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1、,International Economics,Chapter 10 Exchange Rates and The Foreign Exchange Market,Main Contents Exchange rates and international transition The foreign exchange market The demand for foreign currency assets Equilibrium in the foreign exchange market,Key termsappreciation depreciationexchange rate r
2、ate of appreciation forward exchange rate spot exchange rate interbank trading interest parity condition liquidity risk rate of return vehicle currency real rate of returninterest rate arbitrage,. Exchange rates and international transition. Foreign Exchange,Dynamic definition,Static definition,. Ex
3、change rateConception: P329Two kinds quotations,Direct quotation 0.009198 per yen,Indirect quotation￥ 108.72 per dollars,台幣汇率 2004/12/114:33,How to calculate cross rate? Suppose 3 currencies: A, B and C. (/)/(/)/For example, someday on New York foreign exchange market, 1French Franc=0.25 dollar， 1Fr
4、ench Franc=0.57DMThen, 1dollar0.57DM0.25dollar2.28DMor 1DM0.25dollar0.57DM0.44dollar,c.Two changes in exchange rate, 1.50 per pound, 1.25 per pound,pound: depreciation dollar:appreciation, 1.50 per pound, 1.75 per pound,pound: depreciation dollar:appreciation,d.Classification of exchange rate,Basic
5、rate(key currency, pegged currency,Cross rate,Buying rateSelling rate Middle rate=(buying rate+selling rate) 2,Spot rate Forward rate,. Exchange rate and international transition a. Domestic and foreign prices ( 1.50 /) (50)= 75 ( 1.25 /) (50)= 62.50 ( 1.75 /) (50)= 87.50 Conclusion:P331-332 b.Excha
6、nge rates and relative prices Table13-2 Conclusion,. The foreign exchange market. Conception P333. The actors a. commercial banks b.corporations c.non-bank financial institutions d.central banks. Characteristics of the market a.two conceptions: arbitrage; vehicle currency b.characteristics,. Deals o
7、n the foreign exchange marketa. Spot rates and forward rates,Apple computer,pound account,National Westminister Banks,pounds,Bank of America,Wells Fargo,dollar account,dollars,Spot Rates,￥9000 100 30 days later0.0105/yen 9000 0.0105=94.50 +$5.500.0115/yen 9000 0.0115=103.50 $3.500.0107/yen 9000 0.01
8、07=96.30 +$3.70,Forward Rates,b. Foreign exchange swaps,multinational company,Swiss Francs,1 million,suppliers,1 million,in three months,c.Futures and options,put optioncall option,Hedging,Long Hedge / Buying Hedge,Short Hedge / Selling Hedge,Speculation,. The demand for foreign currency assets,. As
9、sets and asset returns a. defining asset returns,dollar rate of return (nominal rate of return),real rate of return,Dollar rate of returninflation,Real rate of return,RiskLiquidity,asset returns,b.three factors influencing asset returns,. Interest rate, exchange rate and asset returns 5 steps Exampl
10、e: $1.1/ $1.165/ : 5% $: 10% step 1: $1.1/ 1=$1.1 step 2: 1 5% 1.05 step3: 1.05 $1.165/ =$1.223 step4: (1.2231.10)/1.10=11% step5: 11%10%Conclusion: euro deposit offers the higher return.,Question:$0.7/DM $0.76/ DM RDM : 5% R$ : 10%,Which offers the higher rate of returns?,A simple rule R : todays i
11、nterest rate on one-year euro deposits R$ : todays interest rate on one-year dollar deposits E$/ : todays dollar/euro exchange rate Ee$/ : dollar/euro exchange rate expected to prevail a year from todayThe expected rate of return on a euro deposit in terms of dollar= R +(Ee$/ - E$/ )/ E$/,R$ - R +(E
12、e$/ - E$/ )/ E$/ ,Positive : dollarNegative: euroZero: same,Same Question:E$/DM = $0.7/DM Ee$/DM = $0.76/ DM RDM : 5% R$ : 10%,. Equilibrium in the foreign exchange market .The basic equilibrium condition -Interest Parity Conception Formula,R$ = R +(Ee$/ - E$/ )/ E$/ ,. Determination of the equilibr
13、ium dollar/euro exchange rate,E$/,E$/,R$,E$/,E*$/,R$,R*,R*,R*,E1$/,E2$/,E$/,2,1,R$,R*,a. At point 2,the return on dollar deposits is lower that on euro deposits.,b. At point 3,No one would demand for dollar deposits,Excess demand for euroExcess supply of dollar,The dollar/euro exchange rate falls to
14、wards E1$/,Rate of return(in dollar terms),E1$/,E2$/,E$/,2,1,Return on dollar deposits,E3$/,3,c. At point 1: equilibrium,the return on dollar deposits is as same as that on euro deposits.,No excess demand for euro and dollarNo excess supply Excess of dollar,The dollar/euro exchange rate falls toward
15、s E1$/,. Interest rates and equilibrium,A rise in the interest rate on dollars,A rise in the interest rate on euro,conclusion,R$ R* ,Dollar appreciation,E1 $/ E2 $/,New equilibrium point 2,At point 1,E$/,E1$/,E2$/,R* ,R$,R$,1,2,1,R$ R*,Dollar depreciation,E1$/ E2$/,New equilibrium point 2,At point 1
16、,R, ,E$/,E2$/,E1$/,R$,2,1,R*,Conclusion : P347,. The expected exchange rate and equilibrium,Current exchange rate: $1.00/ Future exchange rate: $1.05/ The expected rate of dollar depreciation =(1.051.00)/1.00=5%,Future exchange rate: $1.06/ The expected rate of dollar depreciation =(1.051.00)/1.00=5%,Conclusion : P350,
