (selling) domestic currency, the price/value of foreign currency is increased and the price of domestic currency is decreased.Chapter 2The Balance of PaymentsDefinition of BOPThe balance of payments is a statistical record of all the economic transactions between residents of the reporting country and residents of the rest of the world during a given time period.Residents are the economic units whose general centre of interest is considered to rest in the given economy.Centre of interest -that is one, who consume goods and services, participate in production, or engage in other economic activities in the territory of an economy more than one year, even if they have a foreign citizenship. Territory of an economy: Include - the land，sky and waters underThe jurisdiction of a government(领土、领空、领海)- enclave (飞地) Students and medical patients areTreated as residents of the country of origin, regardless of the length of stay; Official diplomatic and consular representatives, members of the armed forces abroad are in any case residents of the country of origin.Accounting and accountsAccounting In an accounting sense, bops always balance;They are based upon the principle of double-entry book-keeping(复式记账法)Each transaction has two sides to it, as a credit （贷）with a positive (+) sign, and as a debit （借） with a negative sign (-) It consists of three parts: current account, capital account, and statistical discrepancy. (经常账户，资本账户和统计偏差和遗漏)凡是引起本国从国外获得货币入的交易记入贷方，凡是引起本对国外货币支出的交易记入借而这笔货币收入或支出本身则应记入借方和贷方。凡是引起外汇供给的经济交易都记入贷方，凡是引起外汇需求的经济交易则记入借方。资本（产）内流（国外资产减少、负债增加）记入贷方，资本（产）外流（国外资产增加、负债减少）记入借方。The current account(经常账户): record trade and income flows; The capital and financial account(资本与金融账户): record changes in assets and liabilities;The Statistical discrepancy(净误差与遗漏): artificially make balance of the current account and capital accountAdditional Summary MeasuresBalance of tradeBalance of trade (贸易差额) records a surplus when merchandise exports exceed imports. If the trade balance is a credit, 0, surplus If the trade balance is a debit, 0, deficitCurrent account balanceMerchandise： is the tangible commodities (有形商品) Services: refers to trade in the services of factors of production Travel and tourismRoyalties (专利权，版税等, 这里指使用权)Transportation costs And insurance premiums. Note: Credit: export, debit: importThe current account balance(CA) = trade balance + services balance + income balance + current transfers balance If the current account balance is a credit, 0 , surplus. If the current account balance is a debit, 0 , deficit. CA = EX IM = Y (C + I + G ) = S ICapital and financial account balanceFinancial account : records transactions concerning the movement of financial capital into and out of the country.1.Direct investment2.Portfolio investments(securities investments)3.Other investment4.Reserve assetsNote: credit: decrease of foreign assets and increase of foreign liabilities; debit: increase of foreign assets and decrease of foreign liabilities.Official settlements balanceOfficial settlements balance: measures changes in financial assets held by foreign monetary agencies and official reserve asset transactions - essentially measures international reserve changes.Overall balanceThe current account balance + the capital and financial account balance + the statistical error = reserve assets balanceBOP Equilibrium BOP equilibrium is often thought of as a condition in which credits equal debits on overall balance.AdjustmentFlexible exchange rate，Fixed exchange ratesChapter 3International Monetary ArrangementsThe gold standardCurrencies are valued in terms of their gold equivalent Gold equivalent Price specie flow mechanism is the adjustment of prices as gold flows into or out of a country, causing an adjustment in the flow of goods.An inflow of gold tends to inflate prices. An outflow of gold tends to deflate pricesMint par Gold transport points How may a balance of payments If a country running a balance of payments deficit net outflows of gold reduce its money supply reduce its prices greater net exports so that balance of payments equilibrium would be restored. Disequilibrium be remedied? Collapse of the gold standardBretton Woods international monetary system (The gold exchange standard)Main aspects of Bretton Woods systemThe Bretton Woods agreement required that: Fixed exchange rates against the US dollar and a fixed dollar price of gold ($35 per ounce). But were committed to change within +(-)1% of parity adjustable pegThe International Monetary Fund (IMF) was created at the Bretton Woods Conference Collapse of the Bretton Woods SystemDefect of the systemGold dollar other currencies“Triffin dilemma”: Gold dollar: keep USA BOP surplusDollars supply to other countries: USA BOP deficitDollar crisis“特里芬悖论”，也可以说是特里芬难题，它是美国耶鲁大学教授特里芬在1960年出版的黄金与美元危机中提出的一个观点。书中的描述是这样的：“由于美元与黄金挂钩，而其他国家的货币与美元挂钩，美元虽然因此而取得了国际核心货币的地位，但是各国为了发展国际贸易，必须用美元作为结算与储备货币，这样就会导致流出美国的货币在海外不断沉淀，对美国来说就会发生长期贸易逆差；而美元作为国际货币核心的前提是必须保持美元币值稳定与坚挺，这又要求美国必须是一个长期贸易顺差国。这两个要求互相矛盾，因此是一个悖论。”The choice of an exchange rate systemThere are systematic differences between countries choosing to peg their exchange rates and those choosing floating rates:Country size Large countries tend to be more independent and less willing to maintain a fixed rate of exchange with foreign currencies, because the foreign trade constitute a smaller fraction of GDP of big countries than that of small countries.Openness of the economyOpenness: means the degree to which the country depends on international trade. (The greater the fraction of tradable goods in GDP, the more open the economy will be.) A country with little or no international trade is referred to as a closed economy. To minimize foreign-related shocks to the domestic price level, the more open economy tends to follow a pegged exchange rate. Inflation rateCountries that choose divergent inflation rate with their trading partner will follow floating rates.Degree of diversified tradesCountries that trade largely with a single foreign country tend to peg their exchange rate to that countrys currency. Exchange rates should be float or be fixedThe European Monetary SystemThe optimum currency area is the best area within which exchange rates are fixed and between which exchange rates are flexibleExample: The European Monetary System and the Euro Chapter 4Forward-Looking Market InstrumentsForwardsDefinition of forward contractA forward contract is a contract between two partiesa buyer and a sellerto buy or sell something at a future date at a price agreed upon today.Long position (long) is the buyer who will buy the securities or the contract.Short position (short) is the seller who will sell the securities or the contract.Maturity(delivery) dateThe specified date is called maturity date.Delivery price (交割价格,合同价格) does not change once the contract is fixed.Forward price Forward price (forward exchange rate) (远期价格) is the market price that would be agreed today for delivery of the asset of the specified future date. Bid/askBid: a certain price at which the bank would buy a currency.Ask: a certain price at which the bank would sell a currency.Delivery price, premium/discount/flat(annual rate, calculation)Forward rates quoted Forward premium/discount FuturesDefinitionThe foreign exchange futures contract is an agreement between two parties to buy/sell a particular currency at a particular price on a particular future date, as specified in a standardized contract common to all participants in that currency futures exchange.A futures contract differs from a forward contractThe futures trade occurs in a specific geographic location, such as the International Monetary Market (IMM) of the Chicago Mercantile Exchange (CME), which is the largest currency futures market; while the forwards is OTC-traded.The futures trade occurs in standardized contracts:The maturity dates are only on the third Wednesday of March, June, Sep., and Dec. (forward: 1month, 3month, and 6month long and traded every day of the year)Future contracts are “marked to market” and adjusted daily; there are initial and maintenance margins and daily cash settlement. While forward contracts do not require any cash payment until maturity.There is a “secondary market” for future contracts.Futures market is a regulated market: the regulators protect the public interests and prevent questionable actions. While forwards market is not regulated (OTC-traded)There is no physical delivery or transfer for futures (clearing out); normally, there is physical delivery for forwards.Speculation(投机) and hedge(套期保值)with futuresOptionsDefinitionA foreign currency option is a contract that provides the right to buy or sell a given amount of currency at a pre-agreed exchange rate in the future. Some Terminologies: Call/putA call option gives the right to buy currency (看涨期权) A put option gives the right to sell (看跌期权). American/European optionThe contract can be exercised at any time up to the maturity dateAmericanOption. European options may be exercised only at maturity. Strike price or exercise price The price at which currency can be bought or sold is the strike price or exercise price (履行价格). Expiration date or maturity dateThe date on which currency can be traded is the expiration date or maturity date （到期日）In/out of/at the money An option is said to be “in the money”(实值状态) if the strike price is less than the current spot rate for a call or greater than the current spot rate for a put;The option is “out of the money” (虚值状态), if the strike price is less advantageous than the current spot rate;The option is “at the money”(平值), if the strike price is equal to the spot rate. Premium(effects)Option premium (option price,保险费): the income received by an investor who sells or writes an option contract to another party. Hedge with optionsOne of the uses of options is for hedging (套期保值)purposes.Hedging: make an investment to reduce the risk of adverse price movements in an asset. Normally, a hedging consists of taking an offsetting position in a relative security.SwapsDefinition of Foreign Exchange Swaps Foreign Exchange Swaps: there is a simultaneous exchange of two currencies on a specific date at a rate agreed at the time of the contract, and a reverse exchange of the same two currencies at a date further in the future at a rate agreed at the time of the contract. Classification of Foreign Exchange Swaps Classification:Spot to spot, spot to forward, forward to forwardCurrency swap Currency swap is a contract where two parties exchange streams of interest payments in different currencies for an agreed period of time and then exchange principal amounts in the respective currencies at an agreed exchange rate at maturity.Swaps rateThis is called swaps rate: the difference between the spot rate and the forward rate in the swap contractAnnual rateChapter 5Foreign Exchange Risk Definition of foreign exchange riskForeign exchange exposure: is the sensitivity of changes in the real domestic-currency value of assets or liabilities to change in exchange rates. The risk arises from uncertainty regarding the future exchange rate; this uncertainty makes forecasting necessary. Types: Transaction/ Translation/ Economic exposure(definition and contrast)Transaction exposure. This is exposure resulting from the uncertain domestic currency value of a foreign-currency-denominated transaction to be completed at some future date.Translation exposure. This is also known as accounting exposure and is the difference between foreign-currency-denominated assets and foreign-currency-denominated liabilities.Translation is the process of expressing financial statements measured in one unit of currency in terms of another unit of currency.Economic exposure. This is exposure of the firms value to changes in exchange rates. Economic exposure is concerned with the sensitivity of the real domestic currency value of long-term cash flows to exchange rate changes. The strategies by which the foreign exchange risk may be hedged or eliminatedForeign exchange risk (mainly transaction exposure) may be hedged or eliminated by the following strategies:Invoicing in the domestic currencyCollecting strong currency, and paying weak currency“Basket currencies”Trading in forward, futures, or options marketsSpeeding (slowing) payments of currencies expected to appreciate (depreciate)Speeding (slowing) collection of currencies expected to depreciate (appreciate)Adding hedge terms in contractChapter 6International banking, debt, and riskInternational financial market andEurocurrency marketDefinitionDefinition: the international deposit and loan market.Reasons for Eurocurrency marketCommunist Countries did not want to hold dollars in U.S. banks for fear of reprisal “Regulation Q” of the FedEnglish Government control to pounds (pound crisis)Demands to capital increaseAdvantages of Eurocurrency market and reasonsOffer higher interest rates on deposits(floor) and lower interest rates on loans(ceiling)No government-mandated interest rate controls, no deposit insurance, no government-mandated credit allocations, less deposit reserve (credit multiplier)Less restrictions on entry of new banks, and low taxesLower credit riskLess service charge (trading volume) More financial innovation Some terms: Eurodollar Eurodollar: US-dollar denominated deposits at foreign banks or foreign branches of American banks.Eurocurrency (Euromoney)Eurocurrency (Euromoney): currency held in banks outside of the country where it is legal tender.EurobankEurobank: a financial institution that readily accepts foreign currency denominated deposits and makes foreign currency loans.Offshore bankingOffshore banking: provide foreign currency borrowing and lending services. International financial centre International banking facilitiesLondon Interbank offering rate (LIBOR)The British Bankers Association fixes a value for LIBOR each day at 11:00 A.M. for each major currencyInternational debtFinancial crisisLatin American debt crisis in 1982Mexican financial crisis in 1994Asian financial crisis in 1997Chapter 7Exchange Rate DeterminationThe theory which describes a relationship between the prices of goods and services and exchange rates is known as purchasing power parity.Absolute/Relative Purchasing Power ParityAbsolute Purchasing Power Parity: The exchange rate between any two currencies is equal to the ratio of their price indexed. E = P / PfE is the spot exchange rate (direct quotation), P the domestic price index, and the Pf foreign price index-consumer price indexed or producer price indexes If the percentage change in the exchange rate is equal to the inflation differential between two countries, relative PPP holds. Main idea1.Relative PPP is not so strong an assumption as absolute PPP:If absolute PPP holds, then relative PPP will also hold. But if absolute PPP does not hold, relative PPP still may.2.PPP holds better for high-inflation countries than low-inflation countries. 3.Investigations over long periods of time have concluded that PPP holds better i