中大国际金融课件

nullnullHuang Chunyang (D.Sc.) Email: huangchunyang1@gmail.com International Business School, SYSU Fall, 2010 Do not quote without permission*nullEconomics (macro- and micro-) *nullThomas A. Pugel, International Finance, (14th edition), McGraw-Hill, 2009, ISBN:978-7-300-10658-8 Other reading materials: 2. Bruno Solnik and Dennis Mcleavey, 国际投资（International Investment,双语版），第五版，中国人民大学出版社， ISBN:978-7-300-08020-8/F.27483. 国际经济学（国际金融分册·原 书 关于书的成语关于读书的排比句社区图书漂流公约怎么写关于读书的小报汉书pdf 第六版），作者:(美)阿普尔亚德等 ，机械工业出版社, ISBN:9787111295587 *nullStudents are expected to present their papers in the classes Topics: any topics in international finance and international investment*nullActive participation during classes facilitates learning and will be rewarded with extra points in final grading*nullPresentation and class participation 40% Final exam 60% Totals 100%*nullTo understand the operation of international financial markets and the factors determining exchange rates To interpret the impact of various macro policies for open economies on a nation’s internal and external balances*nullTraditionally, it is a theoretical course Add practical contents in the facts of rising multinational firms and increasing forex trading volumes, etc. Rich applications*nullBalance of payment and the foreign exchange market Balance of payment (chapter 2 in Pu.) The foreign exchange market (chapter 3 in Pu. and lecture notes) Foreign exchange parity relations (chapter 4 in Pu. And lecture notes) Factors determining exchange rate (chapter 5 in Pu. and lecture notes)*nullGovernment policies toward the foreign exchange market (chapter 6 in Pu.) International lending and financial crisis (chapter 7 in Pu.) Macro policies for open economies Open macro-economy system (chapter 8 in Pu.) Internal and external balance with fixed exchange rates (Chapter 9 in Pu.) *nullFloating exchange rates and internal balance (Chapter 10 in Pu.) The exchange rate systems in the world (chapter 11 in Pu.) *nullWhat is a country’s balance of payment? A systematic account of all the exchanges of value between residents of that country and the rest of the world during a given time period Tow flows in any transaction: double-entry bookkeeping A credit (+) is a flow for which the country is paid A debit (–) is a flow for which the country must pay*nullSix categories of flows Merchandise trade flows Service flows Income flows Unilateral transfers Private capital flows Official international reserve flows *nullSome examples: Exports and imports of goods Expenditures of foreign visitors Study abroad interests and dividend received International migrants’ remittances Lending to (borrowings from) foreigner Direct investments and international portfolio investment *nullConcrete examples of BOP book-keeping (D is for domestic, F is for foreign) A D company export goods valued at $6,000 to a F company. The F company transfers the amount from its $ account in a F bank to the D company’s $ in the same bank. A D consumer purchase goods valued at $12,000 from a F company. The amount is transferred from the consumer’s $ account to the F company’s $ account in a D bank. *null3. A D resident unilaterally transfer goods valued at $1,000 to a F resident. A D company provides transportation service valued at $2,000 to a F company. The F company paid by transferring the amount from its $ account in a D bank to the D company’s $ account in the another D bank. A F company pays a dividend of $2,500 to one of its shareholder in D country. The amount is paid from F company’s $ account in a D bank. *null6. A D resident buy $5,000 bond issued by a F company. The amount is transferred from D resident’s $ account in a D bank to the F company’s $ account in the same D bank. 7. A F commercial bank sell $800 to the F central bank for F currency. *null Debit (–) Credit (+) 1. Increase in D holding Export of goods of F financial assets 2. Import of goods Increase in F holding of D financial assets 3. Unilateral transfer Export of goods 4. Decrease in F holding Service export of D financial assets 5. Decrease in F holding Income of D financial assets 6. Increase in D holding Decrease in D holding of F financial assets of F assets Decrease in F holding Increase in F holding of D financial assets of D financial asset*nullSix balances Merchandise (goods) trade balance Goods and service balance (trade balance) Goods, service, and income balance Current balance (net foreign investment) Financial account balance Overall balance (official settlement balance)*nullThe statistic discrepancy item Something was under-measured A net results of errors and omissions *nullThe macro meaning of current account balance Financing and international financial flows: Net foreign investment (If). CA = If National saving (S) versus domestic investment (Id). S = Id + If, so that CA = S – Id Domestic production (Y) versus national expenditure (E). Y = C + Id + G +(X – M), E = C + Id + G, and CA = (X – M) approximately, so that CA = Y – E*nullThe macro meaning of the overall balance The official settlement balance: B = CA + FA B + OR = 0 The international investment position A statement of the stocks of a nation’s international assets and foreign liabilities at a point in time Flow vs. stock (lender or borrower vs. creditor or debtor)*nullHomework: Prepare China’s BOP according to the format in figure 2.1 in Pugel (page 15) for 1999-2009, and analyze the trends (goods and service balances, current account balances, official settlement balances, etc.) http://www.safe.gov.cn/model_safe/index.html*nullWhat is foreign exchange? Dynamic concept Static concept Demand and supply for foreign exchange Current account Financial account *nullFloating exchange rates Downward-sloping demand curve Equilibrium exchange rate Shift in demand and supply curves Fixed exchange rates Par value and the narrow band Supply and demand gap Government intervention*nullForeign exchange quotation Direct quotation: the amount of DC required to purchase one unit of FC Indirect quotation: the amount of FC required to purchase one unit of DC Bid price: the exchange rate at which the dealer is willing to buy a currency Ask (offer) price: the exchange rate at which the dealer is willing to sell a currency *nullThe dealer need to earn a profit, so she always “buy low and sell high”! Bid-ask spread: the difference between the bid price and the ask price (can be in percentage) Factors affecting the bid-ask spreads Market condition Dealer position Liquidity midpoint price: the average of the bid price and the ask price basic point: usually 0.0001 (0.01 for JPY) or 0.01% nullSome examples: $/₤ = 1.6543 – 1.6547 (direct quote in US) ₤/$ = 0.6043 – 0.6045 (indirect quote in the US) Note that the DC/FC direct bid (ask) exchange rate is the reciprocal of the indirect ask (bid) exchange rate The bid-ask spread is 0.0004 (3bp, direct), or 0.0002 (2bp, indirect) The percentage bid-ask spread is 0.0004/1.6547=0.0242% (2.42bp, direct), or 0.0002/0.6045=0.0331% (3.31bp, indirect) The midpoint exchange rate is 1.6545 (direct), or 0.6044 (indirect) nullQuestions: 1. Suppose you want to convert US dollar into pound, and get three different quotes ($/₤): A: 1.6432/38 B: 1.6433/36 C: 1.6434/37, from which dealer would you buy pound? 2. The interbank quotes for US dollar and pound are $/₤=1.6433/36. If bank A want to earn 2bp profit, what quotes should it give to its retail customers? nullCross-rate calculations with bid-ask spreads Example 2.1: consider the following quotes involving the dollar, pound, and the euro. $/€: 0.9836/39 €/₤: 1.5473/1.5480 Compute the effective $/₤ bid and ask cross-rates, as well as the ₤/$ bid and ask cross-rates? *nullSolution 1: ($/₤)bid = ($/€)bid*(€/₤)bid = 0.9836*1.5473 = 1.5219 dollar per pound bid rate ($/₤)ask = ($/€)ask*(€/₤)ask = 0.9839*1.5480 = 1.5231 dollar per pound ask rate (₤/$)bid = (₤/€)bid*(€/$)bid = [1/(€/₤)ask]*[1/($/€)ask] = (1/1.5480)*(1/0.9839) = 0.6566 pound per dollar bid rate (₤/$)ask = (₤/€)ask*(€/$)ask = [1/(€/₤)bid]*[1/($/€)bid] = (1/1.5473)*(1/0.9836) = 0.6571 pound per dollar ask rate So, the effective $/₤ bid and ask cross-rates is $/₤=1.5219/31, and the effective ₤/$ bid and ask cross-rates is ₤/$=0.6566/71 nullSolution 2: Imaging you want to convert dollar into pound: using dollar to buy euro first (1$ =1/0.9839€), and then using the euro to buy pound (1€=1/1.5480₤). The resulting cross-rate is 1$ =0.6566 ₤, or 1₤= 1.5231$ If you want to convert pound into dollar: using pound to buy euro first (1₤ =1.5473€), and then using the euro to buy dollar (1€=0.9836 $). The resulting cross-rate is 1₤ =1.5219$, or 1$ =0.6571₤. So, the effective $/₤ bid and ask cross-rates is $/₤=1.5219/31, and the effective ₤/$ bid and ask cross-rates is ₤/$=0.6566/71*nullArbitrage “Pay nothing for something,” or “get something for noting” “there is not such thing as a free lunch” Any deviation from “the law of one price” will present an arbitraging opportunity! Basic strategy: “buy low, sell high”! An arbitraging strategy is risk-free. In contrast, a speculative strategy is always associated with some degree of risk *nullBilateral arbitrage with bid-ask spreads No-arbitrage condition: (FC/DC)bid*(DC/FC)bid ≤ 1, or (FC/DC)ask*(DC/FC)ask ≥1, Example 2.2: DC/FC = 0.80025/0.80041, FC/DC = 1.2498/1.2503; Is there an arbitrage opportunity? If so, what is the arbitraging strategy? What about DC/FC = 0.8003/0.8005, and FC/DC = 1.2484/1.2490? Note that when the rates are misquoted, the direct bid (ask) of one currency is not the reciprocal of its indirect ask (bid). *nullTriangular arbitrage with bid-ask spreads No-arbitrage condition: the implied cross-rate is consistent with the actual cross-rate Example 2.3: FC1/DC=0.9836/39; FC1/FC2=1.5373/80; DC/FC2=1.5219/31; Is there an arbitrage opportunity? If so, what is the arbitraging strategy? *nullForward foreign exchange rate A forward forex contract is an agreement to exchange one currency for another on a specified date in the future at a rate set now (the forward exchange rate) A spot rate is the prevailing rate in the market The forward rate is not the same as the future spot rate!*nullTrading involving forward exchange rate Open position Long position Short position Hedging: offsetting a long (short) position in a foreign currency, or covering the open position Speculating: deliberately establishing a net position (long or short) in a foreign currency Hedging eliminates risk exposure, whereas speculation increases risk exposure*nullForward premium (discount): the proportionate difference between the current forward exchange rate and current spot exchange rate f = (forward rate – spot rate) / spot rate (under indirect quotation) Note: the quotation convention (direct or indirect) affects the sign of forward premium! One alternative is to convert the direct quote into indirect quote, and then calculate the premium Annualized forward premium *nullSome examples: A US exporter signs a contract with a French importer for 1 million euro of goods, to be delivered in three months. The current spot rate is €/$=0.7125, and the 3-months forward rate is €/$=0.7225 The US exporter has an open (long) position of 1 million euro If the US exporter also signs a forward contract to sell 1 million euro in three months, she eliminates her exposure to exchange rate risk (hedging) If, instead, the US exporter expects the euro will appreciate against the dollar, she signs a forward contract to buy 1 million euro in 3 months. She increases her exposure to exchange rate risk (speculation)nullSome symbols Current spot rate between domestic currency and foreign currency is FC/DC = S; One-year forward exchange rate is FC/DC = F; One-year domestic interest rate is rD; One-year foreign interest rate is rF; One-year domestic inflation rate is ID; One-year foreign inflation rate is IF; One-year forward premium is f = (F–S)/S; Domestic price level PD; foreign price level PFnullInterest rate parity (covered interest parity) with 1 unit of domestic currency, you can invest either in the domestic market or in the foreign market; If you invest in the domestic market, you will get (1+ rD) unit of domestic currency in one year; If you invest in the foreign market, you will get S*(1+ rF)/F unit of domestic currency in one year; No-arbitrage condition implies that (1+ rD) = S*(1+ rF)/F, or F/S = (1+rF ) / (1+ rD), or (F–S)/S = (rF – rD) / (1+ rD) The linear approximation is: f ≈ rF – rD, which states that the forward premium (in percentage) is approximately the interest rate differential nullThis parity relation seems to be counterintuitive. After all, if interest rate increase in foreign market, capital will flow out of the domestic market, which should lead to the depreciation of domestic currency? The key to understand the interest rate parity is the expected future exchange rate. Specifically, higher foreign interest rate should indeed lead to the outflow of domestic currency in the spot market. Consequently, on the one hand, the decreasing money supply in domestic market (due to money outflow) should lead to higher domestic interest rate, which increases the rate of return in domestic market. At the mean time, the rate of return in foreign market should decreases due to money inflow. On the other hand, the need for hedging should increase the demand for domestic currency in the future. Both effects lead to the expectation that domestic currency will appreciate in the future – higher expected future spot rate for domestic currency. Since forward exchange rate is the unbiased predictor of future spot exchange rate, forward exchange rate should be at premium. nullUncovered interest rate parity The expected one-year spot rate is E(S1) Using the same strategy as in covered interest rate parity, except that you decide not to cover your position using forward contract In equilibrium, we have: (1+rD)=S0*(1+rF)/E(S1), or E(S1)/S0= (1+rF)/(1+rD), or approximately, E(s)≈ rF – rD, which states that the expected exchange rate appreciation should be approximately the interest rate differential.*nullAbsolute purchasing power parity (PPP) With one unit of domestic currency, you can buy 1/PD unit of goods in domestic market You can also buy S/PF unit of the same goods in foreign market The law of one price implies that: PD = PF/S, or S= PF/PDnullRelative PPP (Expected future PPP) By the same reasoning, at the end of the period, 1/{PD*[1+E(ID)]} = E(S1)/{PF*[1+E(IF)]} PD*[1+E(ID)] = PF [1+E(IF)]/E(S1), or E(S1)/S0 = [1+E(IF)] / [1+E(ID)], The linear approximation: s=E(S1)/S0–1≈E(IF)–E(ID), which states that the exchange rate variation is approximately the inflation rate differential *nullCombining relative PPP, covered interest rate parity, and uncovered interest rate parity, we have: E(S1)/S0=F/S=(1+rF)/(1+rD)=[1+E(IF)]/[1+E(ID)], or approximately, Expected appreciation of DC = premium on forward DC = difference between foreign and domestic interest rates = expected difference between foreign and domestic inflation rates *nullReal interest rate equilibrium From (1+rF)/(1+rD)=[1+E(IF)]/[1+E(ID)], we have: (1+rF)/[(1+E(IF)]=(1+rD)/[1+E(ID)], or approximately: rF – E(IF) ≈ rD – E(ID), which states that the real interest rate should be approximately equal internationally *nullInternational Fisher relation Domestic Fisher relation: (1+r) = (1+p)*[1+E(I)], or approximately r≈p+E(I). Assuming that the real interest rate p is constant over time, the fluctuation in nominal interest rates are caused by revision in inflationary expectation. Applying to the international setting, and assuming that the real interest rates are equal globally, we have: (1+rF)/(1+rD)=[1+E(IF)]/[1+E(ID)], or approximately: rFC – rDC ≈ E(IF)]–E(ID), which states that the nominal interest rate differential is approximately the inflationary expectation differential *nullForeign exchange expectation relation F = E(S1) Or, (F–S0)/S0 = [E(S1) – S0]/S0 Which states that the forward premium (discount) is equal to the expected exchange rate movement.*nullEmpirical evidence on international parities Keep in mind that the various international parity relations hold under some strict assumptions, such as: Not transaction and/or transportation costs Not capital control Floating exchange regimes Not import tax and restriction, not export subsidies Investors are risk-natural *nullInterest rate parity holds very well both in the short run and long run, except for some developing countries with capital control and taxes Uncovered interest rate parity does not hold well in real world, particularly in the short run. Possible explanations include (1) measuring error in expected future spot rate; (2) risk premium PPP performs poorly in the short run, but is supported in the long run. Possible explanations include (1) measuring error in inflation rate; (2) barriers on international trade; (3) factors other than inflation rate may influence exchange rates nullA test of international Fisher relation is actually a test of whether the real interest rates are constant internationally. The evidence is unsupported in the short run, but is supported in the long run. Possible explanations: (1) unsynchronized business cycle in the short run; (2) economic integration in the long run Empirical evidence on foreign exchange expectation relation shows that, in the short run, the exchange rate is too volatile to be explained by the interest rate differential; however, over the long run, there seems to be a risk premium in the future spot exchange rate nullA history of exchange rates since the start of floating exchange rate regime The long-term trends The medium-term trends The short-term variability An analytical framework Asset market approach to exchange rates in the short run (portfolio repositioning) Monetary approach to exchange rates in the long run (economic fundamental) nullExchange rates in the short run The uncovered interest rate parity states that: E(s)≈ rF – rD Therefore, change in any of the other three factors should lead to change in spot exchange rate Example 1: domestic interest rate increase – in favor of bond denominated in DC – increasing demand for DC – DC appreciate in spot market – FC is expected to appreciate in the future *nullExample 2: expected future spot rate of FC appreciate – in favor of bond denominated in FC – increasing demand for FC – DC depreciate in spot market – FC is expected to appreciate in the future Self-fulfilling expectation: act on expectation Self-fulfilling expectation can have either stabilizing effect or destabilizing effect on exchange rates, depending on whether the expectation is consistent with economic fundamental *nullExchange rates in the long run PPP implies that exchange rates are closely related to the levels of prices for products in different countries, at least in the long run The price levels in different countries is affected by the money supplies in these countries Thus, in the long run, exchange rates are links to relative money supplies in different countries *nullPPP: S= PF/PD The quantity theory of money supply and demand: Thus, we have: Assuming that the Ks are constant, the equation states that DC will appreciate if (1) the growth of domestic money supply is relatively slower; (2) the growth of domestic real output is relatively faster *nullExample 1: Money supplies and exchange rate cut in domestic money supply – credit tightening by domestic banks – decreasing domestic aggregate demand, output, job, and product prices – the purchasing power of DC should rise – DC appreciate Example 2; Real incomes and exchange rate real domestic income increase due to supply-side reasons – more demand for money (transaction demand) – if the money supply is unchanged, the purchasing power of DC should rise – DC appreciate *nullExchange rate overshooting