1 / 29

Foreign Exchange Determination

Foreign Exchange Determination. Forecasting exchange rates. Forecasting (fundamental analysis). fundamental analysis Theoretical analysis Purchasing power parity balance of payments Cash flow analysis monetary & fiscal policies Stock analysis regulatory policies Trade policies

gizi
Télécharger la présentation

Foreign Exchange Determination

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Foreign Exchange Determination Forecasting exchange rates Foreign Exchange Determination

  2. Forecasting (fundamental analysis) • fundamental analysis • Theoretical analysis • Purchasing power parity • balance of payments • Cash flow analysis • monetary & fiscal policies • Stock analysis • regulatory policies • Trade policies • political risk Foreign Exchange Determination

  3. Theoretical analysis • Purchasing power parity • Assuming efficient markets • Real world prices converge • Measurement problems • Market baskets used to measure inflation are not consistent • Fisher effect • Interest rate parity Foreign Exchange Determination

  4. Parity conditions Purchasing Power Parity Fisher effect International Fisher effect Interest rate parity Unbiased predictor Foreign Exchange Determination

  5. For parity to hold efficient market conditions needed Thick markets many buyers, many sellers Perfect information Low or no market frictions Transactions costs Taxes, tariffs May be most useful pointing to the existence of frictions in the market Parity conditions Foreign Exchange Determination

  6. Cash flow analysis Current acct, capital acct, financial acct, reserve acct Relative demands and supplies of dollars in the exchange markets Function of real cash flows to pay for Trade in goods, services, transfers FDI, investment in real assets Portfolio investment, investment in financial assets Balance of payments Foreign Exchange Determination

  7. Changes in supply and demand for money BOP tracks the foreign exchange as a medium of exchange (flow) Store of wealth (stock) Demand for dollars to hold Moderates BOP influences China holding dollar assets Other currencies are substitutes Moving from dollar reserves to euro reserves Monetary Foreign Exchange Determination

  8. Central Bank affects on liquidity • cash & currency • directly supplied by CB • checking accounts & debit cards • money multiplier determined • CB directly affects the multiplier • reserve requirements • capital requirements • credit cards • availability of credit indirectly affected by CB Foreign Exchange Determination

  9. Factors affecting money & exchange rates • economic growth • economic growth increases demandfor base • inflation • CB controls the supply of base money • interest rates • CB controls the bank rate directly • CB influences term structure of interest rates indirectly • political risk Foreign Exchange Determination

  10. Economic Growth • Growth increases the demand for money • demand for money curve shifts up • Assume CB keeps money supply constant • no change in the vertical supply curve • the value of money increases • prices and value of money inversely related • domestically - deflation • internationally -exchange rate appreciation Foreign Exchange Determination

  11. Money Supply • Central Bank increases supply of money • supply curve shifts out • Assuming no change in demand for money • the demand for money curve remains stationary • the value of money decreases • prices and value of money inverselyrelated • domestically - inflation • internationally - exchange rate depreciation Foreign Exchange Determination

  12. Bonds, stocks, currencies are close substitutes Changes in demand for financial assets (other than money) Portfolio diversification South American investors Saudia Arabian investors Capital flight Seeking efficient markets Properly priced financial assets Asset market Foreign Exchange Determination

  13. Term Structure of Interest Rates iT New term structure of interest rates after CB increases bank rate Term to maturity Foreign Exchange Determination

  14. Shift in Term Structure of Interest Rates • Central bank changes the bank rate • only rate directly controlled by CB • least risky rate in the economy • no default risk • little interest rate risk - overnight funds rate • other rates will ratchet up relative to risk • default - ability to pay • interest rate risk - relative to term to maturity Foreign Exchange Determination

  15. Jump Shift in Term Structure iT Jump in term structure after a large change in political risk Term to maturity Foreign Exchange Determination

  16. Small change in power structure new rules some increase in uncertainty about future small discrete change in market risk premium Large change in power structure systemic change in the economy large increase in uncertainty about future large discrete change in market risk premium Jump Shift in Term Structure Foreign Exchange Determination

  17. Political risk (anticipated) • Fiscal policies • taxes, expenditures • deficit and debt policies • Monetary policies • relative inflation, interest rates • exchange rate (foreign reserves, intervention • Regulatory policies • trade restrictions • capital controls Foreign Exchange Determination

  18. Political risk (unanticipated) • Political risk • probability of change in government • probability of change in direction • external threats • crime • war • Differences between markets • official markets • unofficial markets (grey & black markets) Foreign Exchange Determination

  19. Technical Analysis • technical analysis • Time series analysis • trends • correlation Foreign Exchange Determination

  20. Political Risk • party in power makes the rules • distribution of income and wealth • tax law • transfers • regulatory environment • increase or decrease frims’ costs of doing business • change of party in power • change in the rules • for example PQ in power in Québec Foreign Exchange Determination

  21. Capital Asset Pricing System iM the market rate increases as the market becomes more risky iM - irf the market risk premium also increases I measure of risk increases with market volatility Foreign Exchange Determination

  22. gold silver cd denominated t-bills foreign currency denominated t-bills cash currency chartered bank reserves held at the Bank of Canada Unsterilized Intervention Bof C buys US dollars as an asset Canadian dollar liability increases Foreign Exchange Determination

  23. Domestic Affects of an Unsterilzed Intervention • Base money increases by amount of purchase • pressure exerted on prices to increase • inflation in the economy • Canadian goods cost more in cd Foreign Exchange Determination

  24. Foreign Affects of anUnsterlized Intervention • short run • exchange rate is not allowed to adjust • long run • higher Canadian inflation • US goods cost relatively less to Canadians • Canadian goods cost relatively more to US consumers • exchange rate remains relatively constant Foreign Exchange Determination

  25. gold silver cd denominated t-bills foreign currency denominated t-bills cash currency chartered bank reserves held at the Bank of Canada Sterlized Intervention Bof C buys US dollars as an asset No increase in B of C liabilities B of C sells equal value in other assets Foreign Exchange Determination

  26. Domestic Affects of an Sterilzed Intervention • Base money remains constant • prices remain constant Foreign Exchange Determination

  27. Foreign Affects of anSterlized Intervention • short run • exchange rate is not allowed to adjust • long run • pressure remains on exchange rate to depreciate • BOT deficit remains • eventually the cd price of the usd will increase Foreign Exchange Determination

  28. BOT (Current Account) Deficit • currency depreciation • higher prices for imports • lower prices for exports • protectionism • tariffs, quotas, import restrictions • capital controls • restrict foreign ownership • exchange market intervention Foreign Exchange Determination

  29. Covered Interest Arbitrage • Borrow 100,000 cd @ 6.75% • Buy 66,339.39 usd spot at 1.5074 • Lend 66,339.39 for one year @ 7.75% • Buy 107,585.59 cd forward @ 1.5051 • collect loan of 71,480.69 usd • take delivery of forward contract • pay off loan of 106,750 cd • riskless return of 835.59 cd Foreign Exchange Determination

More Related