CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGE
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER
QUESTIONS AND PROBLEMS
很任性歌词QUESTIONS
1. Give a full definition of the market for foreign exchange.
Answer: Broadly defined, the foreign exchange (FX) market encompass the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.
2. What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange?
Answer: The market for foreign exchange can be viewed as a two-tier market. One tier is the wholesale or interbank market and the other tier is the retail or client market. International banks provide the core
of the FX market. They stand willing to buy or ll foreign currency for their own account. The international banks rve their retail clients, corporations or individuals, in conducting foreign commerce or making international investment in financial asts that requires foreign exchange. Retail transactions account for only about 14 percent of FX trades. The other 86 percent is interbank trades between international banks, or non-bank dealers large enough to transact in the interbank market.
3. Who are the market participants in the foreign exchange market?
Answer: The market participants that compri the FX market can be categorized into five groups: international banks, bank customers, non-bank dealers, FX brokers, and central banks. International banks provide the core of the FX market. Approximately 100 to 200 banks worldwide make a market in foreign exchange, i.e., they stand willing to buy or ll foreign currency for their own account. The international banks rve their retail clients, the bank customers, in conducting foreign commerce or making international investment in financial asts that requires foreign exchange. Non-bank dealers are large non-bank financial institutions, such as investment banks, mutual funds, pension funds, and hedge funds, who size and frequency of trades make it cost- effective to establish their own dealing rooms to trade directly in the interbank market for their foreign exchange
needs.
Most interbank trades are speculative or arbitrage transactions where market participants attempt to correctly judge the future direction of price movements in one currency versus another or attempt to profit from temporary price discrepancies in currencies between competing dealers.
FX brokers match dealer orders to buy and ll currencies for a fee, but do not take a position themlves. Interbank traders u a broker primarily to disminate as quickly as possible a currency quote to many other dealers.
银鱼的做法大全Central banks sometimes intervene in the foreign exchange market in an attempt to influence the price of its currency against that of a major trading partner, or a country that it “fixes” or “pegs” its currency against. Intervention is the process of using foreign currency rer ves to buy one’s own currency in order to decrea its supply and thus increa its value in the foreign exchange market, or alternatively, lling one’s own currency for foreign currency in order to increa its supply and lower its price.
左归丸的功效4. How are foreign exchange transactions between international banks ttled?
Answer: The interbank market is a network of correspondent banking relationships, with large commercial banks maintaining demand deposit accounts with one another, called correspondent bank accounts. The correspondent bank account network allows for the efficient functioning of the foreign exchange market. As an example of how the network of correspondent bank accounts facilities international foreign exchange transactions, consider a U.S. importer desiring to purcha merchandi invoiced in guilders from a Dutch exporter. The U.S. importer will contact his bank and inquire about the exchange rate. If the U.S. importer accepts the offered exchange rate, the bank will debit the U.S. importer’s account for the purcha of the Dutch guilders. The bank will instruct its correspondent bank in the Netherlands to debit its correspondent bank account the appropriate amount of guilders and to credit the Dutch exporter’s bank account. The importer’s bank will then debit its books to offt the debit of U.S. importer’s account, reflecting the decrea in its correspondent bank account balan ce.
5. What is meant by a currency trading at a discount or at a premium in the forward market?
Answer: The forward market involves contracting today for the future purcha or sale of foreign exchange. The forward price may be the same as the spot price, but usually it is higher (at a premium) or lower (at a discount) than the spot price.
6. Why does most interbank currency trading worldwide involve the U.S. dollar?
0用英语怎么说Answer: Trading in currencies worldwide is against a common currency that has international appeal. That currency has been the U.S. dollar since the end of World War II. However, the euro and Japane yen have started to be ud much more as international currencies in recent years. More importantly, trading would be exceedingly cumbersome and difficult to manage if each trader made a market against all other currencies.
7. Banks find it necessary to accommodate their clients’ needs to buy or ll FX forward, in many instances for hedging purpos. How can the bank eliminate the currency exposure it has created for itlf by accommodating a client’s forward transaction?
Answer: Swap transactions provide a means for the bank to mitigate the currency exposure in a forward trade. A swap transaction is the simultaneous sale (or purcha) of spot foreign exchange against a forward purcha (or sale) of an approximately equal amount of the foreign currency. To illustrate, suppo a bank customer wants to buy dollars three months forward against British pound sterling. The bank can handle this trade for its customer and simultaneously neutralize the exchange rate risk in the trade by lling (borrowed) British pound sterling spot against dollars. The bank will le
nd the dollars for three months until they are needed to deliver against the dollars it has sold forward. The British pounds received will be ud to liquidate the sterling loan.
8. A CD/$ bank trader is currently quoting a small figure bid-ask of 35-40, when the rest of the market is trading at CD1.3436-CD1.3441. What is implied about the trader’s beliefs by his prices?
Answer: The trader must think the Canadian dollar is going to appreciate against the U.S. dollar and therefore he is trying to increa his inventory of Canadian dollars by discouraging purchas of U.S. dollars by standing willing to buy $ at only CD1.3435/$1.00 and offering to ll from inventory at the slightly lower than market price of CD1.3440/$1.00.
9. What is triangular arbitrage? What is a condition that will give ri to a triangular arbitrage opportunity?
Answer: Triangular arbitrage is the process of trading out of the U.S. dollar into a cond currency, then trading it for a third currency, which is in turn traded for U.S. dollars. The purpo is to earn an
arbitrage profit via trading from the cond to the third currency when the direct exchange between the two is not in alignment with the cross exchange rate.
Most, but not all, currency transactions go through the dollar. Certain banks specialize in making a direct market between non-dollar currencies, pricing at a narrower bid-ask spread than the cross-rate spread. Nevertheless, the implied cross-rate bid-ask quotations impo a discipline on the non-dollar market makers. If their direct quotes are not consistent with the cross exchange rates, a triangular arbitrage profit is possible.
PROBLEMS
奶茶配料1. Using Exhibit 5.4, calculate a cross-rate matrix for the euro, Swiss franc, Japane yen, and the British pound. U the most current American term quotes to calculate the cross-rates so that the triangular matrix resulting is similar to the portion above the diagonal in Exhibit 5.6.
Solution: The cross-rate formula we want to u is:
S(j/k) = S($/k)/S($/j).
The triangular matrix will contain 4 x (4 + 1)/2 = 10 elements.
¥SF £$
Euro 138.05 1.5481 .6873 1.3112 Japan (100) 1.1214 .4979 .9498 Switzerland .4440 .8470
U.K 1.9077
介字组词
2. Using Exhibit 5.4, calculate the one-, three-, and six-month forward cross-exchange rates between the Canadian dollar and the Swiss franc using the most current quotations. State the forward cross-rates in “Canadian” terms.
Solution: The formulas we want to u are:
F N(CD/SF) = F N($/SF)/F N($/CD)
or
F N(CD/SF) = F N(CD/$)/F N(SF/$).
We will u the top formula that us American term forward exchange rates.
F1(CD/SF) = .8485/.8037 = 1.0557
蒲地蓝消炎片的副作用F3(CD/SF)= .8517/.8043 = 1.0589个人承包协议
F6(CD/SF)= .8573/.8057 = 1.0640
