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Topic 8 Foreign Exchange Marke

2017-04-06 21:36:19   2  举报

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Global business today Topic 8

Foreign Exchange Market

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Managerial Implications

EXPOSURE

Transaction Exposure

the income from individual transactions affected by fluctuations in foreign exchange values.

real monetary loss

Translation Exposure

changes on the reported financial statements of a company, as it impacts the present measurement of past events

Gains and losses from translation exposure are reflected only on paper

Economic Exposure

firm’s future international earning power is affected by changes in exchange rates

Concerned with the long-term effect of changes

Protect from Transaction EX and Translation EX(short term)

hedging through forward market transactions and currency swaps.

lead and lag strategies.

paying suppliers and collecting payment from customers early or late depending on expected exchange rate movements

Protect them from economic Ex(long term)

dispersing production to different locations

diversifying their revenues by tapping into markets in different countries

Functions of FEM

Currency Conversion

Receipts and Payments

Investments

portfolio investment证券交易

direct investment 

Speculation投机

Arbitrage套利 from the shifts in exchange rate 

Insuring against Foreign Exchange Risk

the risk that arises to economic agents from unanticipated changes in exchange rates.

Currency hedging

protect firms and individuals against foreign exchange risk

Spot exchange Rates

spot transaction involved the spot rates

determined by demand and supply of currency  

exchange rate on a particular day

Forward Exchange Rate

hedge against future transaction risks.

quoted for 30, 90, or 180 days into the future.

agree the currency exchange rates at a currently specific day but execute at future day 

Currency Swaps

The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

Eg1: Spot Against Forward

子主题

Eg2:forward against forward

Introduction to FEM

Fundamental concept 

Foreign Exchange 外汇

Exchange Rate

Foreign Exchange Market （converting the currency）

the Nature of FEM

Exchange Rate Quoted (same)

Although simultaneous and parallel FOREX markets

Largest and most liquid financial market in the world

the total currency trade is 200%

Factors Affecting Exchange Rate Movements

Fundamental Factors 

Inflation

Inflation or changes in price level is related to exchange rate movements through

The Law of One Price

Identical products in different countries must sell for the same price

assume transportation cost is negligible and no barrier 

If exchange rates are flexible, it would adjust in order to equalize prices.

If exchange rates are fixed the prices itself would adjust

仅针对一种商品，考虑对象是价格、条件更为严格

Purchasing Power Parity (PPP) Theory

以汇率为分析对象、考虑物价水平问题

不要求每种商品都相等（如果能抵消差异）、也不要求贸易壁垒完全消失，只要壁垒程度相当即可

绝对购买力和相对购买力的差异

Factors behind Departure from PPP Theory （背离）

物价对汇率的作用

以数量为前提，实际本末倒置

not completely accurate in estimating exchange rate changes in the short run，relatively accuate in the long run

仅是静态的分析和比较

factors in real life, e.g. transportation cost and trade restriction

By comparing the prices of identical products in different currencies.

Possible to determine the ‘real’ or PPP exchange rate – if law of one price was true for all goods and services.

Price and Exchange rate

postulates that changes in relative prices will result in a change in exchange rates

A country with high inflation should expect its currency to depreciate

Money Supply and Price Inflation

Inflation occurs when: money supply increases faster than increase in output

(PPP Theory) a country with a high inflation rate will experience depreciation in its currency exchange rate

PPP Theory implies that: a currency will depreciate against currencies of other countries which have relatively slower monetary growth

Interest Rates and Exchange Rates

Interest rates affect expectations about future exchange rates.

nominal interest rate (i) is the sum of real interest rate (r) and expected rate of inflation (I) i.e., i = r + I => r = i - I

In the long-run, real interest rates in different countries gets equalized over time

Investor Psychology

Bandwagon Effect (possible explanations)

The underlying cause behind the creation of bandwagon effects are expectations of traders that turn into self-fulfilling prophecies

sometimes, government intervention can prevent the bandwagon from starting, but at other times it is ineffective and only encourages traders to further speculate.

summary

PPP Theory provides linkage between inflation and exchange rates

Fisher Theory provides link between interest rates and inflation

PPP + Fisher Theory = International Fisher Theory

provides a link between interest rates and exchange rates

Two most important examples in topic 8 P.27

other factors

Balance of payment

Monetary Reverses

Government Contrals

Importance of Currency

Political Climate

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