Copyright © 2000 Addison Wesley Longman Slide #12-1 Chapter Twelve THE FOREIGN EXCHANGE MARKET

Copyright © 2000 Addison Wesley Longman Slide #12-1

Chapter Twelve

THE FOREIGN EXCHANGE MARKET


Foreign Exchange

Rates: 1980-98

美金 / 外幣以 1973 年 3 月為index=100


The Foreign Exchange Market

Definitions:

1. Spot exchange rate

2. Forward exchange rate

3. Depreciation

4.Appreciation

Immediate (2-day) exchange of bank deposits denominated in different currencies

%4323.4

23.405.6appreciate ，則美金

美金1

法郎05.6

美金1

法郎23.4

%3124.0

1651.024.0，則法郎貶值法郎1

美金1651.0

法郎1

美金24.0

注意 A 貨幣升值 x% ，則 B 貨幣會貶值，但不會剛好貶值 x%


The Foreign Exchange Market

Currency appreciates, country's goods prices abroad and foreign goods prices in that country1. Makes domestic businesses less

competitive 對出口不利

2. Benefits domestic consumers 對進口有利

FX traded in over-the-counter market1. Trade is in bank deposits denominated in

different currencies


Law of One PriceExample: American steel $100 per ton, Japanese

steel, 10,000 yen per ton

If E = 50 yen/$ then prices are: American Steel Japanese Steel

In U.S. $100 $200 In Japan 5000 yen 10,000 yen

If E = 100 yen/$ then prices are:American Steel Japanese Steel

In U.S. $100 $100 In Japan 10,000 yen 10,000

yen

Law of one price E = 100 yen/$

假設兩國鋼鐵品質相同 In the long run

∴ 日本人會買美國鋼鐵，不買日本鋼鐵，而美國人也會買美國鋼鐵，不買日本鋼鐵∴ 美金日圓

或者日本人或美國人都會買美國鋼鐵運到日本來賣以賺取套利，∴美鋼價格到$150 ，日鋼價格會下跌到 7,500 yen


Purchasing Power Parity (PPP)

PPP Domestic price level 10%, domestic currency大約 10% ， foreign currency 10%

1. Application of law of one price to price levels

2. Works in long run not short run

Problems with PPP

1. All goods not identical in both countries: Toyota vs Chevy

2. Many goods and services are not traded: e.g. haircuts

當日鋼價格 10% ，變成 11000yen ，則美金必須升值 10% ，變成 110yens/1 美金，因為要使得日本鋼鐵在美國能賣 $100 (11,000yen/110yen) ，也就是說美金升值要剛好抵銷掉日本鋼鐵價格的上升


PPP: U.S. and U.K


Factors Affecting E in Long Run

Basic Principle: If factor increases demand for domestic goods relative to foreign goods, E


Expected Returns and Interest ParityRETe for

Francois Al---------------------------------------------------------------------------------------------------

$ Deposits iD + (Eet+1 - Et)/Et ( 註一 )\ iD

F Deposits iF iF - (Eet+1 - Et)/Et ( 註二 )

--------------------------------------------------------------------------------------------------

Relative RETe iD - iF + (Eet+1 - Et)/Et iD - iF + (Ee

t+1 - Et)/Et

Interest Parity Condition: $ and F deposits perfect substitutes

iD = iF - (Eet+1 - Et)/Et

Example: if iD = 10% and expected appreciation of $, (Eet+1 -

Et)/Et, = 5% iF = 15%

Relative expected return on dollar deposit in terms of francs or dollars

t

tetFF

E

EEiRET

1 =interest rate on foreign deposit – expected appreciation of the dollar

=expected return on foreign deposit in terms of dollars RETF=5%-4%=1%

因為同樣的 risk 與liquidity 以及充分的capital mobility

假設市場處在均衡狀態，當本土利率低於國外利率時，則預期本土貨幣升值，以彌補本土利率之不足。若 relative RETe>0 ，則大家 ( 美國人與法國人 ) 只想 hold 美金存款，而不要法國存款

t

t

tetFD EE

EEii 亦即,,, 1

美金法郎1

tE


註一 ( 假設法國人將一塊法郎換成美金後存到美國銀行，一年後再換成法郎，其報酬率為 ) ：

1/Et*(1+iD)*Eet+1-1

= iD*(Eet+1/Et)+(Ee

t+1-Et)/Et

≈ iD+(Eet+1-Et)/Et

註二 ( 假設美國人將一塊美金換成法郎後存到法國銀行，一年後再換成美金，其報酬率為 ) ：

[1*Et*(1+iF)/Eet+i]-1

= (Et/Eet+1)*(1+iF)-1

= (iF)*(Et/Eet+1)+(Et-Ee

t+1)/Eet+1

≈ iF-(Eet+1-Et)/Et


Deriving RETF Curve

Assume iF = 10%, Eet+1 = 10 francs/$

PointA: Et = 9.5 RETF = .10 - (10-9.5)/9.5 = .048 = 4.8%

B: Et = 10.0 RETF = .10 - (10-10)/10 = .100 =10.0%

C: Et = 10.5 RETF = .10 - (10-10.5)/10.5 = 14.8%

RETF curve connects these points and is upward sloping because when Et is higher, expected appreciation of F higher, RETF

t

tetFF

E

EEiRET

1


Deriving RETD Curve

Deriving RETD CurvePoints B, D, E, RETD = 10%: so is vertical

EquilibriumRETD = RETF at E*

If Et > E*, RETF > RETD, sell $, Et

If Et < E*, RETF < RETD, buy $, Et

=iD


Equilibrium in the

Foreign Exchange

Market


Shifts in RETF

RETF curve shifts right when

1. iF : because RETF at each Et

2. Eet+1 : because

expected appreciation of F at each Et and RETF

Occurs: 1) Domestic P , 2) Tariffs and quotas 3) Imports , 4) Exports , 5) Productivity

t

tetFF

E

EEiRET

1


Shifts in RETD

RETD shifts right when

1. iD ; because RETD at each Et

Assumes that domestic πe unchanged, so domestic real rate


Factors that Shift RETF and RETD

t

tetFF

E

EEiRET

1


Response to i Because πe 1. πe , Ee

t+1 , expected appreciation of F , RETF shifts out to right

2. iD , RETD shifts to right

However because πe > iD , real rate , Ee

t+1 more than iD

RETF shifts out > RETD shifts out and Et

本國利率上升


Response to Ms 1. Ms , P , Ee

t+1 , expected appreciation of F , RETF shifts right

2. Ms , i D , RETD shifts left

Go to point 2 and Et

3. In long run, i D returns to old level, RETD shifts back, go to point 3 and get Exchange Rate Overshooting

長期

短期


Why Exchange Rate Volatility?

1. Expectations of Eet+1 fluctuate

2. Exchange rate overshooting


The Dollar and Interest Rates1. Value of $

and real rates rise and fall together, as theory predicts

2. No association between $ and nominal rates: $ falls in late 70s as nominal rate rises


Profiting from FX Forecasts

Forecasters look at factors discussed here

FX forecasts affect financial institutions managers' decisions

If forecast DM appreciate, franc depreciate, 1. Sell franc assets, buy DM assets

2. Make more DM loans, less franc loans

3. FX traders sell francs, buy DMs

Documents

Copyright © 2000 Addison Wesley Longman Slide #12-1 Chapter Twelve THE FOREIGN EXCHANGE MARKET