Download Exchange Rate

Chapter 1
The ForeignExchange Market
宁波工程学院国商教研室蒋力编
Topics to be Covered
• Foreign Exchange Market
• Spot Rates
• Arbitrage
• Short/Long term FX movement
1-2
宁波工程学院国商教研室蒋力编
Foreign Exchange Market
• The Foreign Exchange Market (FEM) is a
place where one country’s money is traded
for that of another country.
1-3
宁波工程学院国商教研室蒋力编
• The FEM consists primarily of large
commercial banks in world financial centers
such as New York or London. The top three
banks accounted for 36.98% of the total
market in 2011, The market share for the top
10 FX roviders was at about 77%.
• 1. Deutsche Bank （德意志银行）2. Barclays（巴
克莱银行）3. UBS （瑞士联合银行）4. Citi （花旗）
5. JPMorgan （摩根大通）6. HSBC （汇丰银行）
7. Royal Bank of Scotland （皇家苏格兰银行）8.
Credit Suisse （瑞士信贷集团）
• 9. Goldman Sachs （高盛）10. Morgan Stanley
（摩根士丹利）
1-4
宁波工程学院国商教研室蒋力编
Foreign Exchange Market Trading Volume
(by country 2013) (Reported by The Bank
for International Settlements (BIS) )
• Foreign exchange market activity has become ever more
concentrated in a handful of global financial centres. The
vast majority of global FX trading in 2013 has occurred in
five jurisdictions: the United Kingdom (41%), the United
States (19%), Singapore (5.7%), Japan (5.6%) and Hong
Kong SAR (4.1%). The share of the top five global FX
trading centres moved up by 4 percentage points to 75% in
2013.
• Singapore overtook Japan as the world’s third major FX
trading centre in 2013. And Hongkong overtook Switerland
as the world’s fifth top FX trading centre
1-5
宁波工程学院国商教研室蒋力编
FIGURE 1.1 The World of
Foreign-Exchange Dealing(p5)
1-6
宁波工程学院国商教研室蒋力编
Figure 1.2 Average daily trading
value Yen V.S. Dollar (p7)
1-7
宁波工程学院国商教研室蒋力编
TABLE 1.1 Estimation of Average Daily Volume
of Foreign-Exchange Market Activity
1-8
宁波工程学院国商教研室蒋力编
TABLE 1.3 Foreign exchange market turnover
by currency 2013
1-9
宁波工程学院国商教研室蒋力编
TABLE 1.4 Foreign exchange market turnover by
currency pair 2013
1-10
宁波工程学院国商教研室蒋力编
TABLE 1.5 Foreign exchange market turnover
by instruments 2013
1-11
宁波工程学院国商教研室蒋力编
Exchange Rate
What is the Exchange Rate?
• Exchange Rate (XR)—the price of one money in
terms of another.
• The XR helps determine the value of a product
priced in a different currency.
1-12
宁波工程学院国商教研室蒋力编
Exchange Rate
• Basic Types of Exchange Rates: Spot XR
• The Spot XR are quoted at a specific day and time.
1-13
宁波工程学院国商教研室蒋力编
Qutotation Method
• $ is local currency:
U.S. $ per foreign currency
£1 = $1.6472 (Direct);
Foreign currency per U.S. $
£.0.6071 = $1 (Indirect Quotation)
1-14
宁波工程学院国商教研室蒋力编
￥6.20
1-15
宁波工程学院国商教研室蒋力编
How many things can ￥1 buy?
0.15 Can
0.053 Bottle
0.014 Bottle
0.026 Bag
$0.16
1-16
宁波工程学院国商教研室蒋力编
Exchange Rate
• Spread—the difference between the buying and
selling price of a currency.
• The spread will tend to be higher for thinly or lowvolume traded currencies (quick returns and small
margins) or for high-risk currencies.
• International currency symbols p10
1-17
宁波工程学院国商教研室蒋力编
Pricing currency/Unit currency
Here USD is unit currency, JPY is pricing currency, so
77.55 means the price of one USD is 77.55 JPY. The
following currency pairs are similar.
1-18
宁波工程学院国商教研室蒋力编
Arbitrage
• Arbitrage—the activity of simultaneously buying a
currency in one market while selling in another to
take advantage of profit opportunities.
• For example: in our textbook the XR quotation is
pricing currency/unit currency
• Citibank quoting SF/$=0.8745-55
Dresdner Bank quoting SF/$=0.8725-35
1-19
宁波工程学院国商教研室蒋力编
In the real world case
• Jan 7th 2016
• CNY/USD is 6.5314 at mainland market,
however at the offshore market of CNY the
XR is 6.7585.
• The arbitrage is so obvious.
1-20
宁波工程学院国商教研室蒋力编
Cross Rate
• Arbitrage could involve more than two currencies
arbitrage
• Cross Rate—the third exchange rate implied by any
two exchange rates involving three currencies.
• JPY/USD=124.84, USD/GBP=1.5720;
• JPY/GBP=196.2485
• Since the dollar is actively traded with many
currencies, any two exchange rates involving dollars
can be used to determine cross rates.
1-21
宁波工程学院国商教研室蒋力编
Triangular Arbitrage
The implied S(¥/£)
cross rate is 180
Bank 3 has posted
a quote of S (¥/£)
=160, so there is
an arbitrage
opportunity.
$
Bank 1
S($/£)=1.50
S(¥/$)=120
So, how can we make
money with $100 initially?
Bank 2
¥
£
Bank 3
S (¥/£) =160
1-22
宁波工程学院国商教研室蒋力编
Triangular Arbitrage
As easy as 1 – 3 – 2:
1. Sell our $ for ¥,
$
Bank 1
Bank 2
¥12000 at bank 1 S(¥/$)=120
S($/£)=1.50
2. Sell our ¥ for £,
£75 at bank 3
3. Sell those £ for $.
$ 112.5 at bank 2
¥
£
Bank 3
S (¥/£) =160
What if I have no $ at all? Perhaps I can do…
1-23
宁波工程学院国商教研室蒋力编
Triangular Arbitrage
As easy as 1 – 3 – 2:
1. Sell our $ for ¥,
¥12000
$
Bank 1
Bank 2
S(¥/$)=120
S($/£)=1.50
2. Sell our ¥ for £,
£75
3. Sell those £ for $.
$ 112.5
¥
£
Bank 3
S (¥/£) =160
If everyone takes the arbitrage, what will happen?
1-24
宁波工程学院国商教研室蒋力编
Short -term movements
• Depreciation—when the value of one currency falls
relative to another. For example, if the U.S. dollar
depreciates against the Swiss franc, then it takes
more dollars to buy one franc.
• Appreciation—when the value of one currency
rises relative to another.
1-25
宁波工程学院国商教研室蒋力编
Depreciation & Appreciation
1-26
宁波工程学院国商教研室蒋力编
Short -term movements
Why exchangge rates changes throughtout
the day?
• Inventory control effects p14-15
• Asymmetric information effects p16
1-27
宁波工程学院国商教研室蒋力编
Long term movements
• Trade flow model P17
• Refer to Figure 1.3 Dollar/YEN Market
• Demand for DOLLAR curve—comes from the
Japanese demand for U.S goods, services, and
financial assets.
• Supply of DOLLAR curve—comes from the USA
demand for Japanese goods, services, and financial
assets.
• Equilibrium exchange rate—found at the
intersection of the demand and supply curves.
1-28
宁波工程学院国商教研室蒋力编
FIGURE 1.5 Centra bank intervention
Suppose the
U.S. demand
for British
goods ↑, which
causes the
demand for
pounds to shift
to the right. As
a result, the
dollar ↓ and
pound ↑.
The Bank of
England may
intervene to stop
the pound
appreciation by
supply more
pounds in the
foreign exchange
market.
1-29
宁波工程学院国商教研室蒋力编
Exchange Rate Index
1-30
宁波工程学院国商教研室蒋力编
Exchange Rate Index
• Exchange Rate Index – a weighted average of a
currency’s value relative to other currencies, where
the weights are based on the relative trade
importance of each currency.
• Page 21
1-31
宁波工程学院国商教研室蒋力编
1-32
宁波工程学院国商教研室蒋力编
1-33
宁波工程学院国商教研室蒋力编
1-34
宁波工程学院国商教研室蒋力编