Concepte de baza legate de dobnzi, curs de schimb, regimuri valutare

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Concepte de baza legate de dobânzi, curs de
schimb, regimuri valutare
Academia de Studii Economice din
Bucuresti Facultatea de Relatii Economice
Internationale
Cursul II

• Lect. dr. Cristian PAUN

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Interest rate and market equilibrium

• interest rate compensation required by the
  investors because they lend money for a
  determined period of time
• interest rate market equilibrium between
  demand and supply of money

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Shifts in the demand for bonds

• Wealth
• Expected returns on bonds relative to
  alternative assets
• Expected inflation
• Risk of bonds relative to alternative assets
• Liquidity of bonds relative to alternative
  assets.

Shifts in the supply for bonds

• Expected profitability of investment
  opportunities (increase)
• Expected inflation (real cost of financing is
  falling down)
• Government activities (public deficits).

Fisher effect when expected inflation rises,
interest rates will rise
Liquidity preference framework BDMDBSMS
(Keynes)
(no real assets)
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Shifts in the demand for money

• Income level (increase)
• Price level (increase)

Shifts in the supply for money

• Central Bank expansionary monetary policy

2. Interest rate and rate of return
- Zero-cupon bond iRET(FV-IP)/IP -
RET(Pt1-PtI)/Pt current yield capital gain
RET return for holding a security from time t
to time t1 Pt, Pt1 prices at moment t and
t1 Interest payments (Coupon or Dividends)
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Risk Structure of Interest Rate

• Default risk the chance that the issuer of the
  bond will be unable to make interest payments or
  pay off the face value at the maturity
• Aaa ? Baa ? Caa (Moodys)
• AAA ? BBB ? CCC ? D (SP)
• Ex
• B Companies Mariott, Revlon
• AA Companies McDonalds, Mobil Oil
• AAA Companies General Electric, Wisconsin Bell
• Liquidity the capacity of a security to be
  cheaply and quickly converted into cash
• Income Tax Consideration in case of Municipal
  Bonds vs. T-Bonds

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Term Structure of Interest Rate

• Securities with identical risk, liquidity and
  income tax characteristics may have different
  interest rates because the maturity is different
• Yield Curve plots the yields on bonds with
  different terms to maturity but identical risk,
  liquidity and tax characteristics

US Treasury Yield Curve / November 2004
Securities with longer maturities usually have a
higher yield. If short term securities offer a
higher yield, then the curve is said to be
inverted.
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FX Markets basic concepts

• Foreign currency money from abroad circulated
  within an economy, including coins and paper
  notes.
• Exchange rate the exchange rate is the price of
  one countrys currency in terms of another
  countrys currency
• FX Market the place where brokerage firms and
  banks are connected over an electronic network
  that allows them to convert the currencies of
  most countries.
• Exchange rate regime the legal environment
  about FX transactions and FX market.

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FX Markets main characteristics

• The FX market is a highly active, highly
  decentralized market for currency conversions
  that operates almost 24 hours per day around the
  world (see the next slide).
• The vast majority of foreign exchange (FX)
  trading is done over-the-counter (OTC)
• Most transactions have the USD on one side (USD
  is a vehicle currency)
• FX Market is a Wholesale Market- Interbank
  Market and Retail--Client Market too
• About 700 banks worldwide stand ready to make a
  market in Foreign exchange.
• Non-bank dealers account for about 20 of the
  market.
• The FX market is the most active market in the
  world (1,210 trillion turnover per day,
  worldwide, in April 2001)

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Around-the-clock FX trading
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Size of the FOREX Market
Geographic Distribution of Foreign Exchange
Turnover (daily averages in April, billions of
US dollars)
Source Bank for International Settlements,
Central Bank Survey of Foreign Exchange and
Derivatives Market Activity in
April 2001, October 2001, www.bis.org.
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World inter-bank FX transactions
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World FX transactions
1.2 trillion/day
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FX Markets Direct quote vs. Indirect quote
Quoted exchange rates can be either direct or
indirect, one method is usually the convention
Direct home currency per unit of foreign
currency Examples from US perspective 1.676 US
Dollars (USD) per British Pound (GBP) 1.152 US
Dollars (USD) per Euro (EUR) Indirect foreign
currency per unit of home currency Examples from
ROL perspective 109.58 Japanese Yen (JPY) per
US Dollar (USD) 1.3664 Swiss Francs (CHF) per US
Dollar (USD)
Pound, CAD, AUD, NED - Indirect Quote USD, Euro,
ROL Direct Quote
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FX Markets The Bid / Ask Spread

• bid price--the price a dealer (NOT you) is
  willing to pay you for a currency.
• ask price--the amount the dealer wants you to pay
  for a currency.
• The bid-ask spread is the difference between the
  bid and ask prices

1 USD 30.500 550 ROL 1 USD 30.500 30.550
ROL The spread 0.050 ROL / 1 USD
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Exchange rates

• Nominal Exchange Rate the price between the
  local currency and a foreign currency
• Real Exchange Rate the nominal exchange rate
  adjusted with prices differential
• RFXNFX x (PROM-PUS)/(1PUS)
• Effective Exchange Rate the nominal exchange
  rate between a currency basket (simple or
  weighted)
• EFX1/n (NFXUSDNFXyenNFXpound)
• Effective Exchange Rate the effective exchange
  rate between a currency basket (simple or
  weighted)
• EFX1/n (RFXUSDRFXyenNFXpound)

Calculated by IMF, Morgan Guaranty Trust Company,
Federal Reserve Bank
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Cross exchange Rates

• Suppose that S(/) .50
• i.e. 1 2
• and that S(/) 50
• i.e. 1 50
• What must the / cross rate be?
• What must the / cross rate be?

• The use of cross exchange rate
• To determine exchange rate between two different
  foreign currencies
• in arbitrage transaction (buy and sell on
  different FX markets)

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Depreciation and Appreciation of a currency

• A depreciation of the local currency means that
  it takes more local currency to buy a unit of
  foreign currency
• An appreciation of the local currency is the
  opposite
• Example
• If the / exchange rate goes up from 1.20 to
  1.30 the dollar has depreciated against the euro
• but, the euro has appreciated against the dollar.
  

The relationship between depreciation of local
currency and export development !!!
Valuation / Devaluation of a currency

• When a government interviews on FX market to
  manage (to fix) the exchange rate at a specific
  level (value)
• Specific in the case of fixed exchange regimes

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Currency regimes

• Define the regulations related to the FX Rate
  mechanism (Central Bank intervention on FX
  Market, official exchange rate, exchange rate
  control)
• Fixed Exchange Regime
• Hybrid Exchange Regimes
• Dirty Float or Managed Float
• Fixed Band
• Crawling Band
• Fixed Peg
• Crawling Peg
• Currency Board.
• Free Floating Exchange Regimes

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Dirty or managed float
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Fixed Band
Anchor
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Crawling Band
Fixed Margins
Adjustable Anchor
Adjustable Margins
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Fixed and Crawling Peg
Fixed Peg
Crawling Peg
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Currency Regimes and FX Rate Control
FX Rate Control
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Convertibility of a currency

• Full convertible currency no restrictions in
  terms of transactions volume, capital transfers
  and FX Market access for residents and
  non-residents
• Partial convertible currency
• Current Account Convertibility
• Capital Account Convertibility
• No Convertibility FX Market is very restrictive

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Spot transactions

• In the inter-bank market, the standard size trade
  for a spot transaction is about U.S. 10 million
• Private information is an important determinant
  of spot exchange rates.
• Bid-Ask spreads in the spot FX market
• increase with FX exchange rate volatility and
• decrease with dealer competition.
• The settlement or value date for a spot
  transaction (the date on which the parties
  actually exchange assets) occurs two business
  days after the deal is made

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Forward Transactions

• A forward contract is an agreement to buy or sell
  an asset in the future at prices agreed upon
  today.
• Main characteristics
• Usual maturity 30, 90 and 180 days
• It is not a stock exchange contract
• Implies a direct negotiations with the bank
• It is not standardized
• It has a fixed value established in the initial
  moment
• It has not a secondary market
• Can be finished only at the maturity
• It is considered a money market instrument

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Forward transactions
Long Forward
Short Forward
Profit
Exchange Rate at the Maturity
Loss
Initial Spot Exchange Rate
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Forward Contracts and Risk Management
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Forward and Spot Quotations
Pound against USD, Euro and Yen

• Rule for pips
• If the pip for bid is higher than pip for ask
  then
• If the pip for bid is lower than pip for ask
  then

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FX Rate Determinants

• Traditional Approach (Keynes)
• Purchasing Power Parity (PPP)
• Monetary Approach (Friedman)
• Interest Power Parity
• General Equilibrium Theory
• Mundell Fleming Model
• Rudiger Dornbush Model

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Traditional Approach

• The foreign trade is the most important factor
  for FX Rate
• The current account deficit or surplus should be
  taken into consideration
• If M gt X than the local currency will depreciate
  against foreign currency
• If M lt X than the local currency will appreciate
  against foreign currency
• The Model Equation
• CSV F (p-p, Y-Y, R-R)

Prices
Interest rates
GDP Growth
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Purchasing Power Parity

• Low of one price we can write an equation for
  the law of one price as
• PiLC PiFC E
• where
• PiLC is the local currency price of good i
• PiFC is the foreign currency price of good i
• E is the dollar to euro exchange rate
• Or we can rearrange the equation to get
• E PiLC / PiFC

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Monetary Approach

• M x V P x T

M k x P x Y
ROL
FX Rate (M - M) (Y - Y) (k - k)
USD
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Interest Power Parity
(i - i)/ (1 i) (s1 s0) / (1 s0)
i interest rate (i - interest rate from
abroad) s0 initial spot exchange rate s1
predicted spot
General Equilibrium Theory
(p - p) / (1p) (d - d)/ (1 d) (f - s) /
(1 s) (s1 s0) / (1 s0)
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FX Determinants - conclusion

• Changing of FX Rate for a particular currency can
  be determined by the action of the following
  variables
• current account deficits
• real economic growth
• inflation differential
• interest rate differential
• economic structure
• monetary aggregates (M1 and M2)