Foreign exchange trading (TIẾNG ANH KINH tế SLIDE)

FOREIGN EXCHANGE TRADING Foreign Exchange • money or currency of a foreign country Exchange rates • The exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other It is the value of a foreign nation’s currency in terms of the home nation’s currency • For example an exchange rate of 102 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 102 is worth the same as USD The foreign exchange market is one of the largest markets in the world By some estimates, about 3.2 trillion USD worth of currency changes hands every day • The spot exchange rate refers to the current exchange rate • The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date Nominal and real exchange rates • The nominal exchange rate e is the price in foreign currency of one unit of a domestic currency • The real exchange rate (RER) is defined as , RER = e(P/Pf ) where Pf is the foreign price level and P the domestic price level P and Pf must have the same arbitrary value in some chosen base year Hence in the base year, RER = e Gold standard • A monetary system used in the nineteenth and early twentieth centuries whereby the value of currencies could, on request of the owner (holder), be converted in to gold at a country’s central bank As all currencies had a gold value, they also had a certain value in relation to each other This was the beginning of a foreign exchange system Bretton Woods system • The Bretton Woods system of moneytary management estab lished the rules for commercial and financial relations among the world's major industrial states in the mid 20th century The Bretton Wo ods system was the first example of a fully negotiated mo netary order intended to govern monetary relations among independent nation-states Central Bank • A country’s chief bank, which is government owned It regulates the commercial banks and holds gold and foreign currency reserves It actively intervenes by buying and selling its own currency in the foreign exchange markets so that the currency will keep a certain value Functions of a central bank • implementing monetary policy • controlling the nation's entire money supply • the Government's banker and the bankers' bank ("lender of last resort") • managing the country's foreign exchange and gold reserves and the Government's stock register • regulating and supervising the banking industry • setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms Naming of central banks Many countries use the "Bank of Country" form (e.g., Bank of England, Bank of Canada, Bank of Russia)  Some are styled "national" banks, such as the National Bank of Ukraine;  Central banks may incorporate the word "Central" (e.g European Central Bank, Central Bank of Ireland) The word "Reserve" is also often included, such as the Reserve Bank of Australia, Reserve Bank of India, Reserve Bank of New Zealand, the South African Reserve Bank, and U.S Federal Reserve System Fixed exchange rate • A fixed exchange rate, sometimes called pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold Floating exchange rate • A system in which currencies have no specific par value; value is normally determined by supply and demand Central bank are not required to intervene, but they often to avoid wild fluctuations Fiat currency • Fiat currency (fiat money) is money declared by a government to be legal tender The term derives from the Latin fiat, meaning "let it be done" Fiat currency achieves value because a government requires it in payment of taxes and says it can be used to pay debt or buy goods and services and because people trust that the value of the currency will be reasonably stable Legal tender • Legal tender or forced tender is payment that, by law, cannot be refused in settlement of a debt Legal tender is issued by the Government Spot transaction • Currency bought or sold today with delivery two business days later Forward transaction • To buy or sell a currency in the future, with payment and delivery at that future date Hedging • To offset a “buy” contract with a “sell” contract and vice versa, matching the amounts and the time span exactly Speculation • When dealers not offset a “buy” contract with a “sell” contract This means that their position is left open Arbitrage • The transfer of funds from one currency to another to benefit from currency differentials or disparities in interest rates In arbitraging, at least two market are enter Premium • The additional amount it will cost to buy or sell a currency at a given future date (relative to the spot or today’s price) Discount • The lesser amount it will cost to buy or sell a currency at a given future date (relative to the spot or today’s price) There are some key dates in the development of exchange rate systems around the world (1944, 1971, 1973, 1992, 2002) Match the dates with the events : • Most industrialized countries switched to a system of floating rates • • • • However, governments and central banks occasionally attempted to influence exchange rates by intervening in the markets So there was a system of managed floating exchange rates The Bank of England lost over £5 billion in one day attempting to protect the value of the pound sterling After this, governments and central banks intervened much less, so there was almost a freely floating system A fixed exchange rate system was started The values of many major currencies were pegged to the value of the US dollar The American central bank, the Federal Reserve, guaranteed that it could exchange an ounce of gold for $35 Twelve states of the European Union introduced a single currency, the euro, to replace their national currencies Gold convertibility ended because the Federal Reserve no longer had enough gold to back to dollar, due to inflation 1 To ‘peg’ against means to a currency something A clean exchange rate floating Exchange controls used to limit Speculators buy or sell currencies in order to ‘Market forces’ means ‘Hedging’ means A the amount of a country’s money that residents were able to change into foreign currencies B fix its value in relation to it C make a profit by making capital gains or by investing at higher interest rates D is determined by supply and demand E trying to insure against unfavorable price movements by way of futures contract F the determination of price by supply and demand ( the quantity available and the quantity bought and sold)  .. .Foreign Exchange • money or currency of a foreign country Exchange rates • The exchange rates (also known as the foreign- exchange rate, forex rate or FX rate)... current exchange rate • The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date Nominal and real exchange. .. • The nominal exchange rate e is the price in foreign currency of one unit of a domestic currency • The real exchange rate (RER) is defined as , RER = e(P/Pf ) where Pf is the foreign price level