Tài liệu Thị trường tài chính và các định chế tài chính_ Chapter 16 pptx

1
Chapter 16
Foreign Exchange
Derivative Markets
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
2
Chapter Outline

Background on foreign exchange markets

Factors affecting exchange rates

Movements in exchange rates

Forecasting exchange rates

Forecasting exchange rate volatility

Speculation in foreign exchange markets

Foreign exchange derivatives

International arbitrage

Explaining price movements of foreign exchange
derivatives
3
Background on Foreign Exchange
Markets


Foreign exchange markets consist of a global
telecommunications network among large commercial
banks that serve as financial intermediaries

Banks are located in New York, Tokyo, Hong King, Singapore,
Frankfurt, Zurich, and London

The bid price is always lower than the ask price

Institutional use of foreign exchange markets

The degree of international investment by financial institutions is
influenced by potential return, risk, and government regulations

Institutions are increasing their use of the foreign exchange
markets because of reduced information and transaction costs
4
Background on Foreign Exchange
Markets (cont’d)
Financial
Institution
Participation in Foreign Exchange Market
Commercial
banks

Serve as financial intermediaries in the foreign exchange market by
buying or selling currencies

Speculate on foreign currency movements by taking long positions

in some currencies and short positions in others

Provide forward contracts to customers

Offer currency options to customers, which can be tailored to a
customer’s specific needs
International
mutual funds

Use foreign exchange markets to exchange currencies when
reconstructing their portfolios

Use foreign exchange derivatives to hedge a portion of their
exposure
Brokerage firms
and investment
banking firms

Engage in foreign security transactions for their customers or for
their own accounts
5
Background on Foreign Exchange
Markets (cont’d)
Financial
Institution
Participation in Swap Market
Insurance
companies

Use foreign exchange markets when exchanging currencies for their

international operations

Use foreign exchange markets when purchasing foreign securities
for their investment portfolios or when selling foreign securities

Use foreign exchange derivatives to hedge a portion of their
exposure
Pension funds

Require foreign exchange of currencies when investing in foreign
securities for their stock or bond portfolios

Use foreign exchange derivatives to hedge a portion of their
exposure
6
Background on Foreign Exchange
Markets (cont’d)

Exchange rate quotations

The spot exchange rate is for immediate
delivery

Forward rates indicate the rate at which a
currency can be exchanged in the future

Cross-exchange rates

Some quotations express the exchange rate
between two non-dollar currencies

7
Computing A Cross-Exchange
Rate
The euro is worth $1.15, and the Canadian dollar
is worth $0.60. What is the value of the euro in
Canadian dollars?
92.1$C60.0$/15.1$C$ in euro of Value ==
8
Background on Foreign Exchange
Markets (cont’d)

Types of exchange rate systems

1944 to 1971: the exchange rate at which one currency
could be exchanged for another was maintained within
1 percent of a specified rate (the Bretton Woods era)

1971: an agreement among major countries
(Smithsonian Agreement) allowed for devaluation of
the dollar and a widening of the boundaries to 2.25%

1973: boundaries were eliminated and exchange rates
of major countries were allowed to float

Dirty float

Freely floating system
9
Background on Foreign Exchange
Markets (cont’d)


Types of exchange rate systems (cont’d)

Pegged exchange rate systems

Some currencies may be pegged to another
currency or a unit of account and maintained within
specified boundaries

ERM until 1999

Hong Kong since 1983

Argentina from 1991 until 2002

A country that pegs its currency does not have
complete control over its local interest rates
10
Background on Foreign Exchange
Markets (cont’d)

Types of exchange rate systems (cont’d)

Classification of exchange rate arrangements

Many countries allow the value of their currency to
float against others, but governments intervene
periodically to influence its value

Many governments attempt to impose exchange

controls to prevent their exchange rate from
fluctuating

When controls are removed, the exchange rate abruptly
adjust to a new market-determined level
11
Factors Affecting Exchange Rates

The value of a currency adjusts to changes in
demand and supply

In equilibrium, there is no excess or deficiency of that
currency

If a currency increases in value, it appreciates

If a currency decreases in value, it depreciates

Exchange rates are influenced by:

Differential inflation rates

Differential interest rates

Government intervention
12
Factors Affecting Exchange Rates
(cont’d)

Differential inflation rates


Purchasing power parity (PPP) suggests that the exchange rate
will change by a percentage that reflects the inflation differential
between the two countries of concern

Differential interest rates

Interest rate movements affect exchanges rates by influencing the
capital flows between countries

Central bank intervention

Central banks attempt to adjust a currency’s value to influence
economic conditions

Direct intervention occurs when a country’s central bank sells
some of its currency reserves for a different currency
13
Factors Affecting Exchange Rates
(cont’d)

Indirect intervention

The Fed can affect the dollar’s value indirectly by influencing the
factors that determine its value

e.g., the Fed can attempt to lower interest rates by increasing the
money supply, which puts downward pressure on the dollar

Indirect intervention during the Peso Crisis


The central bank increased interest rates to discourage foreign
investors from withdrawing their investments in Mexico’s debt
securities

Indirect intervention during the Asian Crisis

Some Asian countries increased their interest rates to encourage
investors to leave their funds in Asia

Indirect intervention during the Russian crisis

The Russian central bank attempted to prevent outflows by tripling
interest rates
14
Factors Affecting Exchange Rates
(cont’d)

Foreign exchange controls

Controls, such as restrictions on the exchange
of a currency, can be used as a form of
indirect intervention

e.g., Venezuela imposed foreign exchange controls
in the mid-1990s

Under severe pressure, governments tend to
let the currency float temporarily toward its
market-determined level

15
Forecasting Exchange Rates

Market participants take derivative positions based on
their expectations of future exchange rates

Technical forecasting involves the use of historical
exchange rate data to predict future values

e.g., time-series models that examine moving averages and
allow the forecaster to develop some rule

Fundamental forecasting is based on fundamental
relationships between economic variables and exchange
rates

e.g., high inflation in a country can lead to depreciation in its
currency