国际商务英语授课国际商务 (22).pdf

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1、9-1C Ch ha ap pt te er r 8 8The Foreign Exchange Market 9-2ASales BProfitsCStrategy of an enterprise9-3 to explain how the foreign exchange market works;Objective 1 to examine the forces that determine exchange rates;Objective 2nato map the implications for international business of exchangemovement

2、s.Objective 39-4Introduction Question:What is the foreign exchange market?The foreign exchange market is a market for converting the currency of one country into that of another countryThe exchange rate is the rate at which one currency is converted into another9-5 9-6 The Functions of the FX Market

3、There are two main functions for the foreign exchange(FX)market:1.The first is to convert the currency of one currency into the currency of another.2.The second is to provide some insurence against foreign exchange risk.,or the adverse cnsequence of unpredictable changes in exchange rates.9-71.Curre

4、ncy ConversionInternational firms use foreign exchange markets(1)to convert export receipts,income received from foreign investments,or income received from licensing agreements(2)to pay a foreign company for products or services(3)to invest spare cash for short terms in money markets(4)for currency

5、 speculation 9-82.Insuring Against FX RiskThe foreign exchange market can be used to provide insurance to protect against foreign exchange risk-the possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm.A firm that protects itself against foreign ex

6、change risk is hedging:1.spot exchange rates2.forward exchange rates3.currency swaps 9-9Insuring Against FX RiskInsuring against foreign exchange risk(hedging):1.Spot Exchange Rate-when two parties agree to exchange currency and execute the deal immediately;-the rate at which a foreign exchange deal

7、er converts onecurrency into another currency on a particular day.9-10Spot Exchange Rate-is the price quoted for immediate settlement on a currency.-spot setllement normally occurs one or two business days from the trade date.9-11Spot Exchange Rate can be problematic9-12Insuring Against FX Risk2.For

8、ward Exchange Rates-the exchange rate governing the future transactions;-a forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future;-forward rates are typically quoted for 30,90,or 180 days into the future.9-13For example:If you are

9、 going to need 200,000yen in 30 days,and if the yen appreciate its value in these 30 days you will end up need more currency to exchange for yen.Thus,you can have a forward agreement with a forward exchange rate which is lock the exchange rate earlier and reduce the impact of foreign exchange risks.

10、9-14Forward rate is very importantin hedging foreign exchange risks9-15Insuring Against FX Risk3.Currency Swap-the simultaneous purchase and sale of a given amount offoreign exchange for two different value dates-swaps are used when it is desirable to move out of one currency into another for a limi

11、ted period without incurring foreign exchange rate risk 9-16Exmple for currency swap:$1million at spot rate payable to screen producer Apple Japan receivable from importer 120million yen at forwar rate*spot rate:$1=120yen forward rate:$1=110yen9-17Apple entered a forward agreement and block the 90da

12、ys exchange rate at$1=110yen.After 90 days,the$1=120yen.Therefore,Apple converted its 120million yen receviables with the forward rate and end up with more dollars.120million/120=1 million dollar 120million/110=1.09 million dollar1.09million 1million9-18The Nature of the FX Market-The foreign exchan

13、ge market is a global network of banks,brokers,and foreign exchange dealers connected by electronic communications systems-The market is always open somewhere in the world-if exchange rates quoted in different markets were not essentially the same,there would be an opportunity for arbitrage-the proc

14、ess of buying a currency low and selling it high-Most transactions involve U.S.dollars on one side,the U.S.dollar is a vehicle currency9-19 Figure 1.U.S.dollars versus Chinese RMB(2014.12-22015-04)9-20Online ApplicationFor the latest exchange rates,visit:http:/ of Exchange Rate DeterminationA:Prices

15、 and Exchange Rates The law of one price Purchasing power parity B.Economic Facotrs Determine Foreign Exchange Rates Inflation Interest rate National income Govrnment control Market expectation9-22Prices and Exchange Rates Question:How are prices related to exchange rate movements?Answer:To understa

16、nd how prices and exchange rates are linked,we need to understand the law of one price,and the theory of purchasing power parity 9-23 Purchasing Power Parity(PPP):Absolue Form of PPP(or the“law of one price”)-based on notion that without international barriers.Relative Form of PPP-based on market im

17、perfections.9-24Prices and Exchange RatesThe law of one price-in competitive markets free of transportation costs and barriers to trade,identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currencyPurchasing power parity theor

18、y-given relatively efficient markets(markets in which few impediments to international trade and investment exist)the price of a“basket of goods”should be roughly equivalent in each country 9-25 =Price in New York Price in London 9-26Prices and Exchange RatesPPP predicts that changes in relative pri

19、ces will result in changes in exchange rateswhen inflation is relatively high,a currency should depreciateSo,if we can predict inflation rates,we can predict how a currencys value might changethe growth of a countrys money supply determines its likely future inflation rate when the growth in the mon

20、ey supply is greater than the growth in output,inflation will occur 9-27Prices and Exchange RatesTo express the PPP theory in symbols:E=P$/PS$where,P$is the U.S.dollar price of Big Mac.PS$is the Singapore dollar price of Big Mac E is the exchange rate predicted by the PPP theory9-28Big mac=$3.73 in

21、the U.S.Big mac=S$4.23 in Singapore then,The exchange rate=$3.73/S$4.23=0.88189-299-30Simplified PPP relationship:%change in E=inflation rate of HC-inflation rate of FCwhere;E=exchange rateHC=home country FC=foreign country9-31Prices and Exchange Rates Question:How well does PPP theory work?Answer:E

22、mpirical testing of the PPP theory indicates that it is not completely accurate in estimating exchange rate changes in the short run,but is relatively accurate in the long run 9-32Both are significant in trading l Trade barriers l Transfortation cost 9-339-34PPP theory doesnt consider:Government con

23、trol Investor psycology Other economical factors9-35Theories of Exchange Rate Determination Exchang rates-are determined by the demand and spply of one currency relative to the demand and supply of another.Five factors that have an important impact on future exchange rate movements are:1.a countrys

24、price inflation 2.a countrys interest rate3.a countrys income level4.government control5.market psychology9-36Lets use the following two economical factors as example to illustrate how economical factors impact the exchange rates:Inflation Interest rate9-379-38Theories of Exchange Rate Determination

25、Relative Inflation Rates$/Quantity of S0D0r0r1S1D1U.S.inflation U.S.demand for British goods,and hence.British desire for U.S.goods,and hence the supply of.9-39In an open economy,lets consider if the government give every one$10,000;Then,this will increase people consuming for goods;Since the demand

26、 for good increased,the price of good will increase;This certianly will cause inflation and most likely inflation will reduce the currecny value in the foreign exchange market.9-40Theories of Exchange Rate DeterminationRelative Interest Rates$/Quantity of r0S0D0r1D1S1 British desire for U.S.bank dep

27、osits,and hence the supply of.U.S.interest rates U.S.demand for British bank deposits,and hence.9-41Relative Interest Rates A relatively high interest rate may actually reflect expectations of relatively high inflation,which discourages foreign investment.It is thus useful to consider real interest

28、rates,which adjust the nominal interest rates for inflation.9-42The Fisher Effect states that a countrys nominal interest rate is the sum of the required real rate of interest and the expected rate of inflation over the period for which the funds are to be lent.real nominalinterest interest inflatio

29、n rate rate rate9-43Thus,if a countrys inflation is high,and more likely interest rate will also be high and try to remain the investors in the country.Here,high interest rate is a compensation for high inflation.9-44If there is no restrictions on capital flows,then,real interest rates must be the s

30、ame,otherwise an arbitradge opportunity will exist.*arbitradge means investors will buy low and sell high.9-45For example;if the annual real interest rate in Japan=10%the annual real interest rate in U.S.=6%then,investors will borrrow at lower rate in U.S.and invest in Japan to get more returns.This

31、 results,more borrowing occurs in U.S.and eventually push the interest rate up in the U.S.,and opposite will happen in Japan.9-46The International Fisher Effect suggests that for any two countries,the spot exchange rate should change in an equal amount but in the opposite direction to the difference

32、 in nominal interest rates between the two countries.Hence,investors hoping to capitalize on a higher foreign interest rate should earn a return no better than what they would have earned domestically.9-47Neither Purchasing Power Parity International Fisher Effect were accurate enough to predict sho

33、rtrun exchange rates.9-48 Investor Psychology and Bandwagon Effect Question:How are exchange rates influences by investor psychology?Answer:The bandwagon effect occurs when expectations on the part of traders turn into self-fulfilling prophecies,and traders join the bandwagon and move exchange rates

34、 based on group expectationsgovernmental intervention can prevent the bandwagon from starting,but is not always effective9-49Government intervention sometimes can stop bandwagon effect,but not always.9-50SummaryRelative monetary growth,relative inflation rates,and nominal interest rate differentials

35、 are all moderately good predictors of long-run changes in exchange rates,but poor predictors of short term changes So,international businesses should pay attention to countries differing monetary growth,inflation,and interest rates 9-51Exchange Rate Forecasting Question:Should companies invest in e

36、xchange rate forecasting services to help with decision-making?Answer:The efficient market school-forward exchange rates are the best predictors of future spot exchange rates-investing in forecasting services is a waste of moneyThe inefficient market school-companies should invest in forecasting ser

37、vices-forward rates are not the best predictor of future spot rates9-52The Efficient Market SchoolAn efficient market-one in which prices reflect all available informationif the foreign exchange market is efficient,forward exchange rates should be unbiased predictors of future spot rates Most empiri

38、cal tests confirm the efficient market hypothesis suggesting that companies should not waste their money on forecasting services,but some recent studies have challenged the theory 9-53The Inefficient Market SchoolAn inefficient market-one in which prices do not reflect all available informationin an

39、 inefficient market,forward exchange rates are not the best predictors of future spot exchange rates and it may be worthwhile for international businesses to invest in forecasting servicesHowever,the track record of forecasting services is questionable 9-54Approaches to Forecasting Question:How shou

40、ld exchange rate forecasts be prepared?Answer:There are two approaches to exchange rate forecasting1.fundamental analysis2.technical analysis9-55Approaches to Forecasting1.Fundamental Analysis-draws upon economic factors like interest rates,monetary policy,inflation rates,or balance of payments info

41、rmation to predict exchange rates2.Technical Analysis-focuses on trends and believes that past trends and waves are reasonable predictors of future trends and waves 9-56Currency Convertibility Question:Are all currencies freely convertible?Answer:A currency is freely convertible when both residents

42、and non-residents can purchase unlimited amounts of foreign currency with the domestic currencyA currency is externally convertible when only non-residents can convert their holdings of domestic currency into a foreign currencyA currency is nonconvertible when both residents and non-residents are pr

43、ohibited from converting their holdings of domestic currency into a foreign currency9-57Currency Convertibility Question:Why do countries limit currency convertibility?Answer:The main reason to limit convertibility is to preserve foreign exchange reserves and prevent capital flight-when residents an

44、d nonresidents rush to convert their holdings of domestic currency into a foreign currencyIn the case of a nonconvertible currency,firms may turn to countertrade(barter like agreements by which goods and services can be traded for other goods and services)to facilitate international trade9-58Reasons

45、 why a country limit its currency convertibility:protect foreign reservesprotect countrys economical condition change.As if residents will invest their money else where if their countrys economic condition is unhealthy(i.e.high inflation)9-59Implications for ManagersImplications for firms and manage

46、rs-this chapter contains a number of clear implications for business.Answer:Firms must understand the influence of exchange rates on the profitability of trade and investment deals This exchange rate risk can be divided into 1.Transaction exposure2.Translation exposure3.Economic exposure9-60Transact

47、ion ExposureTransaction exposure-the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values the money lost due to an adverse movement in exchange rates between the time when the deal was signed.can lead tp a real monetray loss9-61Translation Ex

48、posureTranslation exposure-the impact of currency exchange rate changes on the reported financial statements of a company deals with the present measurement of past events gains and losses from translation exposure are reflected only on paper9-62Economic ExposureEconomic exposure-the extent to which

49、 a firms future international earning power is affected by changes in exchange rates.concerned with the long-term effect of changes in exchange rates on future prices,sales,and costs consider the effect of wide swings in the value of the dollar on many multinational firms.9-63Many American multinati

50、onal firms were effected by this exposrue in 1990s.Due to the dollar appreciation made the American goods less competitive in the global market.9-64Reducing FX Exposure Question:How can firms minimize translation and transaction exposure?Answer:Firms can buy forward use swapslead and lag payables an