Vous êtes sur la page 1sur 55

Foreign Exchange

1
Foreign-Exchange Market
Foreign-exchange market
Organizational setting
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

2
Foreign-Exchange Market
Foreign-exchange market
Transactions between commercial banks and
their commercial customers
Domestic interbank market conducted through
brokers
Active trading in foreign exchange with banks
overseas

3
Types of Foreign-Exchange Transactions
Spot transaction
Make an outright purchase or sale of a
currency now, as in on the spot
Simplest way to meet your foreign currency
requirements
Greatest risk of exchange rate fluctuations

4
Types of Foreign-Exchange Transactions
Forward transaction
Receiving or paying an amount of foreign
currency on a specific date in the future
At a fixed exchange rate
Protects against unfavorable movements in the
exchange rate
Will not allow gains to be made should the
exchange rate move in your favor

5
Types of Foreign-Exchange Transactions
Currency swap
Conversion of one currency to another
currency at one point in time
With an agreement to reconvert it back to the
original currency at a specified time in the future
The rates of both exchanges are agreed to in
advance

6
TABLE 11.1 Distribution of foreign-exchange transactions by
U.S. banks

7
Interbank Trading
Retail transactions
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

8
TABLE 11.2 Top ten banks by share of foreign-exchange
market, 2009

9
Interbank Trading
Earning profits in foreign-exchange
transactions
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
A banks bid quote < its offer quote

10
Reading Foreign-Exchange Quotations
Exchange rate
Price of one currency in terms of another
Number of units of foreign currency required to
purchase one unit of domestic currency
Exchange rate reported
The midrange between the bid and offer prices
Currency depreciation
It takes more units of a nations currency to
purchase a unit of some foreign currency
11
TABLE 11.3 Foreign exchange quotations (a)

12
TABLE 11.3 Foreign exchange quotations (b)

13
Reading Foreign-Exchange Quotations
Currency appreciation
It takes fewer units of a nations 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)

14
Forward and Futures Markets
Spot market
Foreign exchange bought and sold for delivery
immediately
Forward market
Foreign exchange bought and sold for future
delivery

15
Forward and Futures Markets
Futures market
Contracting parties agree to future exchanges
of currencies
And set applicable exchange rates in advance
Only a limited number of leading currencies are
traded
Trading takes place in standardized contract
amounts and in a specific geographic location

16
TABLE 11.4 Forward contract versus futures contract
Forward Contract Futures Contract
Issuer Commercial bank International Monetary Market (IMM) of
the Chicago Mercantile Exchange and
other foreign exchanges such as the
Tokyo International Financial Futures
Exchange
Trading Over the counter by
telephone On the IMMs market floor

Contract size Tailored to the needs of the


exporter/importer/investor; no Standardized in round lots
set size

Date of delivery Negotiable Only on particular dates

Contract costs Based on the bid Brokerage fees for sell and buy orders

Settlement On expiration date only, at Profits or losses paid daily at close of


prearranged price /offer spread trading

17
Forward and Futures Markets
International Monetary Market (IMM)
Chicago Mercantile Exchange, 1972
An extension of the commodity futures
markets
Size of each contract
On the same line as the currencys name and
country
First column
Maturity months
18
Forward and Futures Markets
Open
Price at which the yen was first sold when the
IMM opened in the morning
High
Contracts highest price for the day
Low
Contracts lowest price for the day
Settle
Contracts closing price for the day
19
Forward and Futures Markets
Change
Compares todays closing price with the closing
price as listed in the previous days paper
(+) means prices ended higher
(-) means prices ended lower
Open interest
Total number of contracts outstanding

20
TABLE 11.5 Foreign currency futures, May 13, 2009:
selected examples

21
Foreign-Currency Options
Option
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

22
Foreign-Currency Options
Foreign-currency options
Options holder
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
23
Foreign-Currency Options
Put option
Gives the holder the right to sell foreign
currency at a specified price
Strike price
Price at which the option can be exercised
Premium
Fee the writer of the options contract receives

24
Exchange-Rate Determination
Exchange rate in a free market
Determined by both supply and demand
conditions
Demand for foreign exchange
Derived demand
Driven by foreigner demand for domestic
goods and assets
Corresponds to the debit items on a countrys
balance of payments
25
GLOBALIZATION
WEAK DOLLAR IS A BONANZA FOR
EUROPEAN TOURISTS
When dollars exchange value depreciates
Foreign tourists realize a good bargain on
goods purchased in America
Delighted American tourist industry
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
26
Exchange-Rate Determination
Supply of foreign exchange
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

27
FIGURE 11.1 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
nations balance-of-payments statement; the supply of foreign exchange corresponds to the credit items.
28
Exchange-Rate Determination
Increase in the demand for pounds
Shift rightward
The dollar will depreciate against the pound
Decrease in demand for pounds
Shift leftward
The dollar will appreciate

29
Exchange-Rate Determination
Increase in the supply of pounds
Rightward shift
The dollar appreciate against the pound
Decrease in the supply of pounds
Leftward shift
Dollar depreciation

30
TABLE 11.6 Advantages and disadvantages of a
strengthening and weakening dollar

31
Nominal and Real Exchange Rates
Exchange-rate index
Effective exchange rate; trade-weighted dollar
Weighted average of the exchange rates
between the domestic currency
And the nations most important trading partners
With weights given by relative importance of the
nations trade with each of these trade partners

32
Nominal and Real Exchange Rates
Nominal exchange-rate index of the U.S. dollar
Average value of the dollar
Not adjusted for changes in prices levels
In the U.S. and its trading partners
if increasing
Dollar appreciation relative to the currencies of the
other nations in the index
Loss of competitiveness for the U.S.

33
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

34
Nominal and Real Exchange Rates
Real exchange-rate index of the U.S. dollar
Embodies the changes in prices in the countries
in the calculation
Nominal exchange rate adjusted for relative
price levels
Average value of the dollar based on real
exchange rates
An appreciation of the dollar - higher index

35
TABLE 11.7 Exchange rate indexes of the U.S. dollar
(March 1973 = 100)*

36
Arbitrage
Exchange arbitrage
Simultaneous purchase and sale of a currency
In different foreign-exchange markets
To profit from exchange-rate differentials in the two
locations
Brings about an identical price for the same
currency in different locations
Results in one market

37
Arbitrage
Two-point arbitrage
Two currencies are traded between two
financial centers
Three-point arbitrage
Triangular arbitrage
Three currencies and three financial centers
Switching funds among three currencies in
order to profit from exchange-rate
inconsistencies
38
The Forward Market
Forward market
Currencies are bought and sold now for future
delivery
The exchange rate is agreed on at the time of
the contract
Payment is made when the future delivery
actually takes place
Forward rate
Rate of exchange used in the settlement of
forward transactions
39
TABLE 11.8 Forward exchange rates: selected examples

40
The Forward Market
At a premium
When a foreign currency is worth more in the
forward market than in the spot market
At a discount
When a foreign currency is worth less in the
forward market than in the spot market

41
The Forward Market
Relation between the forward rate and spot
rate

42
The Forward Market
Managing your foreign exchange risk
Forward foreign-exchange contract
And engage in hedging
Hedging
Process of avoiding or covering a foreign-
exchange risk
Some firms do not hedge
Currency fluctuations even out over the long
term
43
TRADE Exchange-rate risk: the hazard of
CONFLICTS
investing abroad
Exchange-rate fluctuations
Can substantially change the returns on assets
denominated in a foreign currency
Interest rates
Key role in determining the relative
attractiveness of assets denominated in
domestic and foreign currencies
Effects of exchange-rate changes
Can swamp the effects of interest-rate
differentials
44
TABLE 11.9 Return on a three-month German investment

45
Interest Arbitrage
Interest arbitrage refers
Moving funds into foreign currencies
To take advantage of higher investment yields
abroad
Uncovered interest arbitrage
When an investor does not obtain exchange-
market cover
To protect investment proceeds from foreign-
currency fluctuations

46
Interest Arbitrage
A U.S. investors extra rate of return
On an investment in the United Kingdom as
compared to the U.S.
= interest-rate differential adjusted for any change
in the value of the pound

47
TABLE 11.10 uncovered interest arbitrage: an example

48
Interest Arbitrage
Covered interest arbitrage
Investor exchanges domestic currency for
foreign currency - at the current spot rate
And uses the foreign currency to finance a foreign
investment
Investor contracts in the forward market
To sell the amount of the foreign currency that will
be received as the proceeds from the investment
With a delivery date to coincide with the maturity
of the investment

49
Interest Arbitrage
Forward discount or premium
On one currency against another
Reflects the difference in the short-term
interest rates between the two nations
Forward discount
The currency of the higher-interest-rate nation
Forward premium
The currency of the lower-interest-rate nation

50
TABLE 11.11 Covered interest arbitrage: an example

51
Foreign-Exchange Market Speculation
Speculation
Attempt to profit by trading on expectations
about prices in the future
Deliberate assumption of exchange risk
Stabilizing speculation
Goes against market forces by moderating or
reversing a rise or fall in a currencys exchange
rate
Useful function for bankers and
businesspeople, who desire stable exchange
rates
52
Foreign-Exchange Market Speculation
Destabilizing speculation
Goes with market forces by reinforcing
fluctuations in a currencys exchange rate
Can disrupt international transactions
High cost of hedging impeding international trade
Disrupt international investment activity

53
TRADE How to play the falling (rising)
CONFLICTS
dollar
Depreciating dollar
Purchase foreign currency
Purchase bonds denominated in a foreign
currency
Purchase stocks of foreign corporations,
denominated in foreign currencies
Savings account denominated in a foreign
currency
Variety of currency derivatives
54
Foreign Exchange Trading as a Career
Foreign exchange traders
Commercial Banks
Companies
Central Banks
Professional traders
Amateurs speculating in foreign currencies

55