1、International EconomicsChapter 10 Exchange Rates and The Foreign Exchange Market Exchange rates and international transition The foreign exchange market The demand for foreign currency assets Equilibrium in the foreign exchange marketKey termsKey termsappreciation depreciationexchange rate rate of a
2、ppreciation forward exchange rate spot exchange rate interbank trading interest parity condition liquidity risk rate of return vehicle currency real rate of returninterest rate arbitrage. Exchange rates and international transition. Foreign Exchange Dynamic definitionStatic definition Exchange ratea
3、. Conception: P329b. Two kinds quotationsDirect quotation 0.009198 per yenIndirect quotation￥ 108.72 per dollars 幣別幣別 價格價格 美元美元 32.186 人民幣人民幣 3.889 澳幣澳幣 25.028 加幣加幣 27.115 英鎊英鎊 61.659 港幣港幣 4.140 日圓日圓 0.313 歐元歐元42.858 台幣汇率台幣汇率 2004/12/1 14:33 How to calculate cross rate? Suppose 3 currencies: A, B an
4、d C. (/)/(/)/For example, someday on New York foreign exchange market, 1French Franc=0.25 dollar， 1French Franc=0.57DMThen, 1dollar0.57DM0.25dollar2.28DMor 1DM0.25dollar0.57DM0.44dollarc.Two changes in exchange rateAppreciation: A rise in the pounds in terms of dollars is an appreciation of the poun
5、d against the dollar. Depreciation: A fall in the dollar price of pounds is a depreciation of the pound against the dollar. 1.50 per pound 1.25 per poundpound: depreciation dollar:appreciation 1.50 per pound 1.75 per poundpound: depreciation dollar:appreciationd.Classification of exchange rate Basic
6、 rate(key currency, pegged currencyCross rateBuying rateSelling rate Middle rate=(buying rate+selling rate) 2Spot rate Forward rate交叉匯率表美元英鎊加幣日圓法郎瑞郎馬克歐元澳幣台幣人民幣美元-0.5221.187102.7504.9231.1371.4680.7511.28632.1868.276英鎊1.913-2.271196.5709.4211.9132.8091.4362.46461.65915.854加幣0.8420.440-86.5404.1470.95
7、71.2360.6331.08327.1156.972日圓0.0100.0050.012-0.0560.0110.0140.0070.0130.3130.081法郎0.1420.0950.21716.221-0.2320.0000.1530.2616.5381.681瑞郎0.8790.4601.04490.4004.330-1.2910.6611.13128.3087.279馬克0.4960.3310.80869.9700.0000.774-0.5120.87621.9255.638歐元1.3310.6961.581136.8506.5531.5141.954-1.71242.84011.02
8、0澳幣0.7770.4060.92379.8993.8280.8841.1420.584-25.0286.435台幣0.0310.0160.0373.1920.1530.0350.0460.0230.040-0.257人民幣0.1210.0630.14312.4150.5950.1370.1770.0910.1553.889- Exchange rate and international transition a. Domestic and foreign prices ( 1.50 /) ) (50)= 50)= 7575 ( 1.25 /) ) (50)= 50)= 62.5062.50
9、 ( 1.75 /) ) (50)= 50)= 87.5087.50 Conclusion:P331-332 b.Exchange rates and relative prices Table13-2 Conclusion. The foreign exchange market. Conception P333 The actors a. commercial banks b.corporations c.non-bank financial institutions d.central banks Characteristics of the market a.two conceptio
10、ns: arbitrage; vehicle currency b.characteristics Deals on the foreign exchange marketa. Spot rates and forward ratesApple computerpound accountNational Westminister BankspoundsBank of AmericaWells Fargodollar accountdollarsSpot Rates￥9000 100 30 days later0.0105/yen 9000 0.0105=94.50 +$5.500.0115/y
11、en 9000 0.0115=103.50 $3.500.0107/yen 9000 0.0107=96.30 +$3.70Forward Rates Foreign exchange swapsmultinational companySwiss Francs1 millionsuppliers1 millionin three monthsc.Futures and optionsput optioncall optionHedging Long Hedge / Buying HedgeShort Hedge / Selling Hedge Speculation. The demand
12、for foreign currency assets. Assets and asset returns a. defining asset returnsdollar rate of return (nominal rate of return)real rate of returnDollar rate of returninflationReal rate of returnRiskLiquidity asset returnsb.three factors influencing asset returns Interest rate, exchange rate and asset
13、 returns 5 steps Example: $1.1/ $1.165/ : 5% $: 10% step 1: $1.1/ 1=$1.1 step 2: 1 5% 1.05 step3: 1.05 $1.165/ =$1.223 step4: (1.2231.10)/1.10=11% step5: 11%10%Conclusion: euro deposit offers the higher return.Question:$0.7/DM $0.76/ DM RDM : 5% R$ : 10%Which offers the higher rate of returns? A sim
14、ple rule R : todays interest rate on one-year euro deposits R$ : todays interest rate on one-year dollar deposits E$/ : todays dollar/euro exchange rate Ee$/ : dollar/euro exchange rate expected to prevail a year from todayThe expected rate of return on a euro deposit in terms of dollar= R +(Ee$/ -
15、E$/ )/ E$/R$ - R +(Ee$/ - E$/ )/ E$/ Positive : dollarNegative: euroZero: sameSame Question:E$/DM = $0.7/DM Ee$/DMDM = $0.76/ DM RDM : 5% R$ : 10%. Equilibrium in the foreign exchange market .The basic equilibrium condition -Interest Parity Conception Formula R$ = R +(Ee$/ - E$/ )/ E$/ Determination
16、 of the equilibrium dollar/euro exchange rateR$ = R +(Ee$/ - E$/ )/ E$/ E$/ = Ee$/ / (R$ - R +1)R$Ee$/RE$/E$/E$/R$E$/E*$/R$R*R*R*the return on dollar deposits is higher that on euro deposits.No one would demand for euro depositsExcess demand for dollarExcess supply of euroThe dollar/euro exchange ra
17、te falls towards E1$/ E1$/E2$/E$/21R$R*a. At point 2the return on dollar deposits is lower that on euro deposits.b. At point 3No one would demand for dollar depositsExcess demand for euroExcess supply of dollarThe dollar/euro exchange rate falls towards E1$/ Rate of return(in dollar terms)E1$/E2$/E$
18、/21Return on dollar depositsE3$/3c. At point 1: equilibriumthe return on dollar deposits is as same as that on euro deposits.No excess demand for euro and dollarNo excess supply Excess of dollarThe dollar/euro exchange rate falls towards E1$/ Interest rates and equilibriumA rise in the interest rate
19、 on dollarsA rise in the interest rate on euroconclusionR$ R* Dollar appreciationE1 $/ E2 $/New equilibrium point 2At point 1, E$/E1$/E2$/ R* R$R$121R$ R* Dollar depreciationE1$/ E2$/New equilibrium point 2At point 1,R E$/E2$/E1$/R$21R*Conclusion : P347. The expected exchange rate and equilibriumCurrent exchange rate: $1.00/ Future exchange rate: $1.05/ The expected rate of dollar depreciation =(1.051.00)/1.00=5%Future exchange rate: $1.06/ The expected rate of dollar depreciation =(1.051.00)/1.00=5%Conclusion : P350
