1. International Finance
国际经济学
Lectured by Yuanfen Tu
School of International Trade and Economics

2. International Finance By Robert J. Carbaugh 13th Edition
Chapter 2:
Foreign Exchange

3. Arbitrage Exchange arbitrage
Simultaneous purchase and sale of a currency
In different foreign-exchange markets
To profit from exchange-rate differentials in the two locations
Brings about an identical price for the same currency in different locations
Results in one market 3

4. Arbitrage Two-point arbitrage
Two currencies are traded between two financial centers
If ₤1=$2 in New York ₤1=$2.01 in London
Foreign-exchange traders will purchase pounds at $2 per pound in New York and immediately resell them in London for $2.01 .
This arbitrage process will continue until the exchange rate in New York is the same as that in London 4

5. Arbitrage

6. Arbitrage

7. Arbitrage Three-point arbitrage Triangular arbitrage
Three currencies and three financial centers
Switching funds among three currencies in order to profit from exchange-rate inconsistencies
If ₤1=$1.5 in New York, ₤1=4francs in Geneva 1 franc=$0.50 in London
Sell $1.5million for ₤1 million
Simultaneously, sell ₤1 million for 4 million francs.
At the same time, sell 4 million francs for $2 million 7

8. Forward Market
Currencies bought and sold now for future delivery – typically 1, 3, or 6 months
Exchange rate agreed on at the time of the contract
Payment made only when actual delivery takes place
Banks provide this service to earn profits
Forward rate
Rate of exchange used in the settlement of forward transactions

9. The Forward Market At a premium At a discount
When a foreign currency is worth more in the forward market than in the spot market
At a discount
When a foreign currency is worth less in the forward market than in the spot market 9

10. Forward exchange rates: selected examples
TABLE 2.8
Forward exchange rates: selected examples 10

11. Forward Rate What determines the forward rate?
Interest-rate differentials between countries
Why might it be at a premium or discount compared to the spot rate?
One country’s interest rates higher than another’s, currency is a forward discount
One country’s interest rates lower than another country’s, currency is a forward premium

12. The Forward Market Relation between the forward rate and spot rate
Interest rate on six-month treasury bills is five percent in the U.S. and three percent in Swiss 12

13. Forward market functions
Foreign exchange
Hedging (套期保值)refers to the process of avoiding or covering a foreign-exchange risk.
Case 1: U.S. importer hedges against a dollar depreciation
import purchase foreign currency in the forward market in advance
Case 2: U.S. exporter hedges against a dollar appreciation
export sell foreign currency in the forward market in advance 13

14. Does Foreign-Currency Hedging Pay Off?
Standard argument for hedging:
Increased stability of cash flows and earnings
Reasons companies may not view hedging as a benefit:
Locks in an exchange rate costs up to half a percentage point per year of the revenue being hedged
Fluctuations in a firm’s business can detract from the effectiveness of foreign-currency hedging
The ups and downs for currencies would even out over the long run

15. Exchange-rate risk: the hazard of investing abroad
Exchange-rate fluctuations
Can substantially change the returns on assets denominated in a foreign currency
Interest rates
Key role in determining the relative attractiveness of assets denominated in domestic and foreign currencies
Effects of exchange-rate changes
Can swamp the effects of interest-rate differentials 15

16. Return on a three-month German investment
TABLE 2.9
Return on a three-month German investment 16

17. Interest Arbitrage Interest arbitrage refers
Moving funds into foreign currencies
To take advantage of higher investment yields abroad
Uncovered interest arbitrage
When an investor does not obtain exchange-market cover
To protect investment proceeds from foreign-currency fluctuations 17

18. uncovered interest arbitrage: an example
TABLE 2.10
uncovered interest arbitrage: an example 18

19. Interest Arbitrage A U.S. investor’s extra rate of return
On an investment in the United Kingdom as compared to the U.S.
= interest-rate differential adjusted for any change in the value of the pound 19

20. Interest Arbitrage Covered interest arbitrage
Investor exchanges domestic currency for foreign currency - at the current spot rate
And uses the foreign currency to finance a foreign investment
Investor contracts in the forward market
To sell the amount of the foreign currency that will be received as the proceeds from the investment
With a delivery date to coincide with the maturity of the investment 20

21. Covered interest arbitrage: an example
TABLE 2.11
Covered interest arbitrage: an example 21

22. Interest Arbitrage Forward discount or premium
On one currency against another
Reflects the difference in the short-term interest rates between the two nations
Forward discount
The currency of the higher-interest-rate nation
Forward premium
The currency of the lower-interest-rate nation 22

23. Foreign-Exchange Market Speculation
Attempt to profit by trading on expectations about prices in the future
Speculation differs from arbitrage, in that it involves the purchase or sale of a currency in the expectation that its value will change in the future
Deliberate assumption of exchange risk
With arbitrage, a currency trader simultaneously buys a currency at a low price and sells that currency at a high price. 23

24. Foreign-Exchange Market Speculation
Stabilizing speculation
Goes against market forces by moderating or reversing a rise or fall in a currency’s exchange rate
Useful function for bankers and businesspeople, who desire stable exchange rates 24

25. Foreign-Exchange Market Speculation
Destabilizing speculation
Goes with market forces by reinforcing fluctuations in a currency’s exchange rate
Can disrupt international transactions
High cost of hedging – impeding international trade
Disrupt international investment activity 25

26. How to play the falling (rising) dollar
Depreciating dollar
Purchase foreign currency
Purchase bonds denominated in a foreign currency
Purchase stocks of foreign corporations, denominated in foreign currencies
Savings account denominated in a foreign currency
Variety of currency derivatives 26

27. Foreign Exchange Trading as a Career
Foreign exchange traders
Commercial Banks
Companies
Central Banks
Professional traders
Amateurs speculating in foreign currencies 27

28. Speculation in the spot market
Foreign exchange
Given: spot price is $0.40 per franc
Assumption: in 3 months, the spot price of the franc will rise to $0.50.
Procedure:
1.Purchase francs at $0.40 per franc and deposit them in a bank.
2.In 3 months, sell the francs at $0.50 per franc. 28

29. Speculation in the spot market
Foreign exchange
Given: spot price is $0.40 per franc
Assumption: in 3 months, the spot price of the franc will fall to $0.25
Procedure:
1.Borrow francs today, exchange them for dollars at $0.40 per franc, and deposit the dollars in a bank
2.In 3 months, buy the francs at $0.25 per franc and use them to pay back the loan. 29

30. Speculation in the forward market
Foreign exchange
Forward market speculation occurs when a speculator believes that a currency’s spot price at some future date differ from today’s forward price for that same date. 30

31. Speculation in the forward market
Foreign exchange
Given: current price of the 3-month forward franc is $0.40 per franc
Assumption: in 3 months, the prevailing spot price of the franc will be $0.50.
Procedure:
1.Contract to purchase a specified amount of francs in the forward market, at $0.40 per franc, for 3-month delivery.
2.In 3 months, sell the francs at $0.50 per franc in the spot market. 31

32. Speculation in the forward market
Foreign exchange
Given: current price of the 3-month forward franc is $0.40 per franc
Assumption: in 3 months, the prevailing spot price of the franc will be $0.30.
Procedure:
1. Contract to sell a specified amount of francs in the forward market, at $0.40 per franc, for 3-month delivery.
2.In 3 months, purchase an identical amount of franc in the spot market at $0.30 per franc and deliver them to fulfill the forward contract. 32

33. Speculation in the forward market
Foreign exchange
Long position（多头）is the position speculator take when they purchase a foreign currency on the spot or forward market with the anticipation of selling it at a higher future spot price.
Short position（空头）is the position speculator take when they borrow or sell forward a foreign currency with the anticipation of purchasing it at a lower price to repay the foreign-exchange loan or fulfill the forward sale contract. 33

37. 多头套期保值案例
美国某进口商2月10日从德国购进价值125000马克的货物，1个月后支付货款。为防止德国马克升值而使进口成本增加，该进口商买入1份3月期德国马克期货合约，面值125000马克，价格为USD0.5841/DEM，1个月后德国马克果然升值，现汇价由USD0.5815/DEM变为USD0.5945/DEM，期货价变为USD0.5961/DEM，试计算该进口商的进口成本上的损益变化。

47. 套期保值的基本特征是，在现货市场和期货市场对同一种类的商品同时进行数量相等但方向相反的买卖活动，即在买进或卖出实货的同时，在期货市场上卖出或买进同等数量的期货，经过一段时间，当价格变动使现货买卖上出现的盈亏时，可由期货交易上的亏盈得到抵消或弥补。从而在"现"与"期"之间、近期和远期之间建立一种对冲机制，以使价格风险降低到最低限度。期货市场毕竟是不同于现货市场的独立市场，它还会受一些其他因素的影响，因而期货价格的波动时间与波动幅度不一定与现货价格完全一致；加之期货市场上有规定的交易单位，两个市场操作的数量往往不尽相等，这些就意味着套期保值者在冲销盈亏时，有可能获得额外的利润或亏损。