1)International Monetary System

Transcription

1 1) (International Monetary System) 2) 3) (Balance of Payments) 4) (Foreign Exchange Market) 5) Interest Rate Parity (IRP) 6) Covered Interest Arbitrage 1 1)International Monetary System 1.1 The Gold Standard ( ) Industrial revolution in England and later in Europe bring in wealth. The rules of game is to declare par value. $ 20.67/ ounce (1 ounce = grams) / ounce Each countries must maintain adequate reserve of gold to back its currency s value. 1.2 The Inter-War Years ( ) Inadequate of gold to back currency War interupts the free movement of gold. U.S.A, U.K. and France try to restore the gold standard in 1919, 1925 and 1928 but the new parity was never resolved Fixed Exchange Rates ( ) A. The Bretton Woods Agreement (1944) (Dollar-Based System) Establish IMF and World Bank to assist member countries on monetary and structural trade problems. Announce the new par value (Adjustable Peg) $ 35/ ounce Create a new type of reserve called Special Drawing Rights (SDRs) consisting of five major currencies: USD, JPY, DM, FF, GBP ($1.35/SDR). SDRs can be exchanged only among the Central Banks. SDRs * * May 16, SDRs = US.$ March 19, SDRs = US.$ *.. 3 Reference: Finance Department ; International Monetary Fund. 4

2 (Vote) 12 IMF SDRs 1. 42, , , , , , , , , , , , , , , , , , , , , , , , (176 ) 96, ,096, , ,519, B. The Crisis of 1971 (August) The U.S. ran persistent and growing deficits on BOP. Outflows of 1/3 of official gold reserve from U.S. Federal Reserve in 7 months. The U.S. suspend official purchases or sales of gold by the Treasury. Smithsonian Agreement depreciate U.S.$ to $38/ounce and allow it to move 2.25% C. Decision to Float (1973) Most currencies were allowed to float to levels determined by market forces. U.S.$ was attacked in February 1973 and depreciated to * $42.22/ounce. : Index Jan 1973 Mar1976 Sept 1985 Feb Jan 2002 Jan 2009 :. (Major Currencies) : H.10: Foreign Exchange Rates, Federal Reserve Statistical Release, Federal Reserve Bank of New York. ( Mar ). (Exchange Equalization Fund) (U.S. $)

3 U.S. $ 1, ( : ) ( ): IMF / U.S. $ 2 ( ) / U.S. $ 1% Par Value ( Float) ( ) Par Value. Basket of Currencies Demand Supply (Daily Fixing) 4 ( ) U.S. $ Standby Credit IMF 2, ( ) ( U.S. $ 2 ) Basket

4 6 ( ) (Inflation Targeting) 13 3) (Balance of Payments). (Economic and Financial Transactions). (Resident) ( 6 ). (A Unit Period) BOPs (Monetary & Fiscal Policies). : (Money Supply) / 6% (Open Market Operations: OMOs) (FX Swap) (Standing Facilities) (End of Day Liquidity) (Money Supply) 1. Trade Flows 2. Financial Flows $ $ M M FX Dealer $ $ BOT. : 15 M1 = Cash + Current Account M2 = M1 + Saving Deposit 16

5 (Money Supply) M = D r Definitions: M = Multiplier (Money Velocity) D = Initial Money ( ) r = 6% Reserve ( ) BOPs 1. (Current Account) 1.1 (Trade Account) 1.2 (Service Account) 1.3 (Income Account) 1.4 (Current Transfers) (Capital and Financial Accounts) 2.1 (Direct Investment) 2.2 (Portfolio Investment) 2.3 (Other Investment) 3. (International Reserve Account) (Credits : + ). (Debits : - ) * Credit ; > Reserve Debit * Debit ; < Reserve Credit 20

6 3.4 (National Income) National Income, the same meaning as Gross National Product (GNP), is the value of goods and services produced by all production resources and sold to the market within a period of time. NI = C + I + G + EX - IM when NI = National Income C = Private Consumption I = Private Investment G = Government Spending EX = Export of Goods and Services IM = Import of Goods and Services NI = GNP Depre. + Cur. Transfers Indir. Taxes GNP = GDP + Net Foreign Revenues GDP = Gross Domestic Product (Unit : Millions of Baht) (161,129) (203,153) (338,341) (372,159) (40,222) 592, , ,512 (221,675) (226,782) (373,791) (417,647) (84,765) 503, , ,442 77,142 38,712 75, , , , , ,938 (35,572) (43,496) (52,569) (85,759) (105,447) (146,557) (112,358) (55,275) / 18,976 28,413 12,081 19,249 16,157 17,168 13,464 23, , , , ,530 (161,971) (413,435) (297,502) (405,448) 39,809 21,935 29,421 35, , , , , ,151 66, ,533 93, ,589 15,772 (4,369) (29,172) 87, , , ,274 (411,297) (729,371) (511,122) (513,857) - (87,619) (32,738) (64,987) 64,872 (75,759) (133,089) (65,576) (85,888) - 12,677 6,445 2,549 (4,632) (19,844) (19,686) 22,590 (31,790) - 104, , , ,635 72,174 (398,892) (453,690) (372,560) - 67,833 51,143 84,163 73,764 (374,977) (165,890) (5,265) (12,138) - (9,362) (14,058) (1,435) 635 (12,891) (11,814) (9,181) (11,481) (5,975) 2,129 (27,955) (66,763) (97,017) (121,112) 209 (24,504) 98, , ,530 54,608 (299,210) 57, ,695 (58,440) 22 (Unit : Millions of Baht) (Unit : Millions of Baht) , , , ,129 (302,493) 84, ,704 67, , , ,587 58,793 (326,747) 34, ,081 (14,266) 198, , , , , , , ,428 (109,504) (157,270) (205,976) (246,671) (288,668) (254,345) (239,892) (235,018) / 26,703 25,922 38,914 86, , , , ,236 (152,053) (80,731) (200,173) 149, , ,607 (61,663) 399, , , , , , , , ,413 (40,034) (70,537) (5,118) 126, , ,197 (229,035) (65,530) (318,439) (147,013) (386,194) (209,566) (77,443) (177,872) (120,939) 318,927-14, ,593 (1,060) (69,438) (49,764) (432,446) (281,271) 448,685 - (22,936) 9,837 7,891 18, , , ,714 (66,525) - (361,571) (442,065) (437,748) (90,370) (132,089) 92,526 (35,353) 10,119-78, ,032 49,542 (59,427) 1,833 6,498 1,598 4,924 - (27,037) (13,410) (4,819) (8,573) (34,879) 42,588 (12,619) (78,274) (16,721) 59,328 5,077 (29,565) 75,943 82, , ,640 57, ,821 2, , , , , , p 2557p 755, , , , , , ,121, , , , , , (217,367.89) (338,967.67) -321, , , , (331,320.87) (476,312.44) -247, , , , / 182, , , , , , (91,570.14) 802, , , , , , , , , , , (187,854.90) 310, , , , , , , , , , , , (171,271.50) -276, , , , (134,170.50) 201, , , , , , , , , , , , , ,893 26, , , , , , , , , , (128,984.66) 20, , , , , , , , , ,

7 ( : ) ,200, ,000, , , , , (200,000.00) (Millions of US Dollars) Transaction Gold SDRs Reserve position in the IMF Foreign currency reserves 24, , , , , , , ,933.2 Total 25, , , , , , , ,661.3 Increase (Decrease) from previous year 4, , , ,697.8 (11,757) 2, ,244.7 (2,119.3) Net Forward Position n.a. n.a. n.a. n.a. (18,006) (6,572.3) (4,794.2) (2,135.6) (400,000.00) (600,000.00) Current Account Capital and financial account Overall balance : 25 Reference: Bank of Thailand 26 (Millions of US Dollars) Transaction Gold , , , , , ,347.1 SDRs Reserve position in the IMF Foreign currency reserves 32, , , , , , , ,317.1 Total 33, , , , , , , ,008.0 Increase (Decrease) from previous year , , , , , , ,552.9 Net Forward Position (2,078.0) (485.0) 5, , , , , ,955.0 (Millions of US Dollars) Transaction Gold 1 2, , , , , ,854.2 SDRs 1, , , , , ,412.0 Reserve position in the IMF Foreign currency reserves 133, , , , , ,064.3 Total 138, , , , , ,107.6 Increase (Decrease) from previous year 27, , , , , ,181,1 Net Forward Position 15, , , , , ,130 Reference: Bank of Thailand 27 Reference: Bank of Thailand 28

8 ) (Foreign Exchange Market). ( ) ( ) (Foreign Exchange Dealers) (Spread) (Bid) (Offer). (Foreign Exchange Brokers) (Commission) Dealers. (Corporations) (International Investors). (Speculators) (Arbitrageurs). (Central Bank) 31 : Bank of International Settlement (BIS) 32

9 (Billions of US Dollars) 4.3 : Bank of International Settlement (BIS) 33 / (Direct Quotation) (Home Currency) (Foreign Currency) 33.68/U.S. $, 46.26/ (FX Dealer USD/THB = EUR/THB = 46.26). (Indirect Quotation) (Foreign Currency) (Home Currency) $0.0297/, / (FX Dealer THB/USD = THB/EUR = ) 35 (Cross Rate) Country/ Currency USD AUD GBP CAD CNY EUR HGD JPY SGD THB United States Australia Britain Canada China Euro Zone Hong Kong Japan Singapore Thailand : Bloomberg 36

10 (Spot Transaction) 37 : (Forward Transaction) (Forward Rate) (Value Date) (Interest Rate Parity: IRP) (Forward Premium/ Discount) F (1 + i ) = S (1 + i $ ) 39 :,, 40

11 Forward Rate 1 MONTH EXPORT (STANG) IMPORT (STANG) AUD CAD CHF DKK EUR GBP HKD JPY (100Yen) NZD SEK SGD USD 2 9 (Forward Rate) Bid Offer Spot (USD/THB) Forward (6 Months) 6 (0.0200) 6(0.0900) Spot (JPY/THB) Forward (3 Months) 3(0.0182) 3(0.0661) : Interest yield 3.0 % 2.5 % Yield Curve Forward Premium Eurodollar yield curve 4.6 (FX Forward Swap) (Buy/Sell) (Sell/Buy) (Dealer) 2.0 % 1.5 % Forward premium is the percentage difference of 1.0% Baht yield curve 1.0 % Days 43 44

12 4.6.1 Spot-Forward Swap ( ) (Spot Rate) ( ) (Forward Rate) Forward-Forward Swap ( ) ( ) ( ) ( ) t = 0 t = 3 $ 100,000 $ 100,000 Offer Rate Spot Market Bid Rate Forward Market t = 0 t = 3 t = 6 $ 100,000 $ 100,000 Offer Rate Bid Rate Forward 3 Forward Using FX Swap to Rollover Forward Position A USD (Forward Contract). THB A Spot Rate USD/ THB THB34.00 Forward USD (Discount) 5 7. A Rollover Buy/Sell Swap USD 1.5 B Buy Spot 21 THB Sell Forward 28 THB A B 750,000 (USD 50 USD) Forward Contract 47 Using FX Swap to Rollover Forward Position Sell F$ 1.5 m.@ Buy S$ 1.5 m.@ FX Swap Sell F$1.5 m.@33.95 Pay 750,000 [=( ) X 1.5 m.] Receive m. [=33.95 X 1.5 m.] Net Receipt = 50,925, ,000 = 50,175,000 [= THB33.45/USD] 48

13 Forward Swap Defend 2540 $ $24,000 Million Buy/Sell Swap Due Foreign Currency Deposit (FCD) C$ 1,000 S$ 23,000 F$ 23,000 35/ $ FCD 40/ $ C$ 1,000 S$ 22,000 F$ 22,000 41/ $ Inward USD FCD A/C Outward USD 45/ $ C$ 2,000 S$ 20,000 F$ 20,000 46/ $ 42/ $ C$ 3,000 43/ $ S$ 17,000 F$ 17, FCD 1. ( Import and Export Export) ( Import Export FCD $1 mn - $1 mn 12 $100 mn - $100 mn Points (Points) (Swap Rates) Outright ( ) 2.2 ( Import 1 ) $100,000 $300,

14 . (Premium) (Discount) % ( ) = (Spot - Forward) * 360 * 100% Forward n 5) Interest Rate Parity (IRP) The Difference in the National Interest Rates should be Equal to, but Opposite in Sign to, the Forward Rate Discount or Premium for the Foreign Currency, Except Transaction Costs F 1 + i f = S 1 + i d Example: SF/$ 1.01 = =.9902 ~ 1% SF/$ 1.02 % ( ) = (Forward - Spot) * 360 * 100% Spot n ) (Covered Interest Arbitrage) CIA is the Situation where Arbitrageur Takes Advantage of the Disequilibrium in Interest Rate Parity Check Arbitrage Opportunity: F 1 + i = S 1 + i $ Quotation: Spot Exchange Rate = 106/ $ 180-Day Forward Rate = 103.5/ $ Euroyen Market Rate = 4%/ Annum Eurodollar Market Rate = 8%/ Annum i $ 103.5/ $ 1.02 = 106/ $ Arbitrage Opportunity Exists is too low, i is too high 55 56

15 % Forward Premium (Discount) Covered Interest Arbitrage % ( ) = (Spot - Forward) * 360 * 100% Forward n = ( ) * 360 * 100% Borrow $1,000,000 Eurodollar rate = 8.00 % per annum x 1.04 Dollar money market End $1,040,000 $1,044,638 Arbitrage Potential = 4.83% S = /$ 180 days F 180 = /$ Forward premium is 4.83% while interest differential is 4%. Yen money market Therefore, arbitrage opportunity exists. 106,000,000 x ,120,000 Euroyen rate = 4.00 % per annum CIA Transaction 1. Borrow $1,000,000 for 6 months, paying 4.0% Pay 1,000,000 x 1.04 = $1,040,000 in 6 months 2. Immediately convert $1,000,000 at spot rate 106/ $ to 106,000, Invest 106,000,000 for 6 months, earning 2.0% Receive 106,000,000 x 1.02 = 108,120,000 in 6 months 4. Simultaneously sell 108,120,000, forward for dollars at the 180-day forward rate of 103.5/ $ Receive 108,120,000 / = $ 1,044,638 in 6 months 5. Profit on CIA at the end is = $ 1,044,638 - $ 1,040,000 = $ 4,

16 Adjustment of Arbitrage Opportunity 6.2. Market Forces 4 1. Spot strengthens from extra demand 3 2. Forward weakens because of extra sales Percentage premium on 1 foreign currency ( ) Higher demand for borrowing in the U.S.$ causes i $ goes up 4. Higher demand for depositing in the Yen causes Percent difference between foreign ( ) and domestic ($) interest rates X Y Z U 61 i goes down 5. Eventually, arbitrage opportunity disappears. 62