Topic 8 Foreign Exchange Marke
2017-04-06 21:36:19 2 举报AI智能生成
Global business today Topic 8
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Managerial Implications
EXPOSURE
Transaction Exposure
the income from individual transactions affected by fluctuations in foreign exchange values.
real monetary loss
Translation Exposure
changes on the reported financial statements of a company, as it impacts the present measurement of past events
Gains and losses from translation exposure are reflected only on paper
Economic Exposure
firm’s future international earning power is affected by changes in exchange rates
Concerned with the long-term effect of changes
Protect from Transaction EX and Translation EX(short term)
hedging through forward market transactions and currency swaps.
lead and lag strategies.
paying suppliers and collecting payment from customers
early or late depending on expected exchange rate movements
early or late depending on expected exchange rate movements
Protect them from economic Ex(long term)
dispersing production to different locations
diversifying their revenues by tapping into
markets in different countries
markets in different countries
Functions of FEM
Currency Conversion
Receipts and Payments
Investments
portfolio investment证券交易
direct investment
Speculation投机
Arbitrage套利 from the shifts in exchange rate
Insuring against Foreign Exchange Risk
the risk that arises to economic agents from unanticipated changes in exchange rates.
Currency hedging
protect firms and individuals against foreign exchange risk
Spot exchange Rates
spot transaction involved the spot rates
determined by demand and supply of currency
exchange rate on a particular day
Forward Exchange Rate
hedge against future transaction risks.
quoted for 30, 90, or 180 days into the future.
agree the currency exchange rates at a currently specific day but execute at future day
Currency Swaps
The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
desirable to move out of one currency into another for a limited period without incurring foreign exchange
risk.
risk.
Eg1: Spot Against Forward
子主题
Eg2:forward against forward
Introduction to FEM
Fundamental concept
Foreign Exchange 外汇
Exchange Rate
Foreign Exchange Market （converting the currency）
the Nature of FEM
Exchange Rate Quoted (same)
Although simultaneous and parallel FOREX markets
Largest and most liquid financial market in the world
the total currency trade is 200%
Factors Affecting Exchange Rate Movements
Fundamental Factors
Inflation
Inflation or changes in price level is related to exchange rate movements through
The Law of One Price
Identical products in different countries must sell for the same price
assume transportation cost is negligible and no barrier
If exchange rates are flexible, it would adjust in order to equalize prices.
If exchange rates are fixed the prices itself would adjust
仅针对一种商品，考虑对象是价格、条件更为严格
Purchasing Power Parity (PPP) Theory
以汇率为分析对象、考虑物价水平问题
不要求每种商品都相等（如果能抵消差异）、也不要求贸易壁垒完全消失，只要壁垒程度相当即可
绝对购买力和相对购买力的差异
Factors behind Departure from PPP Theory （背离）
物价对汇率的作用
以数量为前提，实际本末倒置
not completely accurate in estimating exchange rate changes in the short run，relatively accuate in the long run
仅是静态的分析和比较
factors in real life, e.g. transportation cost and trade restriction
By comparing the prices of identical products in
different currencies.
different currencies.
Possible to determine the ‘real’ or PPP exchange rate –
if law of one price was true for all goods and services.
if law of one price was true for all goods and services.
Price and Exchange rate
postulates that changes in relative prices will result in a change in exchange rates
A country with high inflation should expect its currency to depreciate
Money Supply and Price Inflation
Inflation occurs when: money supply increases faster than increase in output
(PPP Theory) a country with a high inflation rate will experience depreciation in its currency exchange rate
PPP Theory implies that: a currency will depreciate against currencies of other countries which have relatively slower monetary growth
Interest Rates and Exchange Rates
Interest rates affect expectations about future exchange rates.
nominal interest rate (i) is the sum of real interest
rate (r) and expected rate of inflation (I)
i.e., i = r + I => r = i - I
rate (r) and expected rate of inflation (I)
i.e., i = r + I => r = i - I
In the long-run, real interest rates in different
countries gets equalized over time
countries gets equalized over time
Investor Psychology
Bandwagon Effect (possible explanations)
The underlying cause behind the creation of bandwagon effects are expectations of traders that turn into self-fulfilling prophecies
sometimes, government intervention can prevent the bandwagon from starting, but at other times it is ineffective and only encourages traders to further speculate.
summary
PPP Theory provides linkage between inflation and exchange rates
Fisher Theory provides link between interest rates and inflation
PPP + Fisher Theory = International Fisher Theory
provides a link between interest rates and exchange rates
Two most important examples in topic 8 P.27
other factors
Balance of payment
Monetary Reverses
Government Contrals
Importance of Currency
Political Climate
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