《International Financial Management》课程教学课件（PPT讲稿）Chapter 3 The market for foreign exchange

The Foreign ExchangeMarketChapter Three

I:Foreign Exchange Foreign exchange is a kind of asset denominated by foreigncurrencies. The repayment of foreign exchange should have reliablematerial guarantee and should be generally recognized andaccepted by other countriesForeign exchange must be fully convertiblereferstoallassetsdenominatedbyBroadSenseforeigncurrenciesdenominatedbyforeigncurrenciescanbeusedasmeansofpaymentNarrowSenseforinternationalsettlement

I: Foreign Exchange ❖ Foreign exchange is a kind of asset denominated by foreign currencies. ❖ The repayment of foreign exchange should have reliable material guarantee and should be generally recognized and accepted by other countries. ❖ Foreign exchange must be fully convertible. Broad Sense refers to all assets denominated by foreign currencies Narrow Sense denominated by foreign currencies, can be used as means of payment for international settlement

I:ForeignExchangeSpecificScopeAccording to the Regulation on the Foreign ExchangeSystem of the People's Republic of China, the followingforeign exchange can be used as means of payment and assetfor international settlement:Foreigncurrency Payment instrument denominated in foreign currency Securities denominated in foreign currencySpecial drawing rightOther assets denominated in foreign currency

I:Foreign Exchange ❖Specific Scope According to the Regulation on the Foreign Exchange System of the People’s Republic of China, the following foreign exchange can be used as means of payment and asset for international settlement: ❖ Foreign currency ❖ Payment instrument denominated in foreign currency ❖ Securities denominated in foreign currency ❖ Special drawing right ❖ Other assets denominated in foreign currency

II: Exchange RateQuotationDirect QuotationIndirectQuotationDefinitionThe price of foreign currency inThe price ofdomesticcurrencyterms of domestic currencyinterms of foreign currencyRateForeigncurrencyappreciation,Foreigncurrencydepreciation,domesticcurrencydepreciationdomesticcurrencyappreciationRateForeign currencydepreciation,Foreign currencyappreciation,domesticcurrencyappreciationdomesticcurrencydepreciationtoRMB,itisdirectquotation;to USD,itisindirect quotation$ 1=￥6.2183

II: Exchange Rate ＄1=￥6.2183 Quotation Direct Quotation Indirect Quotation Definition The price of foreign currency in terms of domestic currency The price of domestic currency in terms of foreign currency Rate Foreign currency appreciation, domestic currency depreciation Foreign currency depreciation, domestic currency appreciation Rate Foreign currency depreciation, domestic currency appreciation Foreign currency appreciation, domestic currency depreciation to RMB, it is direct quotation; to USD, it is indirect quotation

II:ExchangeRateClassification offoreign exchangeAccording to certain standards, the foreign exchange can be dividedinto:FromthebankBuyingrateandsellingrateSpotERandforward ERFrom thedeliverytimeFromthedevelopmentofERBasicrateandcrossrateFromdifferentdemandsNominalERandreal ER

II: Exchange Rate ❖ Classification of foreign exchange According to certain standards, the foreign exchange can be divided into: From the bank From the delivery time From the development of ER From different demands Buying rate and selling rate Spot ER and forward ER Basic rate and cross rate Nominal ER and real ER

Il:ExchangeRateQuotation of the forward exchange rateDirect quotation: to show the buying rate and selling rate ofdifferent delivery periods on the quote board directlyForward margin: to show the forward exchange rate byoffering the forward exchange rate is higher or lower certainpoints than the spot exchange rate.Forward margin=forward ER- spot ER

II: Exchange Rate ❖Quotation of the forward exchange rate: ⚫ Direct quotation: to show the buying rate and selling rate of different delivery periods on the quote board directly. ⚫ Forward margin: to show the forward exchange rate by offering the forward exchange rate is higher or lower certain points than the spot exchange rate. Forward margin=forward ER- spot ER

II:ExchangeRate Three kinds of quantitative relationship between forwardexchange rate and spot exchange rate:forward premiumforward discountparity一Theforward ERislowerTheforwardERishigherTheforwardERisequathanthespotER:thethan the spot ER; theto thespot ER:theforward margin isforward margin isforward margin is zeronegativepositive

II: Exchange Rate ❖Three kinds of quantitative relationship between forward exchange rate and spot exchange rate: forward premium forward discount parity The forward ER is higher than the spot ER; the forward margin is positive The forward ER is lower than the spot ER; the forward margin is negative The forward ER is equal to the spot ER; the forward margin is zero

II: Exchange Rate If the bank offers the forward margin, how to calculate theforward exchange rate on the basis of spot exchange rate alsodepends on the quotation of the exchange rateQuotationDirect quotationIndirect quotationwhileforwardpremium,minus the premiumplus the premiumtheforwardERisamountamountequal to the spot ERwhileforward discount.minus the premiumplus the premiumthe forward ER isamountamountequal to the spot ER

II: Exchange Rate ❖ If the bank offers the forward margin, how to calculate the forward exchange rate on the basis of spot exchange rate also depends on the quotation of the exchange rate Quotation Direct quotation Indirect quotation while forward premium, the forward ER is equal to the spot ER plus the premium amount minus the premium amount while forward discount, the forward ER is equal to the spot ER minus the premium amount plus the premium amount

I:ExchangeRateEg: Supposinga bank in China quote the exchange rate between USD andCNY as follows:Spotexchangerate:$1=6.2049---59the three-month forward exchange rate is discount 80---60As China adopts the direct quotation, the three-month forward exchange rate isequal to$ 1=￥6.2049---5980---60$ 1=6.1969---99

II: Exchange Rate Eg: Supposing a bank in China quote the exchange rate between USD and CNY as follows: Spot exchange rate: ＄1=￥6.2049-59 the three-month forward exchange rate is discount 80-60 As China adopts the direct quotation, the three-month forward exchange rate is equal to ＄1=￥6.2049-59 ﹣） 80-60 ＄1=￥6.1969-99

Il:ExchangeRateBasic rate and cross rate Basic rate: the exchange rate between the national currencyand base currency. Cross rate: Generally, it is just reported the basic rate on theforeign exchange market of each country. The exchange ratebetween the national currency and the currency of othercountries can be calculated according to the basic rate, whichis the cross rate

II: Exchange Rate ❖Basic rate and cross rate ❖ Basic rate: the exchange rate between the national currency and base currency. ❖ Cross rate: Generally, it is just reported the basic rate on the foreign exchange market of each country. The exchange rate between the national currency and the currency of other countries can be calculated according to the basic rate, which is the cross rate