Title: Concepte de baza legate de dobnzi, curs de schimb, regimuri valutare
1Concepte de baza legate de dobânzi, curs de
schimb, regimuri valutare
Academia de Studii Economice din
Bucuresti Facultatea de Relatii Economice
Internationale
Cursul II
2Interest 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
3Shifts 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)
4Shifts 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)
5Risk 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
6Term 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.
7FX 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.
8FX 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)
9Around-the-clock FX trading
10Size 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.
11World inter-bank FX transactions
12World FX transactions
1.2 trillion/day
13FX 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
14FX 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
15Exchange 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
16Cross 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)
17Depreciation 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
18Currency 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
19Dirty or managed float
20Fixed Band
Anchor
21Crawling Band
Fixed Margins
Adjustable Anchor
Adjustable Margins
22Fixed and Crawling Peg
Fixed Peg
Crawling Peg
23Currency Regimes and FX Rate Control
FX Rate Control
24Convertibility 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
25Spot 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
26Forward 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
27Forward transactions
Long Forward
Short Forward
Profit
Exchange Rate at the Maturity
Loss
Initial Spot Exchange Rate
28Forward Contracts and Risk Management
29Forward 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
30FX Rate Determinants
- Traditional Approach (Keynes)
- Purchasing Power Parity (PPP)
- Monetary Approach (Friedman)
- Interest Power Parity
- General Equilibrium Theory
- Mundell Fleming Model
- Rudiger Dornbush Model
31Traditional 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
32Purchasing 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
33Monetary Approach
M k x P x Y
ROL
FX Rate (M - M) (Y - Y) (k - k)
USD
34Interest 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)
35FX 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)