Tài liệu Tcqt2 currency market

Tài chính quốc tế (International Finance) II. Currency Market (Foreign Exchange Market) The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By John Maynard Keynes Outline 1. Concept of the FX, characteristics and participants of the FX 2. Functions, transaction and classification of the FX 3. Concept of exchange rate and its classification 4. Direct and indirect quotation 5. Exchange rate point, reading and writting 6. Bid rate, ask rate and spread 7. Speculation and arbitrage 8. Cross rate 9. Conclusion TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 2 1.Concept of the FX, Characteristics and Participants of the FX Concepts of Foreign Exchange

Broadly meaning:Foreign exchange includes foreign currencies, financial assets denominated in foreign currencies (banknotes, checks, bonds, stock etc...), and standard gold Narrowly meaning: Foreign exchange refers foreign currencies TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 3 1.Concept of the FX, Characteristics and Participants of the FX Concept of the Foreign Exchange MarketForex market - FX market: The FX market provides the physical and institutional structure through which the money of one country is exchanged for that of another country (David Eiteman) The FX market is a place in which currencies are exchanged for others.  Broadly meaning: anywhere currencies are exchanged for others  Narrowly meaning (85%): the foreign exchange interbank market TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 4 1.Concept of the FX, Characteristics and Participants of the FX Characteristics: • • • • • Geographical extent and the actual marketplace is not only a visible location but also anywhere currencies are exchanged (so called a space market) A non-stop global market (24-hour-a-day trading): Sydney, Tokyo →Hong Kong, Singapore → Bahrain → Frankfurt, Zurich, London → New York, Chicago, end San Francisco and Los Angeles The center of the FX market is the interbank market Participants in the market are trading though Tel, telex, computer and fax Information asymmetry, huge trading volume (daily over 3.98 trillion USD-2010) and transaction costs are fairly low TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 5 1.Concept of the FX, Characteristics and Participants of the FX • • The USD are traded mostly (90%) The FX market is extremely sensitive to political, economic, social events, psychology and especially monetary and fiscal policy TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 6 1.Concept of the FX, Characteristics and Participants of the FX Participants: (Pilbeam Keith) (1) Retail clients: businesses, international investors, multinational corporations, and the like who need foreign exchange for purposes of operating businesses (via commercial banks) (2) Commercial banks: carry out buy/sell orders from retail clients  alter the structure of assets and liabilities in different currencies Banks can deal either directly other banks or foreign exchange brokers (3) Brokers: often banks do not trade directly one another rather they offer to buy/sell currencies via brokers (4) Central bank and Treasuries TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 7 2. Functions, Transaction and Classification of the FX Functions: • • • • • Service international trade activities Facilitate international capital movements Determine exchange rates Provide hedging instruments (forward, swap, option and future) The place where central banks directly intervence in exchange rate TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 8 2. Functions, Transaction and Classification of the FX Transactions • • • • • Spot transaction Forward transaction Swap transaction Currency option Currency future TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 9 2. Functions, Transaction and Classification of the FX Classifications: (1) Based on the content of transtions (2) Based on the transaction locations: Exchange and OTC (over the counter) (3) Based on the legal: official market and unofficial market (black market) (4) Based on the market space: International and domestic markets (5) Based on the natures of the market: Interbank and retail market TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 10 FX Primary operation Spot Derivative operation Forward Swap OTC Option Future Exchange TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 11 3.Concept of Exchange Rate and its Classification Concept of Exchange rate • Exchange rate is the price of one currency expressed in another currency 20500VND/1USD ; 1,3 USD/1EURO • Commodity currency (C) is the currency with one unit • Term currency (T) is the currency doing the pricing (the number of units of currency changed). • Two-way quotation (special): bid rate and ask rate, bid rate on the left and ask on the right and bid rate lower than ask one TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 12 3.Concept of Exchange Rate and its Classification Exchange rate movements: • • appreciation 20500VND/1USD → 20000VND/1USD 1,3 USD/1EURO → 1,25 USD/1EURO depreciation 20500VND/1USD → 21000VND/1USD 1,3 USD/1EURO → 1,35USD/1EURO TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 13 Graphical determination of the exchange rate E(USD/VND) VND depreciation VND appreciation So S1 21000VND $ 20500VND $ 20500VND $ 20000VND $ D1 Do Qo Q1 Q(USD) TS. Nguyễn Phúc Hiền - ðại học Ngoại thương Q(USD) 14 Tỷ giá USD/VND (end year 1991-2011) 22000 20000 18000 16000 14000 12000 10000 8000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Nguồn: ADB 2011 TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 15 Tỷ giá USD/CNY (end year 1991-2011) 9 8,5 8 7,5 7 6,5 6 5,5 5 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Nguồn: ADB 2011 TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 16 3.Concept of Exchange Rate and its Classification Classification : • • • • bid rate ask or offer rate spot rate: is the rate determined by supply and demand of one currency in the FX market. Transaction taking place today and due up to two days derivative rates include rates in the forward, swap, future and option. Derivatives rate are not directly formulated via supply and demand but computed from the available variables in the market such as spot rates, interest rates of two currencies TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 17 3.Concept of Exchange Rate and its Classification • • • opening rate closing rate crossed rate:the exchange rate of a currency pairs is determined through a third currency (U.S dollar) TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 18 4. Direct and indirect quotation  Direct quotation 1kg meat = 25000 VND 1USD = 18932 VND  Direct quotation is a home currency price of a unit of foreign currency (U.S dollar)  Indirect quotation 1VND = 0,00004 kg meat 1VND = 0,0000528 USD  Indirect quotation is a foreign currency price of a unit home currency  Form of the quote depends on what the speaker regards as home TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 19 4. Direct and indirect quotation  Quotation in practice: On Interbank, most foreign currencies in the world are stated in terms of the number of units of foreign currency to buy one the dollar. This is European Term (except for the below currencies)  Under American Term foreign exchange rate are stated as the US dollar price of one unit of foreign currency: GBP, AUD, NZD, EUR và SDR Example: CNY = 6,921; VND = 18932; EUR = 1,2851; NZD = 0,2515; AUD = 0,7643  Almost national currencies are direct quote against the U.S dollar  The above 5 currencies are indirect quotation against the dollar  The dollar are either direct and indirect quotation  TS. Nguyễn Phúc Hiền - ðại học Ngoại thương 20