1、Chapter Objective:Money represents purchasing power(*).The foreign exchange(FX)market,the conversion of purchasing power from one currency into another,encompasses bank deposit of foreign currency,foreign trade financing,trading in foreign currency option and future,and currency swaps.4Chapter FourT
2、he Foreign ExchangeMarket4-0The Market for Foreign ExchangelThe FX market is the largest financial market in the world by any standard.lIt is open somewhere in the world 365 days a year,24 hours a day.lThe daily trading of spot and forward foreign exchange is about$3.73 trillion.It is about$540 dail
3、y per person.lLondon remains the worlds largest foreign exchange trading centers,and$1.7 trillion,a 25%increase from 2007 to 2010.US has$817 billion and 23%increase from 2007 to 2010.4-1Currency SymbolslIn addition to the familiar currency symbols(e.g.,$)there are three-letter codes for all currenci
4、es.It is a long list,but selected codes include:USD United States dollar CHF Swiss francsGBP British poundZAR South African randCAD Canadian dollarJPY Japanese yen4-2lFunction and Structure of the FX MarketlThe Spot MarketlThe Forward MarketlExchange-Traded Currency FundslFunction and Structure of t
5、he FX MarketlFX Market ParticipantslCorrespondent Banking RelationshipslThe Spot MarketlThe Forward MarketlExchange-Traded Currency FundslFunction and Structure of the FX MarketlThe Spot MarketlSpot Rate QuotationslThe Bid-Ask SpreadlSpot FX TradinglCross Exchange Rate QuotationslTriangular Arbitrag
6、elSpot Foreign Exchange Market MicrostructurelThe Forward MarketlFunction and Structure of the FX MarketlThe Spot MarketlThe Forward MarketlForward Rate QuotationslLong and Short Forward PositionslForward Cross-Exchange RateslSwap TransactionslForward PremiumlExchange-Traded Currency Fundsl4.1 Funct
7、ion and Structure of the FX Marketl4.2 The Spot FX Marketl4.3 The Forward FX Marketl4.4 Exchange-Traded Currency Funds(ETF;交易所交易基金)Chapter Outline4-34.1 Function and Structure of the FX MarketlThe structure of the FX market is one of the primary functions of a commercial banker:to assist clients in
8、the conduct of international commerce.(*)lThe spot and forward FX markets are OTC.lIt is a worldwide linkage of currency trading banks,nonbank dealers,and FX brokers,who assist in trade,connected to one another vie a network of telephone,computer terminals,and automated dealing systems.lReuters(路透社)
9、and EBS(电子经纪服务公司)are the largest vendors of quoting screen monitors used in trading currencies.4-4Rhythms of the FX MarketMost active trading takes place when European and Asian centers overlap or American and European centers overlap.4-5Function and Structure of the FX Marketl4.1.1 FX Market Partic
10、ipantsl4.1.2 Correspondent Banking Relationships(通汇关系)4-64.1.1 FX Market ParticipantslOne tier is the wholesales or interbank market and the other tier is the retail or client market.lMarket participants can be categorized into five groups including international banks,their customers,nonbank dealer
11、s,FX brokers,and central banks.lAbout 100-200 banks worldwide stand ready to make a market in foreign exchange.The interbank market accounts for 86%FX market in 2010.lNonbank dealers,including investment banks,mutual funds,pension funds,and hedge funds account for about 47%of the interbank trading v
12、olume in 2010.4-7FX Market ParticipantslThe international banks serve the bank customers,in the conduct of international commerce.The bank customers include MNC,money managers,private speculators.The client market accounts for 14%of FX market in 2010.lFX brokers match buy and sell orders and receive
13、 commission fees,but they do not carry inventory.lThe central bank has intervened in the foreign exchange market in an attempt to influence the price of its currency against that of a major trading partner or a country that it fixes or pegs its currency against.4-8FX Market ParticipantslPart of the
14、interbank trading among international banks involves adjusting the inventory position they hold in various foreign currencies.However,most interbank trades are speculative or arbitrage transaction,where participants attempt to judge the future direction of price movement.lMarket psychology expectati
15、on is a key ingredient in currency trading,and a dealer can often infer anothers trading intention from the currency position being accumulated.lThe vast majority of interbank trades flows over Reuters and EBS platforms.4-94.1.2 Correspondent Banking Relationships(通汇关系通汇关系)lThe interbank market is a
16、 network of correspondent banking relationships.lLarge commercial banks maintain demand deposit accounts with one another,called correspondent banking accounts.lThe correspondent banking account allows for the efficient functioning of the FX market.4-10Correspondent Banking RelationshipslBank A is i
17、n London.Bank B is in New York.lThe current exchange rate is 1.00=$2.00.lA currency trader employed at Bank A buys 100m from a currency trader at Bank B for$200m settled using its correspondent relationship.Bank ALondonBank BNYC$200m100m4-11$600m400m$1200m100m100m$1,200m400m$600mYou can check your w
18、ork:make sure that 1,300m=$1,200 x(1/$2)+100+600$200m100mBank A buys 100m from Bank B for$200mCorrespondent Banking RelationshipsAssetsLiabilities deposit at B 300mOther Assets600mBs Deposit$1,000mOther L&E600mTotal Assets 1,300mTotal L&E 1,300mAssetsLiabilities$deposit at A$1000mOther Assets$800mAs
19、 Deposit 300mOther L&E$800mTotal Assets$2,200mTotal L&E$2,200mBs Deposit 200m deposit at A200mAs Deposit$800mBank ALondonBank BNYC$deposit at B$800m4-12Practice ProblemlBank X is in Milan.Bank Y is in London.lThe current exchange rate is 1.10=1.00.lShow the correct balances in each account if a curr
20、ency trader employed at Bank X buys 100,000,000 from a currency trader at Bank Y for 110,000,000.(The balance sheets are shown on the next slide.)4-134-13110m100mCheck:1,700m=1,320m x +100+4001.001.10 Check:2,020m=400m x +770+810 1.101.00770m400m100m1,320m100m1,320m770m400mBank X buys 100m from Y fo
21、r 110mAssetsLiabilities deposit at Y 300mOther Assets600mYs deposit 1,210mOther L&E400mTotal Assets 1,700mTotal L&E 1,700mAssetsLiabilities deposit at X1,210mOther Assets590mXs deposit 300mOther L&E810mTotal Assets 2,020mTotal L&E 2,020mYs deposit200m deposit at X 200mXs deposit880mBank XMilanoBank
22、YLondon deposit at Y 880mBank XBank Y1.10=1.00AssetsLiabilities deposit at Y 300mOther Assets600mYs depositOther L&E400mTotal Assets 1,700mTotal L&E 1,700mAssetsLiabilities deposit at X1,210mOther Assets590mXs depositOther L&E810mTotal Assets 2,020mTotal L&E 2,020mYs deposit200m deposit at X 200mXs
23、depositBank XMilanoBank YLondon deposit at Y 880mBank XBank Y1,210m300m880mPractice Problem4-14Correspondent Banking Relationships Example 4.1lConsider US importer desiring to purchase products from Dutch exporter invoiced at a cost of 750,000.If US bank offers a price of$1.2238/1.00.US bank will de
24、bit imports deposit account$917,850 for the purchase of euros.US will instruct its correspondent EZ bank to debit its correspondent bank account 750,000 and credit the same amount to Dutch exports bank account.4-15Correspondent Banking Relationships-examplelUS bank will then credit its books$917,850
25、,an as offset to the$917,850 debit to US importers account,to reflect the decrease in its correspondent bank account balance with EZ bank.4-16Correspondent Banking RelationshipslInternational commercial banks communicate with one another with some channels:lSWIFT:The Society for Worldwide Interbank
26、Financial Telecommunications(全球银行间金融电信协会),non-profit private organizationlCHIPS:Clearing House Interbank Payments System(票据交换所银行间支付系统),for USD onlylECHO:Exchange Clearing House Limited(外汇结算有限公司),the first global clearinghouse for handling interbank FX transactions,merged with CLS in 1997.4-174.2 The
27、 Spot FX Marketl4.2.1 Spot and Cross Exchange Rate Quotationsl4.2.2 The Bid-Ask Spreadl4.2.3 Spot FX tradingl4.2.4 Triangular Arbitragel4.2.5 Spot FX Market Microstructure4-184.2.1 Spot and Cross Exchange Rate QuotationslDirect quotation 直接标价；美式标价;S($/)lthe U.S.dollar equivalentla British pound is w
28、orth about 1.9710 American dollarslIndirect Quotation 间接标价；欧式标价;S(/$)lthe price of a U.S.dollar in the foreign currencyla American dollar is worth about 0.5072 British poundlSee exhibit 4.4 in your textbook.4-19CurrenciesU.S.-dollar foreign-exchange rates in late New York trading.-Friday-Country/cur
29、rencyin US$per US$Euro area euro1.3098.67831-mos forward1.3093.76383-most forward1.3098.76356-mos forward1.3107.7630British pound1.5405.64911-mos forward1.5402.64933-most forward1.5396.64956-mos forward1.5389.6498The direct quote for the pound is:1=$1.5405The indirect quote for the pound is:.6491=$1
30、Note that the direct quote is the reciprocal of the indirect quote:5072.19717.1=CurrenciesU.S.-dollar foreign-exchange rates in late New York trading.-Wednesday-Wednesday-Country/currencyin US$per US$Country/currencyin US$per US$Canadian dollar.99841.0016Euro area euro1.3092.76381-mos forward.99861.
31、00141-mos forward1.3093.76383-most forward.99881.00123-most forward1.3098.76356-mos forward.99791.00216-mos forward1.3107.7630Japanese yen.01009499.07British pound1.5405.64911-mos forward.01009599.061-mos forward1.5402.64933-most forward.01009999.023-most forward1.5396.64956-mos forward.01010698.956
32、-mos forward1.5389.6498Spot Rate Quotations5-20.649115402.1=Spot Exchange Rate QuotationslIt should be intuitive that the American and European term quotes are reciprocals of one another.lS($/):1.5402lS(/$):0.6491lIn conclusion,S(/$)=1/S($/)4-21Spot Exchange Rate QuotationslSb($/):1.9712lSa($/):1.97
33、17lSb(/$):0.5072lSa(/$):0.5073lIn conclusion,Sa(/$)=1/Sb($/)4-22Cross Exchange Rates(套算汇率套算汇率)(No Transaction Costs)lIn general,it is easier to think of cross exchange rates calculated as the product of an American term and a European term exchange lS(j/k)=S($/k)x S(j/$)lAlternatively,cross exchange
34、 rate is the quotient of two American term or two European term exchange rates.lAlternatively,S(j/k)=S($/k)/S($/j)4-230.751.00=$1.501.001.00$2.00 1.00=0.75Pay attention to your“currency algebra”!Cross Exchange Rates(No Transaction Costs)lSuppose that S($/)=1.50l i.e.$1.50=1.00 land that S($/)=2.00l
35、i.e.1.00=$2.00lWhat must the S(/)cross rate be?lS(/)=S($/)x S(/$)=1.50 x 0.50=0.75lS(/)=S($/)/S($/)=1.50/2.00=0.754-244.2.2 The Bid-Ask Spread(买卖价差买卖价差)lThe bid price is the price a dealer is willing to pay you for something.lThe ask price is the amount the dealer wants you to pay for the thing.lIt
36、doesnt matter if were talking used cars or used currencies:the bid-ask spread is the difference between the bid and ask prices.4-250.0339%=x 100$1.4744$1.4739$1.4744 The Bid-Ask SpreadlA dealer could offer lbid price of$1.4739 per lask price of$1.4744 per lWhile there are a variety of ways to quote
37、that,the bid-ask spread represents the dealers expected profit.Percent Spread=100Ask Price Bid Price Ask Price 4-26big figuresmall figureThe Bid-Ask SpreadA dealer pricing pounds in terms of dollars would likely quote these prices as 1217.1.97 means big figure(主要数字);12-17 means small figure(微量数字).Ho
38、w about 13-18 or 11-16?1.97971.9802 quotes these price as 97-02.USD Bank QuotationsAmerican TermsEuropean TermsBidAskBidAskPounds1.97121.9717.5072.50734-27The Bid-Ask SpreadUSD Bank QuotationsAmerican TermsEuropean TermsBidAskBidAskPounds1.97121.9717.5072.5073Notice that the reciprocal of the Sb($/)
39、bid is the Sa(/$)ask.=1.00$1.9712.5073$1.00Sa(/$)=1/Sb($/)互为导数；注意解释4-28The Bid-Ask SpreadNotice that the reciprocal of the S($/)bid is the S(/$)ask.=1.00$1.5400.6494$1.00USD Bank QuotationsAmerican TermsEuropean TermsBidAskBidAskPounds1.54001.5405.6491.64945-29Copyright 2014 by the McGraw-Hill Compa
40、nies,Inc.All rights reserved.Dealer Customer$1,5401,000 Dealer Customer$1,000649.40Customer sells pounds to dealer at direct bidBuy USD from dealer at indirect askDealer will pay$1.9715 for 1 GBP;he is asking$1.9720.He will pay.5071 for$1 and will charge.5072 for$1$10,000 1$1.9720=5,071Currency Conv
41、ersion with Bid-Ask SpreadslA speculator in New York wants to take a$10,000 position in the pound.lAfter his trade,what will be his position?两种算法?1.9715 20.5071 72S($/)S(/$)Bid Ask10,000 x 0.5071=5,0714-304.2.3 Spot FX tradinglIn the interbank market,the standard size trade is about$10 million USD.T
42、he stakes are high.lA bank trading room is a noisy,active place.lDealers consists of the speculative and the non-speculative trades.lThe“long term”is about 10 minutes for any non-speculative trades.4-31Cross Rate Bid-Ask Spread(EX 4.2)(套算汇率价差计算练习套算汇率价差计算练习EX.4.2)To find the/cross bid rate,consider a
43、 retail customer who:USD Bank QuotationsAmerican TermsEuropean TermsBidAskBidAskPounds1.46501.4655.6824.6826Euros1.22331.2238.8171.81751,000,000$1.46501.001.00$1.2238/1.00=1,197,052Starts with 1,000,000,sells for$,sells$for:Sb(/)=Sb(/$)x Sb($/)=0.8171 x 1.4650=1.19714-32Cross Rate Bid-Ask SpreadTo f
44、ind the/cross ask rate,consider a retail customer who:USD Bank QuotationsAmerican TermsEuropean TermsBidAskBidAskPounds1.46501.4655.6824.6826Euros1.22331.2238.8171.81751,000,000$1.22331.001.00$1.4655=834,732Starts with 1,000,000,sells for$,sells$for :Sa(/)=Sa(/$)x Sa($/)=0.8175 x 1.4655=1.19804-33Cr
45、oss Rate Bid-Ask SpreadBank QuotationsAmerican TermsEuropean TermsBidAskBidAskS($/)$1.4650$1.4655.6824.6826S($/)$1.2233$1.2238.8171.8175S(/)1.19711.19800.83470.8354Recall that the reciprocal of the Sb(/)bid is the Sa(/)ask.=0.83541.001.19711.00=0.83471.001.19801.004-344.2.4 Triangular Arbitrage(EX4.
46、3)Bank QuotationsBidAskDeutsche Bank S($/)$1.9712$1.9717Credit Lyonnais S($/)$1.4738$1.4742Credit Agricole S(/)1.33101.3317“No Arbitrage”S(/)1.33711.3378Suppose we observe these banks posting these exchange rates.As we have calculated the“no arbitrage”/cross bid and ask rates,we can see that there i
47、s an arbitrage opportunity:4-35The arbitrage opportunity is that the investor buys those pounds from Credit Agricole for 1.3317 and sell those pounds for 1.3371 by going through Deutsche and Credit.Bank QuotationsBidAskDeutsche Bank S($/)$1.9712$1.9717Credit Lyonnais S($/)$1.4738$1.4742Credit Agrico
48、le S(/)1.33101.3317“No Arbitrage”S(/)1.33711.3378By going through Deutsche Bank and Credit Lyonnais,we(the investors)can sell 1 pound for 1.3371.1$1.97121.001.00$1.4742/1.00=1.33714-36Triangular ArbitrageBank QuotationsBidAskDeutsche Bank S($/)$1.9712$1.9717Credit Lyonnais S($/)$1.4738$1.4742Credit
49、Agricole S(/)1.33101.3317Start with 1m:the investors Sell 1m to Deutsche Bank for$1,971,200.The bank buys.The investors Buy euro from Credit Lyonnais receive 1,337,132.The bank buys$.$1,971,200 1.00$1.4742=1,337,132.The investors Buy from Credit Agricole.You receive 1,004,078.89=1,337,132/1.3317.You
50、 gain 4,078.89.1,000,000$1.97121.00=$1,971,200.4-374.2.5 Spot FX Market MicrostructurelFX Market Microstructure refers to the mechanics of how a marketplace operates.lBid-Ask spreads in the spot FX market:lIncrease with FX rate volatility and lDecrease with dealer competition.lPrivate information(内幕
