Tài liệu Thị trường tài chính và các định chế tài chính_ Chapter 16 pptx

Chapter Outline Background on foreign exchange markets  Factors affecting exchange rates  Movements in exchange rates  Forecasting exchange rates  Forecasting exchange rate volatili

Chapter 16

Foreign Exchange Derivative Markets

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

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

Background on Foreign Exchange Markets (cont’d)

 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

Background on Foreign Exchange Markets (cont’d)

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

Background on Foreign Exchange Markets (cont’d)

delivery

 Forward rates indicate the rate at which a

currency can be exchanged in the future

 Some quotations express the exchange rate between two non-dollar currencies

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

$ C 60

0

$ / 15 1

$ C$

in euro of

Background on Foreign Exchange Markets (cont’d)

 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

Background on Foreign Exchange Markets (cont’d)

 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

Background on Foreign Exchange Markets (cont’d)

 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

Factors Affecting Exchange Rates

demand and supply

 In equilibrium, there is no excess or deficiency of that currency

 If a currency increases in value, it appreciates

 If a currency decreases in value, it depreciates

 Exchange rates are influenced by:

 Differential inflation rates

 Differential interest rates

 Government intervention

Factors Affecting Exchange Rates (cont’d)

 Differential inflation rates

 Purchasing power parity (PPP) suggests that the exchange rate will change by a percentage that reflects the inflation differential between the two countries of concern

 Differential interest rates

 Interest rate movements affect exchanges rates by influencing the capital flows between countries

 Central bank intervention

 Central banks attempt to adjust a currency’s value to influence economic conditions

 Direct intervention occurs when a country’s central bank sells some of its currency reserves for a different currency

Factors Affecting Exchange Rates (cont’d)

 Indirect intervention during the Peso Crisis

 The central bank increased interest rates to discourage foreign investors from withdrawing their investments in Mexico’s debt securities

 Indirect intervention during the Asian Crisis

 Some Asian countries increased their interest rates to encourage investors to leave their funds in Asia

 Indirect intervention during the Russian crisis

 The Russian central bank attempted to prevent outflows by tripling interest rates

Factors Affecting Exchange Rates (cont’d)

exchange of a currency, can be used as a

form of indirect intervention

 e.g., Venezuela imposed foreign exchange controls in the mid-1990s

let the currency float temporarily toward its

market-determined level

Forecasting Exchange Rates

 Market participants take derivative positions based on their expectations of future exchange rates

 Technical forecasting involves the use of historical

exchange rate data to predict future values

 e.g., time-series models that examine moving averages and

allow the forecaster to develop some rule

 Fundamental forecasting is based on fundamental

relationships between economic variables and exchange rates

 e.g., high inflation in a country can lead to depreciation in its

currency

Forecasting Exchange Rates

(cont’d)

 Market-based forecasting is the process of

developing forecasts based on the spot rate or the forward rate

 Use of the spot rate

 Corporations can use the spot rate to forecast, since it represents the market’s expectation of the spot rate in the near future

 Use of the forward rate

 Speculators would take positions if there was a large discrepancy between the forward rate and 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

Forecasting Exchange Rates

 The actual forecast used by an MNC is a weighted

average of the various forecasts developed

Forecasting Exchange Rate

Volatility

volatility to develop a range surrounding their forecast

 To develop a volatility forecast:

 e.g., historical exchange rate volatility, time series

of volatility patterns, implied standard deviations

Speculation in Foreign Exchange

Markets

currencies to capitalize on expected

exchange rate movements

Speculating on Expected

Exchange Rate Movements

Zena Bank expects the euro to depreciate against the dollar and plans

to take a short position in euros and a long position in dollars

Assume the following

:

1

Interest rate on borrowed euros is 5 percent annualized

2

Interest rate on dollars loaned out is 6 percent annualized

3

Spot rate is €0.90 per dollar

4

Expected spot rate in ten days is €0.95 per dollar

5

Zena Bank can borrow €10 million

Describe the steps Zena should take to profit from shorting euros and going long on dollars

Borrow €10 million and convert to $11,111,111

2

Invest the $11,111,111 million for ten days at 6 percent annualized

(or 1667 percent over ten days), which will generate $11,129,630

3

After ten days, convert the $11,129,630 into euros at the existing

spot rate, which converts to €10,573,148

4

Pay back the loan of €10 million plus interest of 5 percent annualized (.1389 percent over ten days), which equals €10,013,889

Thus, Zena earns €559,259 over a ten-day period

Foreign Exchange Derivatives

 Speculate on future exchange rate movements

 Hedge anticipated cash inflows or outflows in a given foreign currency

international investments, which has increased their exposure to exchange rate risk

Foreign Exchange Derivatives

(cont’d)

 Forward contracts

 Forward contracts are contracts typically negotiated with a

commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specified future date

 The forward market facilitates the trading of forward contracts

 Commercial banks profit from the difference between the bid price and the ask price and are exposed to exchange rate risk if their purchases do not match their sales of a foreign currency

 Forward purchases can hedge the corporation’s risk that the

currency’s value may appreciate

 Forward sales can hedge the corporation’s risk that the

currency’s value may depreciate

Foreign Exchange Derivatives

(cont’d)

 Forward contracts (cont’d)

 The forward rate may sometimes exhibit a premium

or discount relative to the existing spot rate:

 The forward premium reflects the percentage by

which the forward rate exceeds the spot rate on an

annualized basis

n S

S

premiumrate

Computing A Forward Rate

Premium or Discount

Assume that the spot rate for the euro is $1.20,

while the 180-day forward rate for the euro is

$1.22 What is the forward rate premium

?

%33

3180

36020

.1

$

20.1

$22.1

$

360premium

rateForward

S FR

Foreign Exchange Derivatives

(cont’d)

 Currency futures contracts

 A currency futures contract is a standardized contract that

specifies an amount of a particular currency to be exchanged

on a specified date and at a specified exchange rate

 Firms purchase futures to hedge payables

 Firms sell futures to hedge receivables

 Futures contracts have specified settlement dates

 Currency swaps

 A currency swap is an agreement that allows one currency to

be periodically swapped for another at specified exchange

rates

 Essentially a series of forward contracts

Foreign Exchange Derivatives

(cont’d)

 Currency options contracts

 A currency call option provides the right to purchase a

particular currency at a specified price (the exercise price)

within a specified period

 Used to hedge payables in a foreign currency

 The option will not be exercised if the spot rate remains below the exercise price

 A currency put option provides the right to sell a particular

currency at the exercise price within a specified period

 Used to hedge receivables in a foreign currency

 The option will not be exercised if the spot rate remains above the exercise price

Foreign Exchange Derivatives

(cont’d)

 Conditional currency options

 The premium is conditioned on the actual movement in the currency’s value over the period of concern

 The choice of a basic option versus a conditional option is dependent on the firm’s expectations of the currency’s exchange rate over the period of concern

Foreign Exchange Derivatives

Foreign Exchange Derivatives

 Sell euros forward and purchase them in the spot market

to fulfill the obligation

 Sell futures contracts on euros and purchase euros in the spot market by the settlement date

 Purchase put options on euros and purchase the euros in the spot market if the option is exercised

Speculating with Currency

Futures

Assume the following

:

1

The spot rate for the euro is $1.15

2

The price of a futures contract is $1.17

3

Expectation of euro’s spot rate as of the settlement date is $1.20

What could you do to profit from your expectations

?

You could buy euro futures You would receive euros on the settlement date for $1.17 and could sell euros at $1.20 if your expectations

were correct To account for uncertainty, you could also develop a

probability distribution for the future spot rate

Speculating with Currency

Options

Assume the following

:

1

The spot rate for the euro is $1.15

2

A call option is available with an exercise price of $1.17 and a

premium of $0.02 per unit

3

Expectation of euro’s spot rate as of the settlement date is $1.20

What could you do to profit from your expectations

?

You could euro call options If your expectations are correct, you will net $1.20 – $1.17 – $0.02 = $0.01 per unit

International Arbitrage

 If exchange rates become misaligned, arbitrage will

occur, forcing realignment

 Locational arbitrage is the act of capitalizing on a

discrepancy between the spot rate at two different

locations by purchasing the currency where it is priced low and selling it where it is priced high

 Some financial institutions watch for locational arbitrage

opportunities, so any discrepancy in exchange rates is quickly corrected

Conducting Locational Arbitrage

Assume the following information

International Arbitrage (cont’d)

 Covered interest arbitrage

 Interest rate parity refers to the relationship between a

forward rate premium and the interest rate differential of two

countries:

 If the interest rate is lower in the foreign country than in the home country, the forward rate of the foreign currency should exhibit a premium

 The forward rate premium or discount should be about equal to the differential in interest rates between the countries of concern

1 )

1 (

) 1

Computing A Forward Premium Using Interest Rate Parity

Assume that the spot rate of the British pound is $1.50, the one-year U.S

interest rate is 7 percent, and the one-year British interest rate is 8

percent What should the forward rate premium or discount of the British

1 08 1

07 1

1 ) 1

(

) 1

International Arbitrage (cont’d)

 Covered interest arbitrage (cont’d)

 If interest rate parity does not hold, covered interest

arbitrage is possible

 E.g., if the spot rate and forward rate for a foreign currency are equal and the foreign interest rate is higher, arbitrageurs would buy the currency now, invest in the foreign country, and sell the currency forward

 Interest rate parity prevents investors from earning higher

returns from covered interest arbitrage than can be earned in the U.S

 Impact of the September 11 Crisis

 The interest rate differential between the U.S and other countries increased, resulting in increased forward rate discounts

Explaining Price Movements of

Foreign Exchange Derivatives

 The spot rate influences the forward rate and

currency futures

 Indicators that may signal a change in economic

conditions that will affect the supply and demand for a particular currency and the spot rate are monitored:

 Relative inflation

 Relative interest rates

 Economic growth indicators

 Relative budget deficits