International Finance
国际金融
Lectured by Yuanfen Tu
School of International Trade and Economics
Email:[email protected]
1
International Finance
By Robert J. Carbaugh
13th Edition
Chapter 2:
Foreign Exchange
2
Main Contents



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What is the foreign-exchange market? How many
tapes of foreign-exchange transactions do banks
typically engage in?
How to read foreign-exchange quotations? What
is depreciation or appreciation?
What are the differences among forward markets,
futures & options?
What determinates the exchange-rate? What are
arbitrage, hedge & speculation?
3
Foreign-Exchange
Foreign-Exchange
《中华人民共和国外汇管理条例》第一章第三条规
定：本条例所称外汇，是指下列以外币表示的可以
用作国际清偿的支付手段和资产：
1、外国货币，包括纸币、铸币；
2、外币支付凭证，包括票据、银行存款凭证、邮
政储蓄凭证等；
3、外币有价证券，包括政府债券、公司债券、股
票等；
4、特别提款权、欧洲货币单位；
5、其他外汇资产。
Foreign-Exchange Market

Foreign-exchange market

Organizational setting
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

Within which individuals, businesses, governments,
and banks
Buy and sell foreign currencies and other debt
instruments
Largest and most liquid market in the world
Dominated by four currencies

U.S. dollar, euro, Japanese yen, British pound
6
Foreign-Exchange Market
2016年世界十大货币排行榜
Top1：美元
Top2：欧元
Top3：英镑
Top4：日元
Top5：澳元
Top6：加元
Top7：瑞士法郎
Top8：人民币
Top9：港元
Top10：瑞典克朗
Foreign-Exchange Market

Foreign-exchange market



Not An organized structure; no centralized
meeting place; no formal requirements for
participation
Not limited to any one country
Three of the largest foreign –exchange markets


London, New York and Tokyo
A round-the-clock operation
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Foreign-Exchange Market
Foreign-Exchange Market
Foreign-Exchange Market
Foreign-Exchange Market

Foreign-exchange market
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

Transactions between commercial banks and
their commercial customers
Domestic inter-bank market conducted through
brokers
Active trading in foreign exchange with banks
overseas
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Foreign-Exchange Market
Types of Foreign-Exchange
Transactions

Banks typically engage in 3 types of foreign
exchange transactions: spot, forward, and
swap

Spot transaction



Outright purchase or sale of currency now, as in “on
the spot”
Spot dealing simplest way to meet currency
requirements but carries high risk of exchange rate
fluctuations because there’s no certainty of rate until
transaction complete
Maturity date is two working days
14
Types of Foreign-Exchange
Transactions

Forward transactions




Receiving or paying an amount of foreign currency on a
specific date in future, months to years from now
Fixed exchange rate
Protect against unfavorable movements in exchange
rate but will not allow gains to be made, should
exchange rate move in one’s favor
Forward market

Foreign exchange bought/sold for delivery at future date
– exists mainly for widely traded currencies
15
Types of Foreign-Exchange
Transactions

Currency swaps

Conversion of one currency to another currency at
one point in time
 Agreement to reconvert it back to original
currency at specified time in future
 Rates of both exchanges agreed to in advance
 Involves single transaction in which traders
agree to pay/receive stipulated amounts of
currencies at specified rates
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TABLE 2.1
Distribution of foreign-exchange
transactions by U.S. banks
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TABLE 2.1
Distribution of foreign-exchange
transactions by U.S. banks
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Interbank Trading

Retail transactions
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Bank purchases from and sales to their
customers
Less than 1 million currency units
Wholesale transactions


More than 1 million currency units
Between banks or with large corporate
customers
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Interbank Trading

Earning profits in foreign-exchange
transactions

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Bid rate - price that the bank is willing to pay
for a unit of foreign currency
Offer rate - price at which the bank is willing
to sell a unit of foreign currency
Spread - difference between the bid and the
offer rate


Size of the transaction
Liquidity of the currencies being traded
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TABLE 2.2
Top ten banks by share of foreignexchange market, 2009
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外汇市场中的市场份额及排名
Foreign exchange
Interbank trading

A banker’s bid quote will be less than
its offer quote at any time.

Citibank might quote bid and offer rates for
the Swiss franc at $0.5851/0.5854, the
spread is $0.5854-$0.5851=$.0003
 foreign-exchange dealers attempt to
profit by anticipating correctly the
future direction of currency movements.
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Reading Foreign-Exchange
Quotations

Exchange rate
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
Exchange rate reported
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
Price of one currency in terms of another
Number of units of foreign currency required
to purchase one unit of domestic currency
The midrange between the bid and offer prices
Currency depreciation

It takes more units of a nation’s currency to
purchase a unit of some foreign currency
24
Reading Foreign-Exchange
Quotations

Currency appreciation


It takes fewer units of a nation’s currency to
purchase a unit of some foreign currency
Cross exchange rate


Exchange 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)
25
Foreign exchange
Reading foreign exchange quotations
 直接标价法（direct foreign exchange
quotation ）：用一单位外国货币为标准折算出
的本国货币数额。
 间接标价法：用一单位本国货币为标准折算出的
外国货币数额。
中国外汇牌价使用的是直接标价法还是间接标价
法？
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TABLE 2.3
Foreign exchange quotations (a)
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TABLE 11.3
Foreign exchange quotations (b)
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Forward and Futures Markets
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
Foreign exchange can be bought & sold for
delivery immediately (spot market) or in
future (forward market)
Foreign exchange can also be traded in
futures market



Parties agree to future exchanges of currencies
and set applicable exchange rates in advance
Only some leading currencies traded
Trading takes place in standardized contract
amounts and in specific geographic location
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Forward and Futures Markets
TABLE 2.4
Forward contract versus futures contract
Forward Contract
Futures Contract
Issuer
Commercial bank
Trading
“Over the counter” by
telephone
International Monetary Market (IMM) of
the Chicago Mercantile Exchange and
other foreign exchanges such as the
Tokyo International Financial Futures
Exchange
Contract size
Tailored to the needs of the
exporter/importer/investor; no
set size
Standardized in round lots
Date of
delivery
Negotiable
Only on particular dates
Based on the bid
Brokerage fees for sell and buy orders
On expiration date only, at
prearranged price /offer
spread
Profits or losses paid daily at close of
trading
Contract costs
Settlement
On the IMM’s market floor
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Forward and Futures Markets

International Monetary Market (IMM)
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Size of each contract

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Chicago Mercantile Exchange, 1972
An extension of the commodity futures
markets
On the same line as the currency’s name and
country
First column

Maturity months
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Forward and Futures Markets
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Open
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High
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Contract’s highest price for the day
Low
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Price at which the yen was first sold when the
IMM opened in the morning
Contract’s lowest price for the day
Settle
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Contract’s closing price for the day
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Forward and Futures Markets
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Change
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Compares today’s closing price with the closing
price as listed in the previous day’s paper
(+) means prices ended higher
(-) means prices ended lower
Open interest

Total number of contracts outstanding
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TABLE 2.5
Foreign currency futures, May 13, 2009:
selected examples
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Foreign-Currency Options

Option
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
Agreement between a holder (buyer) and a writer
(seller)
Holder has the right, but not the obligation, to
buy or sell financial instruments at any time
through a specified date
38
Foreign-Currency Options
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Foreign-currency options
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Options holder
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Right to buy or sell a fixed amount of foreign currency
At a prearranged price, within a specified date
Can choose the exchange rate to guarantee
Can choose length of the contract
Call option

Gives the holder the right to buy foreign currency
at a specified price
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Foreign-Currency Options

Put option
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Strike price


Gives the holder the right to sell foreign
currency at a specified price
Price at which the option can be exercised
Premium

Fee the writer of the options contract receives
40
Exchange-Rate Determination
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Exchange rate in a free market
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
Determined by both supply and demand
conditions
Demand for foreign exchange
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
Derived demand
Driven by domestic demand for foreign goods
and assets
Corresponds to the debit items on a country’s
balance of payments
44
Exchange-Rate Determination

Supply of foreign exchange
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

Amount of foreign exchange that will be
offered to the market
At various exchange rates, all other factors
held constant
Equilibrium exchange rate

Determined by the market forces of supply
and demand
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FIGURE 2.1
Exchange-rate determination
The 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
nation’s balance-of-payments statement; the supply of foreign exchange corresponds to the credit
items.
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Exchange-Rate Determination

Increase in the demand for pounds
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
Shift rightward
The dollar will depreciate against the pound
Decrease in demand for pounds
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
Shift leftward
The dollar will appreciate
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Exchange-Rate Determination

Increase in the supply of pounds
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Rightward shift
The dollar appreciate against the pound
Decrease in the supply of pounds
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Leftward shift
Dollar depreciation
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TABLE 2.6
Advantages and disadvantages of a
strengthening and weakening dollar
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WEAK DOLLAR IS A BONANZA FOR
EUROPEAN TOURISTS
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When dollar’s exchange value depreciates
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Foreign tourists realize a good bargain on goods
purchased in America
Delighted American tourist industry
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Tourists could afford to stay longer
Stay at nicer and more expensive hotels
Take more tours
Eat at more restaurants
Shop with bargain-basement enthusiasm.
Air fares to and from the United States declined
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Nominal and Real Exchange Rates

Exchange-rate index
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
Effective exchange rate; trade-weighted dollar
Weighted average of the exchange rates between
the domestic currency


And the nation’s most important trading partners
With weights given by relative importance of the
nation’s trade with each of these trade partners
51
Nominal and Real Exchange Rates

Nominal exchange-rate index of the U.S.
dollar

Average value of the dollar

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Not adjusted for changes in prices levels
In the U.S. and its trading partners
if increasing
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Dollar appreciation relative to the currencies of the
other nations in the index
Loss of competitiveness for the U.S.
52
Nominal and Real Exchange Rates

Nominal exchange-rate index of the U.S.
dollar

If decreasing



Dollar depreciation relative to the other currencies
in the index
Improvement in U.S. international competitiveness
Based on nominal exchange rates that do not
reflect changes in price levels in trading
partners
53
Nominal and Real Exchange Rates

Real exchange-rate of the U.S. dollar



Embodies the changes in prices in the countries
in the calculation
Nominal exchange rate adjusted for relative price
levels
An appreciation of the dollar - higher index
54
TABLE 2.7
Exchange rate indexes of the U.S. dollar
(March 1973 = 100)*
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