TÀI CHÍNH QUỐC TẾ 2 Currency Market (Foreign Exchange Market)

Tài quốc tế (International Finance) II Currency Market (Foreign Exchange Market) The best way to destroy the capitalist system is to debauch the currency By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens By John Maynard Keynes Outline Concept of the FX, characteristics and participants of the FX Functions, transaction and classification of the FX Concept of exchange rate and its classification Direct and indirect quotation Exchange rate point, reading and writting Bid rate, ask rate and spread Speculation and arbitrage Cross rate Conclusion TS Nguyễn Phúc Hiền - ðại học Ngoại thương 1.Concept of the FX, Characteristics and Participants of the FX Concepts of Foreign Exchange Broadly meaning:Foreign exchange includes foreign currencies, financial assets denominated in foreign currencies (banknotes, checks, bonds, stock etc ), and standard gold Narrowly meaning: Foreign exchange refers foreign currencies TS Nguyễn Phúc Hiền - ðại học Ngoại thương 1.Concept of the FX, Characteristics and Participants of the FX Concept of the Foreign Exchange MarketForex market - FX market: The FX market provides the physical and institutional structure through which the money of one country is exchanged for that of another country (David Eiteman) The FX market is a place in which currencies are exchanged for others Broadly meaning: anywhere currencies are exchanged for others Narrowly meaning (85%): the foreign exchange interbank market TS Nguyễn Phúc Hiền - ðại học Ngoại thương 1.Concept of the FX, Characteristics and Participants of the FX Characteristics: • • • • • Geographical extent and the actual marketplace is not only a visible location but also anywhere currencies are exchanged (so called a space market) A non-stop global market (24-hour-a-day trading): Sydney, Tokyo →Hong Kong, Singapore → Bahrain → Frankfurt, Zurich, London → New York, Chicago, end San Francisco and Los Angeles The center of the FX market is the interbank market Participants in the market are trading though Tel, telex, computer and fax Information asymmetry, huge trading volume (daily over 3.98 trillion USD-2010) and transaction costs are fairly low TS Nguyễn Phúc Hiền - ðại học Ngoại thương 1.Concept of the FX, Characteristics and Participants of the FX • • The USD are traded mostly (90%) The FX market is extremely sensitive to political, economic, social events, psychology and especially monetary and fiscal policy TS Nguyễn Phúc Hiền - ðại học Ngoại thương 1.Concept of the FX, Characteristics and Participants of the FX Participants: (Pilbeam Keith) (1) Retail clients: businesses, international investors, multinational corporations, and the like who need foreign exchange for purposes of operating businesses (via commercial banks) (2) Commercial banks: carry out buy/sell orders from retail clients alter the structure of assets and liabilities in different currencies Banks can deal either directly other banks or foreign exchange brokers (3) Brokers: often banks not trade directly one another rather they offer to buy/sell currencies via brokers (4) Central bank and Treasuries TS Nguyễn Phúc Hiền - ðại học Ngoại thương Functions, Transaction and Classification of the FX Functions: • • • • • Service international trade activities Facilitate international capital movements Determine exchange rates Provide hedging instruments (forward, swap, option and future) The place where central banks directly intervence in exchange rate TS Nguyễn Phúc Hiền - ðại học Ngoại thương Functions, Transaction and Classification of the FX Transactions • • • • • Spot transaction Forward transaction Swap transaction Currency option Currency future TS Nguyễn Phúc Hiền - ðại học Ngoại thương Functions, Transaction and Classification of the FX Classifications: (1) Based on the content of transtions (2) Based on the transaction locations: Exchange and OTC (over the counter) (3) Based on the legal: official market and unofficial market (black market) (4) Based on the market space: International and domestic markets (5) Based on the natures of the market: Interbank and retail market TS Nguyễn Phúc Hiền - ðại học Ngoại thương 10 Direct and indirect quotation Quotation in practice: On Interbank, most foreign currencies in the world are stated in terms of the number of units of foreign currency to buy one the dollar This is European Term (except for the below currencies) Under American Term foreign exchange rate are stated as the US dollar price of one unit of foreign currency: GBP, AUD, NZD, EUR SDR Example: CNY = 6,921; VND = 18932; EUR = 1,2851; NZD = 0,2515; AUD = 0,7643 Almost national currencies are direct quote against the U.S dollar The above currencies are indirect quotation against the dollar The dollar are either direct and indirect quotation TS Nguyễn Phúc Hiền - ðại học Ngoại thương 20 Exchange rate point, reading and writting Point • • • Number of digits in an exchange rate is formed according to routine and usually includes five significant digits from left to right Point is the last digit of an exchange rate (the fifth digit) Pip is an added digit (the sixth digit) following the point and applying for professional traders Example: • • • Eur/USD =1.3182 → 0.0001 USD =1point USD/JPY = 77.256 → 0.001 JPY =1point USD/VND= 20831 → VND =1point TS Nguyễn Phúc Hiền - ðại học Ngoại thương 21 Exchange rate point, reading and writting Reading • • last digits read point, next digits read digit VD: E(USD/VND)=19490 one-94 digit-90point Writting - E(USD/VND) or E(VND/USD) Commodity currency/ term currency Full writting: USD/VND = 19450-19500 or VND=1945019500 Simple writting way: USD/VND = 19450/00 hay VND = 19450/00 Professional writting way: USD/VND = 50/00 hay VND = 50/00 TS Nguyễn Phúc Hiền - ðại học Ngoại thương 22 Bid, Ask Rate and Spread Bid rate (buy) is the price (that is, exchange rate) in one currency at which a dealer will buy another currency Ask or offer rate (sell) is the price (that is, exchange rate) at which a dealer will sell the other currency Dealer bid (buy) at one price and ask (sell) at slightly higher price, making their profit from the spread between the buying and selling prices Mid rate is an average of bid and ask rate Depend on size of foreign exchange market Depend on volume of a sansaction Depend on foreign currency TS Nguyễn Phúc Hiền - ðại học Ngoại thương 23 Bid Rate, Aks Rate and Spread Rate point (absolute) Spread = Ask rate – bid rate Spread = 20830 – 20820 = 10VND (10 ñiểm) Percentage % (relative) Spread = ask – bid*100% bid Spread = 20830 – 20820*100% =0,048% 20820 TS Nguyễn Phúc Hiền - ðại học Ngoại thương 24 USD/VND and EUR/USD Average 2011 (EUR/USD) Average 2011 (USD/VND) Bid Ask Bid spread (%) Ask Sread (%) January 19353,57 19663,36 1,600705 January 1,33532 1,33574 0,031453 February 19857,42 20151,35 1,480195 February 1,36454 1,36492 0,027848 March 20547,03 20826,65 1,360891 March 1,40007 1,4004 0,02357 April 20728,12 20989,63 1,261652 April 1,44354 1,44395 0,028402 May 20457,39 20859,11 1,963672 May 1,43405 1,43446 0,02859 June 20430,54 20767,18 1,647729 June 1,43819 1,43856 0,025727 July 20436,83 20730,33 1,436165 July 1,43061 1,43103 0,029358 August 20498,06 20946,68 2,188562 August 1,43422 1,43472 0,034862 September 20682,43 21014,01 1,603197 September 1,38043 1,38085 0,030425 October 20741,56 21008,51 1,287006 October 1,37004 1,37045 0,029926 November 20799,62 21241,96 2,126673 November 1,3587 1,35908 0,027968 December 20880,17 21194,35 1,5047 December 1,31842 1,31882 0,030339 Source: OANDA 2012 TS Nguyễn Phúc Hiền - ðại học Ngoại thương 25 Arbitrage Concept • Arbitrage is the practice of taking advantage of a price differential between two or more markets • Currency markets at different places are linked by arbitrage movements • Implication Due to the fact that currencies are homogenous goods and information is available at anytime and everywhere Arbitragers use the price differences between two markets by buying low on one market (going long) and selling high (going short) on the other market TS Nguyễn Phúc Hiền - ðại học Ngoại thương 26 Arbitrage As a consequence the prices adjust in both markets as long as the traders gain through additional transactions In contrast to goods markets, the transaction costs on the currency market are small and arbitrage is fast (very short term) TS Nguyễn Phúc Hiền - ðại học Ngoại thương 27 Cross rate Concept • The exchange rate of a currency pairs is determined through a third currency (U.S dollar) • Why to canculate the cross rate? • Why the U.S dollar is the benchmark - Is the world‘s largest economy - Major in international trade (15%) - Major in international capital flows Monetary standard - The currency to store value - A unit of accounting in international trade - Medium of exchange TS Nguyễn Phúc Hiền - ðại học Ngoại thương 28 Cross Rate Cross rate calculation • Simple cross rates are developed from the two original rates without bid-ask spreads (mid rate) • Case 1: given E(USD/VND)=20830 and E(USD/SGD)=5.1324 E(SGD/VND)=?= 20830/5.1324 • Case 2: given E(USD/VND)=20830 and E(EUR/USD)=1.3128 E(EUR/VND)=?=20830*1.3128 • Case 3: given E(AUD/USD)=0.8512 and E(EUR/USD)=1.3128 E(EUR/AUD)=?=1.3128/0.8512 TS Nguyễn Phúc Hiền - ðại học Ngoại thương 29 Cross Rate Compound cross rate USD play role as the commodity currency in both the pairs of the exchange rates • E(USD/VND) = (a,b) • E(USD/CNY) = (c,d) ? E(CNY/VND) = (x,y) x=bid (USD/VND): ask (USD/CNY)=a/d TS Nguyễn Phúc Hiền - ðại học 30 Ngoại thương y=ask (USD/VND): bid (USD/CNY)=b/c Cross Rate U.S dollar play role as the commodity currency in one pair and as the term currency in the other • • ? E(USD/VND) = (a,b) E(EUR/USD) = (c,d) E(EUR/VND) = (x,y) x=bid (USD/VND) * bid (EUR/USD) = a*c y=ask (USD/VND) * ask (EUR/USD)= b*d TS Nguyễn Phúc Hiền - ðại học Ngoại thương 31 Cross Rate USD play role as the term currency in both of exchange rates • • ? E(AUD/USD) = (a,b) E(GBP/USD) = (c,d) E(GBP/AUD) = (x,y) x=bid (GBP/USD): ask (AUD/USD)=c/b y=ask (GBP/USD): bid (AUD/USD)=d/a TS Nguyễn Phúc Hiền - ðại học Ngoại thương 32 Conclusion • • • • • • The FX market is a place in which currencies are exchanged for others Foreign exchange refers to foreign currency Function of the FX market: determining the exchange rate, facilitate international capital flows movements and international trade, provide derivatives and interventions of central banks Foreign exchang rate is the price of one currency expressed in term of another currency Depreciation of home currency when need more the number of home units exchange for one unit of foreign currency and vice versa appreciation of home currency European terms quotation are the foreign currency price of a U.S dollar American terms quotation are the dollar price of a foreign currency TS Nguyễn Phúc Hiền - ðại học Ngoại thương 33 Conclusion • • • Quotation can also be direct and indirect a direct quote is the home currency price of a unit of foreign currency while an indirect quote is the foreign currency price of a unit of home currency In practice (interbank) most currencies are stated with the U S dollar (direct quote) (exception currencies: Euro, AuD, NzD, GBP SDR) Cross rate is an exchange rate between two currencies calculated form their common relationships with a third currency TS Nguyễn Phúc Hiền - ðại học Ngoại thương 34 ... legal: official market and unofficial market (black market) (4) Based on the market space: International and domestic markets (5) Based on the natures of the market: Interbank and retail market TS... is the price of one currency expressed in another currency 20500VND/1USD ; 1,3 USD/1EURO • Commodity currency (C) is the currency with one unit • Term currency (T) is the currency doing the pricing... FX, Characteristics and Participants of the FX Concept of the Foreign Exchange MarketForex market - FX market: The FX market provides the physical and institutional structure through which the money