International Finance

Transcription

1 International Finance 7 e édition Christophe Boucher christophe.boucher@u-paris10.fr 1

2 Session 1 7 e édition The foreign exchange market and some stylized facts 2

3 Roadmap 1. Geographical Extent 2. Size 3. Functions 4. Participants 5. Transactions 6. Quotations and cross rates 7. Basics 8. Stylized facts 3

4 Introduction The foreign exchange market provides the physical and institutional structure through which the money of one country is exchanged for that of another country, the rate of exchange between currencies is determined, and foreign exchange transactions are physically completed. A foreign exchange transaction is an agreement between a buyer and a seller that a given amount of one currency is to be delivered at a specified rate for some other currency. 4

6 Geographical Extent Geographically, the foreign exchange market spans the globe, with prices moving and currencies traded somewhere every hour of every business day. The market is deepest, or most liquid, early in the European afternoon, when the markets of both Europe and the U.S. East coast are open. The market is thinnest at the end of the day in California, when traders in Tokyo and Hong Kong are just getting up for the next day. 6

7 Geographical Extent 24h opening 7

8 Geographical Extent The Market clock 8

9 Concentration (1) Main market places in the World 9

11 Size In 2013, the daily volume of trading on the foreign exchange market and its satellites (futures, options, and swaps) at more than USD 5 trillion (10 times the daily volume of international trade in goods and services). The US dollar remained the dominant vehicle currency (87% of all trades). The euro was the second most traded currency (33%). Several emerging market currencies, and the Mexican peso and Chinese renminbi entered the list of the top 10 most traded currencies. Trading is increasingly concentrated in the largest financial centres. Sales desks in the UK, US, Singapore and Japan intermediated 71% of foreign exchange trading, whereas in April 2010 their combined share was 66%. 11

12 Size 12

13 Size 13

14 Relative size Relative size to GDP, eq. turnover and gross trade flows 14

15 Concentration (2) Main currencies 15

16 Concentration (2) Major Currencies 16

17 Products Turnover 17

19 To what? Transfer of Purchasing Power: Transfer of purchasing power is necessary because international transactions normally involve parties in countries with different national currencies. Each party usually wants to deal in its own currency, but the transaction can be invoiced in only one currency. Provision of Credit: Because the movement of goods between countries takes time, inventory in transit must be financed. Minimizing Foreign Exchange Risk: The foreign exchange market provides "hedging" facilities for transferring foreign exchange risk to someone else. Speculate: trading in a fair game or zero-sum-game (see below) 19

21 Two faces of a global market The foreign exchange market consists of two tiers: the interbank or wholesale market, and the client or retail market. Individual transactions in the interbank market usually involve large sums that are multiples of a million USD or the equivalent value in other currencies. By contrast, contracts between a bank and its client are usually for specific amounts, sometimes down to the last penny. 21

22 Foreign Exchange Dealers: Banks, and a few nonbank foreign exchange dealers, operate in both the interbank and client markets. They profit from buying foreign exchange at a bid price and reselling it at a slightly higher ask price. Worldwide competitions among dealers narrows the spread between bid and ask and so contributes to making the foreign exchange market efficient in the same sense as securities markets. Dealers in the foreign exchange departments of large international banks often function as market makers. They stand willing to buy and sell those currencies in which they specialize by maintaining an inventory position in those currencies. 22

23 Commercial and Investment Transactions Importers and exporters, international portfolio investors, multinational firms, tourists, and others use the foreign exchange market to facilitate execution of commercial or investment transactions. Some of these participants use the foreign exchange market to hedge foreign exchange risk. 23

24 Speculators and Arbitragers Speculators and arbitragers seek to profit from trading in the market. They operate in their own interest, without a need or obligation to serve clients or to ensure a continuous market. Speculators seek all of their profit from exchange rate changes. Arbitragers try to profit from simultaneous exchange rate differences in different markets. 24

25 Central Banks and Treasuries Central banks and treasuries use the market to acquire or spend their country's foreign exchange reserves as well as to influence the price at which their own currency is traded. In many instances they do best when they willingly take a loss on their foreign exchange transactions. As willing loss takers, central banks and treasuries differ in motive and behavior form all other market participants. 25

26 Foreign Exchange Brokers Foreign exchange brokers are agents who facilitate trading between dealers without themselves becoming principals in the transaction. For this service, they charge a small commission, and maintain access to hundreds of dealers worldwide via open communication lines. It is a broker's business to know at any moment exactly which dealers want to buy or sell any currency. This knowledge enables the broker to find a counterpart for a client quickly without revealing the identity of either party until after an agreement has been reached. 26

28 Spot Transactions A spot transaction requires almost immediate delivery of foreign exchange. In the interbank market, a spot transaction involves the purchase of foreign exchange with delivery and payment between banks to take place, normally, on the second following business day. The date of settlement is referred to as the "value date." Spot transactions are the most important single type of transaction (43 % of all transactions). 28

29 Outright Forward Transactions A forward transaction requires delivery at a future value date of a specified amount of one currency for a specified amount of another currency. The exchange rate to prevail at the value date is established at the time of the agreement, but payment and delivery are not required until maturity. Forward exchange rates are normally quoted for value dates of one, two, three, six, and twelve months. Actual contracts can be arranged for other lengths. Outright forward transactions only account for about 9 % of all foreign exchange transactions. 29

30 Forwards 30

31 Swap Transactions A swap transaction involves the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. The most common type of swap is a spot against forward, where the dealer buys a currency in the spot market and simultaneously sells the same amount back to the same back in the forward market. Since this agreement is executed as a single transaction, the dealer incurs no unexpected foreign exchange risk. Swap transactions account for about 48 % of all foreign exchange transactions. 31

32 Derivatives 32

33 Derivatives FX Options et Volatility 33

35 Quotes A foreign exchange rate is the price of a foreign currency. A foreign exchange quotation or quote is a statement of willingness to buy or sell at an announced rate. 35

36 European / American quotes The most common way that dealers and brokers state foreign exchange quotations, and the way they appear on all computer trading screens worldwide, is called European terms. The European terms quote shows the number of units of foreign currency needed to purchase one USD: CAD / USD or 1 USD = CAD (USD au certain / CAD à l incertain ) or direct quote of the USD An alternative method is called the American terms. The American terms quote shows the number of units of USD needed to purchase one unit of foreign currency: USD / CAD or 1 CAD = USD (CAD au certain / USD à l incertain ) or indirect quote of the USD 1 CAD/USD = 1 / USD/CAD 36

37 Bid and Ask Quotations A bid is the exchange rate in one currency at which a dealer will buy another currency An ask is the exchange rate at which a dealer will sell the other currency. Dealers buy at the bid price and sell at the ask price, profiting from the spread between the bid and ask prices: bid < ask. 37

38 Bid and Ask Quotations A dealer provides you the following quote: USD / CAD. This suggests that the bid price for the CAD is USD /CAD and that the ask price is USD / CAD. The indirect version of this quote would be CAD /USD The spread between bid and ask prices exists for two reasons: 1. Transaction costs and dealers as financial intermediaries 2. Profits. 38

39 Example of quotes Bid-ask 39

40 Example of quotes Best bid-ask 40

41 Example of quotes Bid, Ask, High, Low, Open 41

42 The Law of One Price and Cross Rates The law of one price states that homogenous goods and assets should have the same price everywhere (efficient markets and free trade). Cross Rates: Many currency pairs are only inactively traded, so their exchange rate is determined through their relationship to a widely traded third currency (generally the USD): Example of quotations: Thai Baht: THB /USD Barbados Dollars: BBD /USD The cross rate is THB/BBD is: THB / BBD 42

43 Effective exchange rates Effective exchange rates (or Trade weighted indexes) are calculated as (geometric) weighted averages of bilateral exchange rates. The weighting pattern is time-varying and based on trades See eg Various definitions depending on on the number of bilateral ER considered (Main / Narrow / Broad) The BIS considers: Broad indices comprising 61 economies Narrow indices comprising 26 economies 43

44 Real exchange rates The Real Exchange Rate (RER) between two currencies is the product of the monial exchange rate and the ratio of prices between the two countries RER = e x P*/P (à l incertain) where e is the EURUSD (an indirect quote of the USD: 1 EUR = e USD) P* the average price of good in the euro area P the average price of good in the US BIG Mac Example: e = 1.08 / BM price at Paris = 2.5 / at NY = 3.4$ RER = 1.08 x (2.5/3.4) = 0.79 Misalignments measures: where do you buy your BM? EUR or USD is undervalued? 44

45 PPP Big Mac Latte Ikea Billy Apple Ipod Etc. 45

49 Basics Appreciation and Depreciation of Exchange Rates If one currency buys more of another currency, we say it has experienced an appreciation its value has risen, appreciated, or strengthened If a currency buys less of another currency, we say it has experienced a depreciation its value has fallen, depreciated, or weakened 49

50 Basics Exchange Rate Regimes: Fixed versus Floating There are different patterns of exchange rate behavior, known as exchange rate regimes These regimes reflect choices made by governments There are two polar regime types: fixed (or pegged) and floating (or flexible) 50

51 Basics Bounds for Russian Ruble Nominal Exchange Rate 51

52 Basics Exchange Rate Behavior: Selected Developed Countries,

54 Stylized facts Random walk behavior Non-autocorrelation of returns Instability in the short-term (high frequency) and in the longterm (low frequency) Volatility clusters (autocorrelation of absolute returns) Non-Gaussian returns at high frequencies (fat tails) Jumps Crises Non-linear persistent mean-reverting of RER 54

55 Stylized facts High low-frequency movements with floating XR 2 EUR USD 1,8 1,6 1,4 1,2 1 0,8 0, Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 55

56 Stylized facts Volatile high-frequency XR returns and time-varying volatility 6% 1 day returns 4% 2% 0% -2% -4% -6% Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 56

57 Stylized facts Volatile intermediate-frequency XR returns 15% 5 day returns 10% 5% 0% -5% -10% Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 57

58 Stylized facts Volatile intermediate-frequency XR returns 20% 1 month returns 15% 10% 5% 0% -5% -10% -15% -20% Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 58

59 Stylized facts Volatile intermediate-frequency XR returns 20% 3 month returns 15% 10% 5% 0% -5% -10% -15% -20% -25% Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 59

60 Volatile low-frequency XR returns Stylized facts 40% 1 Year returns 30% 20% 10% 0% -10% -20% -30% Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 60

61 Stylized facts Volatility clusters / autocorrelation of squared returns ( ) 0,0025 Squared returns 0,002 0,0015 0,001 0, Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 61

62 Stylized facts Volatility clusters / autocorrelation of squared returns ( ) 0,25% Squared returns 0,20% 0,15% 0,10% 0,05% 0,00% Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 62

63 Stylized facts Shape of the distribution is not the same at different time scales Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 63

64 Stylized facts Heavy tails (but precise form of the tails difficult to determine) and aggregational Gaussianity Sources: Datastream, daily data from 01/01/1958 to 17/07/2015. Computations by the author. 64

65 Stylized facts Jumps at high frequency (intra-day) 65

66 Stylized facts Crises (Asian ) Philippines NBPH Thailand NBTH Malaysia NBMY Indonesia NBID (right) Sources: BIS, monthly data from 1994 to Computations by the author. 66

67 Stylized facts Crises (Russia 1998/1999 Argentina 2001/2002)) Russia NBRU 500 Argentina NBAR Sources: BIS, monthly data from 1994 to Computations by the author. 67

68 Stylized facts Emerging pseudo-crises (Spring-Summer 2013 on the Taper tantrum) May-July 2013 XR depreciations -14,6% -13,1% -11,6% -10,4% -10,0% -8,5% -6,8% -6,3% -6,0% -5,1% -4,9% -4,8% -4,7% -4,5% -4,0% -3,8% -3,0% -2,6% -1,5% -1,3% -1,2% -1,0% -0,6% -0,3% 0,0% India Indonesia Turkey Brazil Australia South Africa Thailand Mexico Argentina Chile Malaysia Philippines Peru Russia Algeria Norway Colombia Iceland New Zealand Canada Poland Sweden Japan Romania Singapore -16% -14% -12% -10% -8% -6% -4% -2% 0% Sources: BIS, monthly data from 1994 to Computations by the author. 68

69 Stylized facts What moves FX markets? 69

70 Stylized facts 70

71 Stylized facts See also (Eichengreen and Bordo, 2002) Speculative attacks on currencies in the European Exchange Rate Mechanism in Mexican crisis ( Tequila crisis) in 1994 Iceland in 2008 Sources: BIS, monthly data from 1994 to Computations by the author. 71

72 Stylized facts Persistent RER (mean-reverting? Non-linear?) Euro area RBXM Japan RBJP 70 United Kingdom RBGB United States RBUS Sources: BIS, monthly data from 1994 to Computations by the author. 72

73 Stylized facts Persistent RER (mean-reverting? Non-linear?) Greece RBGR Italy RBIT 85 Spain RBES Portugal RBPT Sources: BIS, monthly data from 1994 to Computations by the author. 73

74 See you next week. 74