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Chapter 18

Forward Exchange and International Financial Investment

Forward Exchange and International Financial Investment This chapter presents the uses of forward foreign exchange rates and the returns and risks of international financial investments, both covered and uncovered. It begins by noting that in many situations people or organizations are exposed to exchange rate risk, because the value of the individual's income, wealth, or net worth changes when exchange rates change unexpectedly in the future.

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Slide18
知识点7
案例4
习题60

Knowledge Points

知识点

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Exchange Rate Risk

This chapter presents the uses of forward foreign exchange rates and the returns and risks of international financial investments, both covered and uncovered. It begins by noting that in many situations people or organizations are exposed to exchange rate risk, because the value of the individual's income, wealth, or net worth changes when exchange rates change unexpectedly in the future.

  • You are exposed to exchange-rate risk if the value of your income or wealth or net worth changes when exchange rates change unpredictably in the future.
  • Hedging
  • is taking an action to reduce your exposure to exchange-rate risk.
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International Financial Investment

Forward Exchange and International Financial Investment

  • Forward Exchange and International Financial Investment
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International Investment With Cover

This chapter presents the uses of forward foreign exchange rates and the returns and risks of international financial investments, both covered and uncovered. It begins by noting that in many situations people or organizations are exposed to exchange rate risk, because the value of the individual's income, wealth, or net worth changes when exchange rates change unexpectedly in the future.

  • Decisions about international investments are based on the returns and risks of the available investment alternatives.
  • Covered international investment
  • is hedged exposure to exchange-rate risk.
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International Investment Without Cover

This chapter presents the uses of forward foreign exchange rates and the returns and risks of international financial investments, both covered and uncovered. It begins by noting that in many situations people or organizations are exposed to exchange rate risk, because the value of the individual's income, wealth, or net worth changes when exchange rates change unexpectedly in the future.

  • The investor is exposed to exchange-rate risk, because the actual return depends on the actual value of the future spot exchange rate, which is uncertain at the time the investment is made.
  • At the time the investment is made, the investor can use the expected future spot rate (
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Does Interest Parity Really Hold? Empirical Evidence

It is more difficult to test uncovered interest parity, because we cannot observe the expected future spot exchange rate in the market. (If we use the forward rate as an indicator of the expected future spot exchange rate, then we are really just testing covered interest parity.) Indirect tests of uncovered interest parity suggest that it does not hold as tightly as covered interest parity.

  • Four rates are needed to test for covered interest parity: the current spot exchange rate, the current forward exchange rate, and the current interest rates in the two countries.
  • All of these rates can be seen in the foreign exchange markets and the short-term financial markets.
  • Covered interest parity holds very well, except:
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The Market Basics of Forward Foreign Exchange

An investor can compare the return on a covered international investment to the return on a home investment using the covered interest differential (CD). The exact expression is CD = (1 + if) f/e − (1 + i), where the i's are the foreign (subscript f) and domestic interest rates, e is the spot exchange rate, and f is the forward exchange rate.

  • In the forward market, deals are transacted for foreign exchange deliveries to be made at some specified future date (e.g. 30 days, 60 days, 90 days, etc.) Banks provide forward foreign exchange on all currency pairs.
  • The forward exchange market is convenient for large customers and corporations that are viewed by banks as acceptable credit risks.
  • Don’t confuse the forward rate with the future spot rate, the spot rate that will exist at a date in the future.
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Hedging Using Foreign Exchange

This chapter presents the uses of forward foreign exchange rates and the returns and risks of international financial investments, both covered and uncovered. It begins by noting that in many situations people or organizations are exposed to exchange rate risk, because the value of the individual's income, wealth, or net worth changes when exchange rates change unexpectedly in the future.

  • Hedging
  • means reducing both kinds of “open” positions in a foreign currency—both
  • long positions

Cases

案例与情境

Eurocurrencies: Not (Just) Euros and Not Regulated: The beginning and ea ...

Eurocurrencies: Not (Just) Euros and Not Regulated: The beginning and early growth of the Eurocurrency market included deposits from the government of the Soviet Union and the governments of Arab oil-exporting countries. These governments did not trust the U.S. government, but they still wanted to hold dollar bank deposits.

查看原始摘录

Eurocurrencies: Not (Just) Euros and Not Regulated: The beginning and early growth of the Eurocurrency market included deposits from the government of the Soviet Union and the governments of Arab oil-exporting countries. These governments did not trust the U.S. government, but they still wanted to hold dollar bank deposits. So, they found banks outside the United States that were willing to take dollar deposits. Even if the Soviet Union and the Arab countries had not played such a role, the Eurocurrency market probably would still have developed into a large market. Other depositors were looking to get a better return on their deposits. Banks in some countries found that they could take dollar deposits (and make dollar loans) while avoiding both U.S. bank regulations and the bank regulations of their own countries. By avoiding some of the costs of these regulations, the banks could pay a

The final section of the chapter presents some evidence on whether ...

The final section of the chapter presents some evidence on whether the various parity conditions actually hold. For several decades up to 2007, covered interest parity holds well between currencies of countries whose governments permit free movements of international capital. Larger deviations from covered interest parity arose during the global financial and economic crisis and then for the euro during the euro crisis.

查看原始摘录

The final section of the chapter presents some evidence on whether the various parity conditions actually hold. For several decades up to 2007, covered interest parity holds well between currencies of countries whose governments permit free movements of international capital. Larger deviations from covered interest parity arose during the global financial and economic crisis and then for the euro during the euro crisis. While it is not surprising that such deviations arose during the turmoil of these crises, it has been surprising that larger deviations of up to a full percentage point from parity arose at times during 2015, 2016, and 2017, as shown in the new Figure 18.3. Research indicates that stricter bank regulation imposed since the global crisis has limited the willingness of banks to commit funds to covered interest arbitrage.

11. a.For the expected future value of the euro, the future ...

11. a.For the expected future value of the euro, the future spot exchange rate expected in 90 days is U.S.$1.408/euro (= 1/0.71). This value is larger than the current spot rate, $1.400/euro, so investors are expecting the euro to appreciate.

查看原始摘录

11. a.For the expected future value of the euro, the future spot exchange rate expected in 90 days is U.S.$1.408/euro (= 1/0.71). This value is larger than the current spot rate, $1.400/euro, so investors are expecting the euro to appreciate.

A forward foreign exchange contract is an agreement to exchange a ...

A forward foreign exchange contract is an agreement to exchange a certain amount of one currency for a certain amount of another currency on some date in the future, with the amounts based on the price (forward exchange rate) set when the contract is entered. A forward foreign exchange contract is a kind of derivative contract based on exchange rates.

查看原始摘录

A forward foreign exchange contract is an agreement to exchange a certain amount of one currency for a certain amount of another currency on some date in the future, with the amounts based on the price (forward exchange rate) set when the contract is entered. A forward foreign exchange contract is a kind of derivative contract based on exchange rates. A box in the text discusses other foreign-exchange derivative contracts—currency futures, options, and swaps.

Exercises

习题与答案

题目 1Exchange Rate Risk

Company X is a perfume manufacturer and one of its popular products involves rosewood. It is deeply concerned with the market price fluctuations of rosewood. To protect this, it enters into a contract which would allow the company to buy rosewood at a specific price at a given future date. This is an example of

  • A) hedging.
  • B) speculation.
  • C) investment.
  • D) profit maximization.

正确答案：A | hedging.

难度：2 Medium Bloom's：Understand

题目 2Exchange Rate Risk

The act of taking a net asset position or a net liability position in some asset class is referred to as

  • A) hedging.
  • B) speculating.
  • C) investing.
  • D) buying.

正确答案：B | speculating.

难度：1 Easy Bloom's：Remember

题目 3Exchange Rate Risk

Which of the following is true for forward foreign exchange contracts?

  • A) Common dates for future exchange are 50, 100, and 150 days forward.
  • B) The actual currency exchange occurs after one week from the stated time period.
  • C) They are used mostly to offset net asset positions held in the foreign currencies.
  • D) They can be used for both speculation and hedging.

正确答案：D | They can be used for both speculation and hedging.

难度：1 Easy Bloom's：Remember

题目 4Exchange Rate Risk

________ means committing oneself to an uncertain future value of one's net worth in terms of home currency.

  • A) Selling
  • B) Hedging
  • C) Speculating
  • D) Importing

正确答案：C | Speculating

难度：1 Easy Bloom's：Remember

题目 5Exchange Rate Risk

Assume you are a Chinese exporter and expect to receive $250,000 at the end of 60 days. You can remove the risk of loss due to a devaluation of the dollar by

  • A) selling dollars in the 60-day forward exchange market.
  • B) buying dollars now and selling these dollars at the end of 60 days.
  • C) selling the yuan equivalent in the forward exchange market for 60-day delivery.
  • D) keeping the dollars in the United States after they are delivered to you.

正确答案：A | selling dollars in the 60-day forward exchange market.

难度：2 Medium Bloom's：Understand

题目 6Exchange Rate Risk

Assume you are an American importer who must pay 500,000 Euros at the end of 90 days when you receive 1,000 cases of French wine at your warehouse in New York. Suppose that you have not covered this transaction in the forward market. In which of the following cases will you suffer the largest loss?

  • A) The euro spot exchange rate value vis-à-vis the dollar does not change
  • B) The euro (spot) initially appreciates by 2 percent, and then depreciates by 1 percent
  • C) The euro (spot) initially depreciates by 3 percent, and then appreciates by 2 percent
  • D) The euro (spot) initially appreciates by 3 percent, and then depreciates by 2.9 percent

正确答案：B | The euro (spot) initially appreciates by 2 percent, and then depreciates by 1 percent

难度：2 Medium Bloom's：Understand

题目 7Exchange Rate Risk

Assume you are an American importer who must pay 500,000 euros at the end of 60 days when you receive 1,000 cases of French wine at your warehouse in New York. If you do not hedge this transaction, you face exchange-rate risk. The best way to remove the risk of loss due to currency fluctuations is to

  • A) buy 500,000 euros in the forward exchange market for delivery in 60 days.
  • B) invest the dollar equivalent of 500,000 euros in a dollar-denominated deposit at a French bank.
  • C) sell 500,000 euros in the forward exchange market for delivery after 60 days.
  • D) sell 500,000 euros now in the spot market.

正确答案：A | buy 500,000 euros in the forward exchange market for delivery in 60 days.

难度：2 Medium Bloom's：Understand

题目 8Exchange Rate Risk

An import-export business that finds itself in a "short" foreign-currency position risks a financial loss if

  • A) it pays attention to exchange-rate forecasts.
  • B) foreign demand for its product rises (more than expected).
  • C) the domestic currency depreciates (more than expected).
  • D) the foreign currency depreciates (more than expected).

正确答案：C | the domestic currency depreciates (more than expected).

难度：1 Easy Bloom's：Remember

题目 9Exchange Rate Risk

In a ________ contract you can effectively lock in the price at which you buy or sell a foreign currency at a set date in the future.

  • A) securities spot
  • B) covered arbitrage
  • C) currency futures
  • D) spot foreign exchange

正确答案：C | currency futures

难度：1 Easy Bloom's：Remember

题目 10Exchange Rate Risk

A ________ gives the holder the right (but not the obligation) to sell a foreign currency at some time in the future at a price set today.

  • A) forward exchange contract
  • B) currency swap
  • C) put option
  • D) call option

正确答案：C | put option

难度：1 Easy Bloom's：Remember

题目 11Exchange Rate Risk

Which of the following financial instruments provides a buyer the right (but not the obligation) to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a few years?

  • A) Letter of credit
  • B) Currency option
  • C) Currency swap
  • D) Forward contract

正确答案：B | Currency option

难度：1 Easy Bloom's：Remember

题目 12International Financial Investment

An investment exposed to exchange-rate risk is a(n) ________ international investment.

  • A) covered
  • B) uncovered
  • C) hedged
  • D) arbitrage

正确答案：B | uncovered

难度：1 Easy Bloom's：Remember

Manual Preview

教师手册摘录

Forward Exchange and International Financial Investment

This chapter presents the uses of forward foreign exchange rates and the returns and risks of international financial investments, both covered and uncovered. It begins by noting that in many situations people or organizations are exposed to exchange rate risk, because the value of the individual's income, wealth, or net worth changes when exchange rates change unexpectedly in the future. A net asset position in the foreign currency is called a long position; a net liability position is called a short position. Some individuals want to reduce their risk exposure by hedging—an action to reduce a net asset or net liability position in a foreign currency. Other individuals may actually want to take on risk exposure in order to profit from exchange rate changes, by speculating—an action to take on a net asset or net liability position in a foreign currency.

A forward foreign exchange contract is an agreement to exchange a certain amount of one currency for a certain amount of another currency on some date in the future, with the amounts based on the price (forward exchange rate) set when the contract is entered. A forward foreign exchange contract is a kind of derivative contract based on exchange rates. A box in the text discusses other foreign-exchange derivative contracts—currency futures, options, and swaps.

Because the forward exchange contract establishes a position in foreign currency, it can be used to hedge or to speculate. One hypothesis based on the use of forward foreign exchange contracts to speculate is that the pressures on the supply and demand of forward foreign exchange should drive the forward exchange rate to equal the average expected value of the future spot exchange rate.

Slide Outline

课件线索

  • Exchange-Rate Risk
  • The Market Basics of Forward Foreign Exchange
  • Hedging Using Foreign Exchange
  • Speculating Using Forward Foreign Exchange
  • Futures, Options, and Swaps
  • International Financial Investment
  • International Investment with Cover
  • Covered Interest Differential
  • Covered Interest Arbitrage
  • Covered Interest Parity
  • International Investment Without Cover
  • Expected Uncovered Interest Differential

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Mundell Trilemma Lab

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