Tài chính doanh nghiệp - International transactions and currency values

Money and Capital Markets25C h a p t e rEighth EditionFinancial Institutions and Instruments in a Global MarketplacePeter S. RoseMcGraw Hill / IrwinSlides by Yee-Tien (Ted) FuInternational Transactions And Currency Values Learning Objectives To explore the functions and roles performed by the international markets within the global financial system.To see how international payments for goods and services are made, and how international borrowing and lending can be tracked through a nation’s balance-of-payments accounts.To understand how the values of national currencies are determined.IntroductionFacilitated by dramatic improvements in communication and transportation, world trade and the international financial markets have experienced enormous growth.The Balance of PaymentsOne of the most widely used sources of information concerning flows of funds, goods, and services between nations is each country’s balance of payments (BOP) accounts.This statistical report summarizes all the economic and financial transactions between residents of one nation and the rest of the world during a specified period of time.The U.S. Balance of PaymentsThe U.S. BOP25 - 5Source: Bureau of Economic AnalysisThe U.S. Balance of PaymentsThe U.S. BOP25 - 6Source: Bureau of Economic AnalysisThe U.S. Balance of PaymentsData Source: Bureau of Economic Analysis$ MillionsNet Financial FlowsBalance of Current AccountNet Capital Account TransactionsThe Problem of Different Monetary UnitsIn International Trade and FinanceDifferent monetary units are used as the standard of value in different countries.When goods and services are sold or when capital flows across national boundaries, currency exchange is often necessary.Currency exchange is risky. Speculative currency flows may also complicate government policies aimed at curbing inflation and ensuring economic growth.The Problem of Different Monetary UnitsIn International Trade and FinanceThe gold standard – During the 17th and 18th centuries, major trading nations in Western Europe made their currencies freely convertible into gold at predetermined prices.The gold exchange standard – Each currency was freely convertible into gold at a fixed rate, and also free convertible into other currencies at relatively stable prices.The Problem of Different Monetary UnitsIn International Trade and FinanceThe modified exchange standard (Bretton Woods System) – Foreign currency prices were linked to the U.S. dollar and to gold.The managed floating currency standard – Each nation chooses its own exchange rate policy, consistent with the structure of its economy and its goals. Examples of policies used include pegging, managed float, and free floating.Determining Foreign Currency ValuesIn Today’s MarketsThe foreign exchange market is an over-the-counter market, with no central trading location, no set hours of trading, and no formal code of rules.There are three major sections:  the spot market,  the forward market, and  the currency futures and options market.Foreign exchange rates are quoted as bid (buy) and ask (sell) prices by dealers.Determining Foreign Currency ValuesIn Today’s MarketsForeign exchange rates are affected by a number of factors, including:balance of payments positionsspeculation over future currency valuesdomestic political and economic conditionscentral bank interventionsThese factors may be expressed in terms of the market forces of demand and supply.Determining Foreign Currency ValuesIn Today’s MarketsPrice of $ in terms of £ (£/$)Quantity of $Supply of $(demand for £)SDemand for $(supply of £)D•D2S2•The Forward Market for CurrenciesA forward contract is an agreement to deliver a specified amount of foreign currency at a set price on some future date.There are several ways of measuring and quoting forward exchange rates:outright rate, e.g. $1.14/€ for delivery in 6 monthsswap rate, e.g. 2¢ discount from spot ($1.16/€)annualized percentage rate, e.g. 3.45% discountThe Forward Market for CurrenciesThe functions of forward contracts can be grouped into four categories:commercial covering by exporters and importers of goods and serviceshedging an investment position in a foreign currencyspeculation on future currency pricescovered interest arbitrageThe Forward Market for CurrenciesA condition known as interest rate parity exists when the interest rate differential between two nations is exactly equal to the forward discount or premium on their two currencies.When parity exists, the currency markets are in equilibrium and capital funds do not flow from one country to another.The Market for Foreign Currency FuturesForeign currency futures are contracts calling for the future delivery of a specific currency at a price agreed today, although there is usually no intent to actually deliver the currencies.They are attractive to both foreign exchange hedgers and foreign exchange speculators.Importers of goods typically use the buying hedge, while those expecting foreign currency earnings usually use the selling hedge.Other Innovative Methods forDealing with Currency RiskThe recent volatility of foreign exchange rates has given rise to an ever-widening circle of devices to deal with currency risk.Currency optionsOptions on currency futuresCurrency swapsLocal loans and Dual-currency bondsPrepayments, barter, or selective currency pricingRisk-adjusted pricingGovernment InterventionIn the Foreign Exchange MarketsA strong and stable currency encourages investment in the home country, stimulating its economic development. The US$ is also a vehicle currency that facilitates trade and investment between many nations.Hence, the United States, as well as foreign governments, have intervened in the foreign exchange market to stabilize currency values and insulate domestic economic conditions from developments abroad.Money and Capital Markets in CyberspaceFor more information about international transactions and currency values, visit: ReviewIntroductionThe Balance of PaymentsThe U.S. Balance of International PaymentsThe Current AccountThe Capital AccountThe Financial AccountDisequilibrium in the Balance of PaymentsChapter ReviewThe Problem of Different Monetary Units in International Trade and FinanceThe Gold StandardThe Gold Exchange StandardThe Modified Exchange StandardAdoption of the Managed Floating Currency StandardChapter ReviewDetermining Foreign Currency Values in Today’s MarketsEssential Features of the Foreign Exchange MarketExchange Rate QuotationsFactors Affecting Foreign Exchange RatesSupply and Demand for Foreign ExchangeChapter ReviewThe Forward Market for CurrenciesMethods of Quoting Forward Exchange RatesFunctions of the Forward Exchange MarketThe Principle of Interest Rate ParityThe Market for Foreign Currency FuturesOther Innovative Methods for Dealing with Currency RiskGovernment Intervention in the Foreign Exchange Markets