International Trade: Chapter NINE (The Foreign Exchange Market) доклад по теме Экономика и Финансы

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Chapter 9 The foreign exchange market
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Foreign exchange transactions
The foreign exchange rate = the price of one currency expressed in terms of another currency.
	–  appreciation
	–  depreciation
Foreign exchange transactions The foreign exchange rate = the price of one currency expressed in terms of another currency. – appreciation – depreciation
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Determination of the exchange rates
Price						
A$1						 S
in 
US$0.55			E
								D
				Quantity of A$
Determination of the exchange rates Price A$1 S in US$0.55 E D Quantity of A$
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Floating currencies: demand for the national currency
Nation’s exporters paid in other hard currencies 
Foreign companies undertaking direct 
and portfolio investment in the nation’s economy
‘Bull’ speculators in the nation’s currency
Nation’s Central Bank selling US$ and other hard currencies for the nation’s currency
Foreign tourists visiting your country
Floating currencies: demand for the national currency Nation’s exporters paid in other hard currencies Foreign companies undertaking direct and portfolio investment in the nation’s economy ‘Bull’ speculators in the nation’s currency Nation’s Central Bank selling US$ and other hard currencies for the nation’s currency Foreign tourists visiting your country
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Floating currencies: supply of the national currency
Nation’s importers paying in US$, Yen 
Domestic firms investing abroad 
‘Bear’ speculators in the national currency
Nation’s central bank buying US$, Yen   
Individual residents travelling overseas
Floating currencies: supply of the national currency Nation’s importers paying in US$, Yen Domestic firms investing abroad ‘Bear’ speculators in the national currency Nation’s central bank buying US$, Yen Individual residents travelling overseas
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Impact of A$ depreciation
Impact of A$ depreciation
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Impact of A$ appreciation
Impact of A$ appreciation
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Functions of the foreign exchange market
Currency conversion
Reduction of foreign exchange risk
Functions of the foreign exchange market Currency conversion Reduction of foreign exchange risk
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Australian importer purchase of computers (purchase price: US$1400 FOB)
Australian importer purchase of computers (purchase price: US$1400 FOB)
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Reduction of FX risk
Spot exchange rates
Forward exchange rates 
Currency swaps
Reduction of FX risk Spot exchange rates Forward exchange rates Currency swaps
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Spot transactions
Spot transaction = the purchase of FX with delivery and payment (referred to as settlement on the following business day.
Foreign exchange traders always quote a bid (buy) and offer (sell) rate.
The spread = difference between the bid and offer rates and is the margin on which the trader earns a profit.
Spot transactions Spot transaction = the purchase of FX with delivery and payment (referred to as settlement on the following business day. Foreign exchange traders always quote a bid (buy) and offer (sell) rate. The spread = difference between the bid and offer rates and is the margin on which the trader earns a profit.
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Market quotations
Dealers always ‘buy low’ and   ‘sell high’.
Selling rates and buying rates are always from the perspective of the dealer/bank.
Market quotations Dealers always ‘buy low’ and ‘sell high’. Selling rates and buying rates are always from the perspective of the dealer/bank.
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Forward transactions
A forward rate = the price agreed on today for purchase or sale of foreign exchange at a future date.
Usually agreed for less than 1 year.
Premiums and discounts: forward quotations are either at a 
premium: forward > spot
discount: forward < spot
Forward transactions A forward rate = the price agreed on today for purchase or sale of foreign exchange at a future date. Usually agreed for less than 1 year. Premiums and discounts: forward quotations are either at a premium: forward > spot discount: forward < spot
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Australian exporter to receive
Euro 1 million in 6 months
Spot rate on contract date: 
A$1 = Euro 0.60): estimated income = A$1.67m
Payment made after 6 months from delivery.
If A$ appreciates by 10% over 6 months, the exporter will receive 10% less: A$1.51 (loss A$160,000).
The exporter will take a forward contract in order to protect the company income and ensure stable planning of operations.
Australian exporter to receive Euro 1 million in 6 months Spot rate on contract date: A$1 = Euro 0.60): estimated income = A$1.67m Payment made after 6 months from delivery. If A$ appreciates by 10% over 6 months, the exporter will receive 10% less: A$1.51 (loss A$160,000). The exporter will take a forward contract in order to protect the company income and ensure stable planning of operations.
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Speculative operations
1991: Clifford Hatch, finance director of  British food and drink company Allied Lyons bet on a higher BP against the US$.
Over the previous 3 years he had made US$25 million for the company.
Feb–April 1991 the BP depreciated from US$2.00 to US$1.75.
Allied Lyons lost US$269 m. (more than the company was to earn from all of its food and drink activities during 1991!).
Speculative operations 1991: Clifford Hatch, finance director of British food and drink company Allied Lyons bet on a higher BP against the US$. Over the previous 3 years he had made US$25 million for the company. Feb–April 1991 the BP depreciated from US$2.00 to US$1.75. Allied Lyons lost US$269 m. (more than the company was to earn from all of its food and drink activities during 1991!).
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Currency swaps
Foreign exchange swaps commit two counterparties (e.g. banks) to the exchange of two cash flows and involve the sale of one currency for another in the spot market with the simultaneous repurchase of the first currency in the forward market.
The difference between the spot and the forward rates, called the swap rate, is expressed in terms of points and it is fixed.
Currency swaps Foreign exchange swaps commit two counterparties (e.g. banks) to the exchange of two cash flows and involve the sale of one currency for another in the spot market with the simultaneous repurchase of the first currency in the forward market. The difference between the spot and the forward rates, called the swap rate, is expressed in terms of points and it is fixed.
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Economic theories of exchange rate determination
Prices and exchange rates
the law of one price
the Purchasing Power Parity (PPP)
Money supply and price inflation
Interest rates and exchange rates
Investor psychology and bandwagon effects
Economic theories of exchange rate determination Prices and exchange rates the law of one price the Purchasing Power Parity (PPP) Money supply and price inflation Interest rates and exchange rates Investor psychology and bandwagon effects
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The Law of One Price
It states that in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price(when their price is expressed in terms of the same currency). An example is a highly traded good like wheat.
The Law of One Price It states that in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price(when their price is expressed in terms of the same currency). An example is a highly traded good like wheat.
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The Purchasing Power Parity (PPP)
PPP exchange rate shows what the exchange rate would be if the law of one price held. 
Example:
In German, 1 box of Chocolate = €165
IN USA, 1 box of Chocolate = $150
Exchange rate at that time is €1.00 = $0.909
End of the year: In German = €198, In USA=$150
PPP theory predicts exchange rate should be then
€1.00 = $0.7575 (Euro depreciated against dollar)
The Purchasing Power Parity (PPP) PPP exchange rate shows what the exchange rate would be if the law of one price held. Example: In German, 1 box of Chocolate = €165 IN USA, 1 box of Chocolate = $150 Exchange rate at that time is €1.00 = $0.909 End of the year: In German = €198, In USA=$150 PPP theory predicts exchange rate should be then €1.00 = $0.7575 (Euro depreciated against dollar)
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Money Supply and Price Inflation
Positive Relationship between the inflation rate and the level of the money supply
Money Supply and Price Inflation Positive Relationship between the inflation rate and the level of the money supply
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Информация вложена в изображении слайда
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Investor Psychology and Bandwagon Effects
Example of George Soros: 
		“Anti-Pound Scheme”
Sell massively British Pound in 1990 
Devaluation of British Pound 
Short term exchange rate movements
Investor Psychology and Bandwagon Effects Example of George Soros: “Anti-Pound Scheme” Sell massively British Pound in 1990 Devaluation of British Pound Short term exchange rate movements