Tài chính doanh nghiệp - Topic 5: Exchange rates, spot quotes, transactions, forwards, and appreciations

Topic #5: Exchange Rates, Spot Quotes, Transactions, Forwards, and AppreciationsL. GattisMultinational Financial Management1Learning Objectives2Students can obtain and interpret exchange ratesStudents can convert currencies usingdirect and indirect exchange rate quotationsBid and Ask quotationsStudents can compute and interpret currency appreciations and depreciationsStudents can compute forward premiumsDirect and Indirect Prices: Latte3The price of a Latte is 3.30 U.S. dollarsDirect Price Quote: $3.30/LatteThis a called a direct quote in USD for an American buyerYou could also say that the Latte price of a USD is 0.3030 LatteIndirect Quote: 0.3030 Latte/USDThis a called a indirect quoteLattes are always quoted in direct terms$3.25Direct and Indirect Prices: Euro4The price of a Euro is 1.25 U.S. dollarsDirect Quote: $1.25/EuroThis a direct quote in USD for an AmericanYou could also say that the euro price of a USD is .80 euroIndirect Quote: €0.80/USDThis a called a indirect quoteThe euro is usually quoted in direct terms$1.25/€Direct and Indirect Prices: Danish Kroner5The price of one Krone is .16 U.S. dollarsDirect Quote: $0.16/KroneThis a direct quote in USD for an AmericanYou could also say that the krone price of a USD is 6.25 kroneIndirect Quote: Kr 6.25/USDThis a called an indirect priceThe krone is usually quoted in indirect terms, others includeJap. Yen, Swiss Franc, Can. dollar, Chinese yuan, Mexican pesoKr6.25/$6ISO Currency Codes7 and Currency Pairs8 FormatBASE-QUOTE (EUR-USD)BASEQUOTE (EURUSD)BASE/QUOTE (EUR\USD)Currency Conversions10Suppose the USD-CAD exchange rate is 1.05. How many CAD (C$) can you exchange for $100 USD?How many USD can you exchange for C$100?   Concept Check11Suppose the yen quote is ¥78/$. How many USD dollars could you exchange for 10,000 yen?$128.21$780,000Suppose the pound is selling for $1.55. How many pounds could you exchange for $10,000?₤6,451.61₤15,50012Calculating Currency Appreciations and DepreciationCurrency Appreciation = (s1 - s0)/ s0 where s0 = old currency value s1 = new currency value When using this equation you are describing the appreciation or depreciation of the “denominator currency”(If you want to talk about the numerator currency use this equation to calculate appreciation = (s0 - s1)/ s1) or invert exchange rates and use the previous example.13Appreciation: Direct Quotes EXAMPLE: € Appreciation If the dollar value of the € goes from $1.50 (s0) to $1.65 (s1), What is the appreciation or depreciation of the €? What is the appreciation or depreciation of the $?   Hint: Euro appreciated, USD depreciated14Appreciation: Indirect Quotes EXAMPLE: C$ AppreciationThe USD-CAD rate goes from C$1.05 (s0) to C$1.03 (s1), What is the appreciation or depreciation of the US$? What is the appreciation or depreciation of the C$?   Hint: USD depreciated, C$ appreciated15Concept CheckThe yen quote goes from ¥95 to ¥85.The quote ¥95 is the price of what currency?YenUSDWhich currency depreciated? YenUSDWhat is the appreciation or depreciation of the $?11.76%10.53%-11.76%-10.53%What is the appreciation or depreciation of the ¥?11.76%10.53%-11.76%-10.53%Bid – Ask Exchange Rates16Travelex or American Express currency offices at the airport use one exchange rate for buying and one for selling. Listed below are the Travelex USD rates for 8/10/2010British PoundTravelex: $1.43 – $1.85Danish KronerTravelex : Kr4.92 – Kr6.30Customer buys pounds (selling dollars) at this priceCustomer buys dollars (selling kroner) at this priceBid-Ask Quotations17How many Kroner can you buy for $100?Since you are buying Kroner and Selling Dollar – Use USD Bid$100 x “USD Bid” (Kr4.92/$) = Kr492Alternative rule: Customer always loses – gets less, pays more $100 x “Lowest Rate” (Kr4.92/$) = Kr492 Bid Kr 4.92/$ – Ask Kr 6.30/ $Price to Sell $ / Buy KrPrice Buy $ / Sell KrBid (Low) Price of $Ask (High) Price of $Bid-Ask Quotations18How many kroner will it cost to buy $100?Since you are buying USD and Selling kroner – Use USD ask$100 x “USD ask” (Kr6.30/$) = Kr630Alternative rule: Customer always loses – gets less, pays more $100 x “Highest Rate” (Kr6.30/$) = Kr630 Bid Kr 4.92/$ – Ask Kr 6.30/ $Price to Sell $ / Buy KrPrice Buy $ / Sell KrBid (Low) Price of $Ask (High) Price of $Spot vs. Forward Exchange Rates19A 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 deliveryBloomberg EURUSD Forward Quotes20Forward Premium and Discount: Direct Quote21Suppose 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 Quotes22Suppose 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%Concept Check23The 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 Discount24Annualized 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.Assigned Problems – Set A25How many yuan could Bank X get for 100,000 USD? How many USD could Bank X get for 1,000,000 peso? How many USD could Bank X get for 500,000 yen? How many euros could Bank X get for 50,000 USD? How many USD could bank X get for 10,000 Canadian dollars? Suppose the euro exchange rate decreases from $1.25 to $1.22. What was the appreciation of the euro and USD? Suppose the Norwegian krone went from Kr5.50 per euro to Kr6.5. What was the appreciation of the krone? What was the appreciation of the euro? Suppose the pound went from £1.5 to £1.7 per euro. What was the appreciation of the pound? What was the appreciation of the euro? Exchange Rates for problems A1-5 USDCNY = 6.76 EURUSD = $1.30 USDMXN = 12.7 GBPUSD = $1.57 USDJPY = 85.18 CADUSD = $0.96 Assigned Problems – Set B26How many USD could it cost to buy 1,000,000 yen in 3 months? How many USD would you receive for 500,000 yen in 3 months? How many yen would it cost to buy $50,000 in 3 months? How many euros could you buy for 100,000 USD in 3 months? What is the euro’s annualized forward premium in USD terms (use ASKs)? What is the yen’s annualized forward premium in USD terms (use ASKs)? Exchange Rates for problems B1-6 Interbank Spot Bid - Ask 3-month Forward Points (Bid – Ask)EURUSD $1.2530 – 1.2568 $1.25575 – 1.25998USDJPY ¥85.54 – 85.75 ¥83.988 – 84.395 Textbook27Shapiro 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 marketAdditional problems using exchange rates