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 [...]... expectations of the future spot rate  e.g., if the forward rate for the pound was $1.40 and the spot rate was expected to be $1.45, everyone would buy pounds forward and sell them at the future spot rate 16 Forecasting Exchange Rates (cont’d)  Mixed forecasting involves using a combination of forecasting techniques  No single technique has been found to be consistently superior  Each of the techniques... Expected Exchange Rate Movements (cont’d) :Zena Bank should take the following steps Borrow €10 million and convert to $11,111,111 1 Invest the $11,111,111 million for ten days at 6 percent annualized (or 2 166 7 percent over ten days), which will generate $11,129,630 After ten days, convert the $11,129,630 into euros at the existing spot 3 rate, which converts to €10,573,148 Pay back the loan of €10 million . 1 Chapter 16 Foreign Exchange Derivative Markets Financial Markets and Institutions,. ©2006 by South-Western, a division of Thomson Learning. All rights reserved. 2 Chapter Outline  Background on foreign exchange markets  Factors affecting