TIẾNG ANH KINH TẾ ESP foreign exchange trading

Foreign Exchange Market Foreign exchange market: Market in which currencies are bought and sold and in which currency prices are determined... International Monetary Funds IMF:  Inte

Unit 4

Foreign Exchange Trading

1 Foreign Exchange Market

 Foreign exchange market:

Market in which currencies are bought and sold and in which currency prices are determined.

2 The Gold standard

 Advantages of using gold as a medium of exchange:

+Its limited supply made it a highly demanded commodity.

+Gold is highly resistant to corrosion, so it can be traded and

stored for hundreds of years.

+It can be melted into either small coins or large bars, so gold is a good medium of exchange for both small and large purchases

3 The Gold standard

 Disadvantages of using as a medium of exchange:

+Its weight made transporting it expensive.

+When a transport ship sank at sea, the gold sank to the ocean floor and was lost.

Gold standard: International monetary system in which nations linked the value of their paper currencies to specific values of gold

3 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.

3 The Gold standard

Advantages of the gold standard:

 Reduce exchange rate risk

 Impose strict monetary policies

 Correct trade imbalances

4 Bretton Woods system

 The Bretton Woods system of moneytary management

established the rules for commercial and financial relations among the world's major industrial states in the mid 20th

century The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

4 Bretton Woods Agreement

 Bretton Woods Agreement: Agreement (1944) among nations to create a new international monetary system based on the value

of the U.S dollar.

 Its features: Fixed exchange rates, built-in flexibility, funds for economic development, and an enforcement mechanism.

4 Bretton Woods Agreement

 World Bank (International Bank for Reconstruction and

Development, or IBRD): Agency to provide funding for national economic development efforts.

International Monetary Funds

(IMF):

 International Monetary Funds (IMF): Agency to regulate fixed exchange rates and enforce the rules of the international monetary system.

 Purposes:

+Promote international monetary cooperation.

+Facilitate expansion and balanced growth of international trade.

+Promote exchange stability, maintain orderly exchange

arrangements and avoiding competitive exchange

devaluation.

+Make the resources of the Fund temporarily available to

members

+Shorten the duration and lessen the degree of

disequilibrium in the international balance of payments of member nations

5 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.

6 Functions of 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

7 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

7 Exchange rates

 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.

8 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.

 A fixed exchange rate is usually used to stabilize the value of a

currency, vis-a-vis the currency it is pegged to This facilitates

trade and investments between the two countries, and is especially useful for small economies where external trade forms a large part

of their GDP.

 It is also used as a means to control inflation However, as the reference value rises and falls, so does the currency pegged to

it In addition, a fixed exchange rate prevents a government

from using domestic monetary policy in order to achieve

macroeconomic stability.

9 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 do to avoid wild fluctuations

10 Factors determine

exchange rates

 The law of one price stipulates that when price is expressed in a common denominator currency, an identical product must have an identical price in all countries and must be entirely produced within

each particular country.

 The purchasing power parity (PPP)concept helps determine the relative ability of two countries’

currencies to buy the same “basket” of goods in those two countries.

11 Inflation and Interest rates

 Inflation erodes purchasing power.

 Interest rates affect inflation because they affect the cost of borrowing

money.

 Exchange rates adjust to reflect

changes in interest rates

12 Spot transaction

 Currency bought or sold today with delivery two business days later

13 Forward transaction

 To buy or sell a currency in the future, with payment and delivery at that future date

14 Hedging

 To offset a “buy” contract with a “sell” contract and vice versa, matching the amounts and the time span exactly.

15 Speculation

 When dealers do not offset a “buy” contract with a “sell” contract This means that their position is left open

16 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.

17 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)

18 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).

2 International monetary

system

 International monetary system: Collection of agreements and institutions governing exchange rates.

The Gold standard

1 Fixed exchange rate system: System

in which the exchange rate for

converting one currency into another is fixed by international agreement.

2 Exchange rates

exchanged for another.

+The size of the transaction

+The trader conducting it

+General economic conditions

+Government mandate

2 Exchange rates

 Exchange rates influence:

+Production and marketing

decisions of companies.

+Financial decisions of companies

5 Forecast exchange rates

Forward exchange rate: By the rate agree upon for foreign exchange

payment at a future date

+Efficient market view: View that prices of financial instruments reflect all publicly available information at any given time.

+Inefficient market view: View that prices of financial instruments do not reflect all publicly available information.

 Forecasting techniques:

+Technical analysis: A technique using charts of past trends in currency prices and other factors to forecast exchange rates.

+Fundamental analysis: Technique using statistical models based on

fundamental economic indicators to forecast exchange rates.