Tài chính doanh nghiệp - Finance 407: Multinational financial management - Topic 4: Institutional foreign exchange spot and forward markets

Topic 4: Institutional Foreign exchange Spot and forward MarketsL. GattisThe Pennsylvania State UniversityFinance 407: Multinational Financial Management1Review Poll2You withdrawal Kr500 from an ATM in Copenhagen. The institutional market rate is Kr5.51/$ and the banks has a markup of 2.5%. Your bank charges a $10 foreign ATM fee and the foreign bank charges a Kr20 ATM fee. How many dollars were withdrawn? $2,946.83 $102.07 $123.01 $106.73 None of the above.Learning Objectives3Learning ObjectivesStudents understand and can recallThe size and composition of institutional (interbank) forex market Students can calculateCurrency exchange cashflows using direct and indirect quotes and bid-ask pricesForward quotes, premiums and discountsThe Foreign Exchange (Forex) Market4Unlike a centralized exchange such as the NYSE, the forex market is not a physical place, but a network of banks, dealers, and brokers.Average daily value of tradesLong-term corporate bonds: $20 billionU.S. Stock exchanges: $105 billionMortgage-backed Securities: $250 billionCurrencies: $1.2 trillion! (includes spot, forward, and swap transactions, 2001)Forex Activity Travels Around the Globe, 24-hours per day5Tokyo OpenLondon OpenNew York OpenForex Activity Primarily Takes Place in the U.K., followed by the U.S.6The U.S. Dollar Is The Most Traded Currency7Spot Transactions and Swaps are the most frequent Transactions – followed by forwards8Swaps are forward contracts with multiple delivery dates.For latest data see: Dealers9Bloomberg Spot Bid and Ask (FXGN)10Sometimes $1.4788 Bid - $1.4790 Ask is written $1.4788 – 90 - sometimes only the PIPS are quoted 788-790Sometimes 109.72 Bid – 109.74 Ask is written 109.72 – 74 - sometimes only the PIPS are quoted 72-74Poll11How many Canadian dollars would it cost to buy 100,000 pounds?198,139198,238198,195198,181None of the abovePoll12Suppose the interbank market price of the euro is $1.3115 – 1.3311The bank quote for retail customers is $1.19 - $1.45What are the USD bank profits if a customer buys 1,000 euros from the bank at retail prices and the bank buys the euros from the interbank market?-$61.60$61.60$118.90$138.50$698.74Spot vs. Forward Exchange Rates13A spot (a.k.a., “cash”) transaction requires almost immediate delivery (usually 1-2 days) of a foreign currency.A “forward” transaction requires delayed delivery of foreign exchange.Bank quotes for deliveries of 1, 3, 6, 9 and 12 months are readily available.No cash is exchanged until deliveryWays to Express Forward Rates14There are three ways to express forward rates:Outright Quotes (either direct or indirect)Points to be added or subtracted from spot rate (a.k.a., swap rates)Annualized percentage forward premium or discountForward Points – 4 Decimal Currency15EURUSD Spot Bid – Ask 1.2546 - 1.25781-Year Forward Bid – Ask Points - 49 / - 40Since the EUR is normally quoted in 4 decimal points, 1 forward point = .0001 in full quotation. Likewise -49 points = -.0049 in full quotationFull QuotationEURUSD Spot Bid – Ask 1.2546 1.25781-Year Forward Points -.0049 -.0040Forward Bid – Ask 1.2497 1.2538Negative points = forward discountForward Points – 2 Decimal Currency16USDJPY Spot Bid – Ask 78.45 – 78.551-Year Forward Bid – Ask Points 122 / 144Since the JPY is normally quoted in 2 decimal points, 1 forward point = .01 in full quotation. Likewise,122 points = 1.22 in full quotationFull QuotationUSDJPY Spot Bid – Ask 78.45 78.551-Year Forward Points +1.22 +1.44Forward Bid – Ask 79.67 79.99Positive Points = Forward PremiumForward Points – 2 Decimal Currency17USDJPY Spot Bid – Ask 78.45 – 78.551-Year Forward Bid – Ask Points 122.2 / 144.5Since the JPY is normally quoted in 2 decimal points, 1 forward point = .01 in full quotation. Likewise,122.2 points = 1.222 in full quotation. All numbers after the decimal in points are greater precision than spot.Full QuotationUSDJPY Spot Bid – Ask 78.45 78.551-Year Forward Points 1.222 1.445Forward Bid – Ask 79.672 79.995Bloomberg EURUSD Forward Quotes18The forward points after the decimal are precision greater than the spot price quote.The Bloomberg points are shown with (-) sign. Notice that the bid points > ask pointsSpot3-Month Bid= $1.471455 (1.4786 - .007145)3-Month Ask = 1.471605 (1.4787 - .007095)1-Year Bid = 1.454375 (1.4786 - .024225)1-Year Ask = 1.454665 (1.4787 - .024035)Forward Quotes in Reuters19In this case, the Reuters bid and ask forward points are added or subtracted from the last spot price (not bid and ask)The Aussie (AUSUSD) spot is $.7630 with 6-month forward points of -52.5 / -52. What is the full quote?Forward Premium and Discount: Direct Quote20Suppose the Spot Euro is $1.50 and 1-Yr Forward is $1.60 Remember that an exchange rate is the price of one currency in terms of another ($1.50 is the price of a euro for immediate delivery, $1.60 is the price for 1-year delivery)The euro is selling at forward premium, since it is more expensive to buy in the forward marketThe premium is (1.60 – 1.50)/1.50 = 6.67%For 1-year forwards, the premium for direct quotes is (Forward – Spot) / SpotForward Premium and Discount: Indirect Quotes21Suppose the Spot Yen is ¥115 and 1-Yr Forward is ¥110These quotes are actually the price of the $ (in yen terms), so the USD is at a forward discount (cheaper to buy later)Thus, the yen must be a premium (let’s prove it)$/¥ Spot = 1/115 = $.008696, Forward = 1/110 = $.009091You can see that the forward yen is more expensive (premium)The ¥ premium is (.009091-.008696)/.008696 = 4.5% using (F-S)/S --- you can use this since Yen is the denom. currencyYou can also use (S-F)/F, when you are given indirect quotes and you want to quote the foreign currency premium(115 – 110)/110 = 4.5%Poll22The Canadian dollar is selling for C$1.0245/US$ in spot markets and C$1.0059 for 3-month delivery. Is the Canadian dollar selling at a forward premium or discount against the USD?What is the 3-month Canadian dollar forward premium or discount?-1.8155%-1.8491%+18.155% +1.8491%None of the aboveExpressing Forward Quotes as an Annualized % Premium or Discount23Annualized Foreign Premium or Discount:= where t = number of days forward and the resulting percentage is the premium or discount of the “denominator” currency. Assume 30 days per month.If ft > 0, then denominator currency is at a premium. If ft < 0, then denominator currency is at a discount.Example24The 6-month yen is said to be selling at a 3% annualized premium to the dollar. The spot price is ¥90.55 per dollar. (hint: the $/¥ is at a premium) What are the 6-month forward points in (¥/$) indirect terms?Example25The Canadian dollar is selling for C$1.0245/US$ in spot markets and C$1.0159 for 9-month delivery. What is the annualized 9-month Canadian dollar forward premium or discount?Problems26How many USD would it cost to buy 1,000,000 yen today?Today = ¥1,000,000 * High $/¥ (1/85.54) = $11,690.44 How many USD would you receive for 500,000 yen today?Today = ¥500,000 * Low $/¥ (1/85.75) = $5,830.90How many yen would it cost to buy $50,000 today?Today = $50,000 * High Y/$ 85.75 = Y4,287,500; How many euros could you buy for 100,000 USD today?Today = $100,000 * Low €/$ (1/1.2568) = €79,567.15What is the EURJPY spot bid-ask outright quotation? Spot Bid ¥/€ = Low ¥/$ * $/ € = 85.54 * 1.2530 = ¥107.18 /€; Spot Ask ¥/€ = 85.75 * 1.2568 = 107.7706How many euros would it cost to buy 100,000 yen today?¥100,000 * High Spot €/ ¥ (1/Low 107.18) = € 933.01 If a banks’ retail price of the yen is ¥75/$ - ¥105/$, what are its USD profits from the bank selling 10,000 yen to a customer? (Hint: Customer buys high)$ Revenue = Y10,000 / 75 = $133.33; Cost = Y10,000 / 85.54 = $116.90; Profit = $133.33 - $116.90 = $16.43 Interbank Spot Bid - AskEURUSD $1.2530 – 1.2568 USDJPY ¥85.54 – 85.75 Assigned Problems27What are the outright full forward quotations for the yen?Bid = ¥85.54 – 1.552 = Y83.988/$; Ask = 85.75 – 1.355 = 84.395 What are the outright full forward quotations for the euro?Bid = $1.2530 + .00275 = $1.25575/€; Ask = 1.2568 + .00318 = 1.25998How many USD could it cost to buy 1,000,000 yen in 3 months? 3-mo = ¥1,000,000/83.988 = $11,906.46How many USD would you receive for 500,000 yen in 3 months? 3-mo = ¥500,000/84.395 = $5,924.52How many yen would it cost to buy $50,000 in 3 months? 3-mo = $50,000 *84.395 = Y4,219,750How many euros could you buy for 100,000 USD in 3 months? 3-mo = $100,000 / 1.25998 = €79,366.34 Interbank Spot Bid - Ask 3-month Forward Points (Bid – Ask)EURUSD $1.2530 – 1.2568 27.5 / 31.8 USDJPY ¥85.54 – 85.75 - 155.2 / – 135.5 Assigned Problems28What is the EURJPY 3-month forward bid-ask outright quotation?3-mo bid ¥/€= Low ¥/$ * $/ € = 83.988 * 1.25575 = Y105.4679 /€; 3-mo Ask = 84.395 * 1.25998 = Y106.336/€What is the euro’s annualized forward premium in USD terms (use ASKs)?Euro Annualized Premium = (F-S)/S *4 = (1.25998 – 1.2568)/1.2568 * 4 = 1.01%What is the yen’s annualized forward premium in USD terms (use ASKs)?Yens Annualized Premium = (S-F)/F * 4 = (85.75 - 84.395)/ 84.395 * 4 = 6.4% If the 6-month euro annualized premium is -2% (against the $), what is the outright ($/€) quotation and points? (use the ask spot price)Forward Quotation = 1.2568 * (1-.01) = 1.24423; Difference = 1.24423 – 1.2568 = -.01257 = -125.7 If the 6-month yen annualized premium is 5% (against the $), what is the outright (Y/$) quotation and points? (use the ask spot price)Forward Quotation = (1/85.75) * 1.025 = .011953 inverted = 83.6585; diff = 83.6585 – 85.75 = -2.0915; PIPs= -209.15Interbank Spot Bid - Ask 3-month Forward Points (Bid – Ask)EURUSD $1.2530 – 1.2568 27.5 – 31.8 (add points)USDJPY ¥85.54 – 85.75 -155.2 / - 135.5 (subtract points)Textbook29Shapiro and Sarin’s Foundation of Multinational Finance 6th Ed. Chapter 6 covers the forex markets and exchange rates includingSpot quotesBid-ask and SpreadDirect-indirect quotesCurrency CodesThe forward marketCross ratesAdditional problems using exchange ratesiClicker: Class Evaluation30How would you rate today’s class? Highest Lowest