Tài chính doanh nghiệp - Chapter 23: International transactions and currency values

Chapter 23International Transactions And Currency Values Learning Objectives To explore the functions and roles performed by the international markets within the global financial system.To see how international payments for goods and services are made, and how international borrowing and lending can be tracked through a nation’s balance-of-payments accounts.To understand how the values of national currencies are determined.IntroductionFacilitated by dramatic improvements in communication and transportation, world trade and the international financial markets have experienced enormous growth.The Balance of Payments AccountsOne of the most widely used sources of information concerning flows of funds, goods, and services between nations is each country’s balance of payments (BOP) accounts.This statistical report summarizes all the economic and financial transactions between residents of one nation and the rest of the world during a specified period of time.The U.S. Balance of International PaymentsThe transactions recorded in the balance of payments fall into three broad groups:Transactions on current account, e.g. imports and exports of goods and services, unilateral transfers (gifts)Transactions on capital account, e.g.long- and short-term investment at home and abroadOfficial reserve transactions to settle BOP deficitsThe U.S. Balance of International PaymentsPrincipal Credit and Debit ItemsRecorded in a Nation’s Balance of PaymentsThe U.S. Balance of International PaymentsU.S. international transactions are subdivided into categories – the current account, the capital account, and residual items (including a sizeable statistical discrepancy due to unreported transactions) – that help us to understand how the BOP bookkeeping system works.The U.S. Balance of International PaymentsThe Current AccountThe most important components of the current account include:The merchandise trade balanceThe service balanceNet investment incomeCompensation of employees (wages for domestic workers employed overseas relative to wages for foreigners working in the domestic economy)Unilateral transfersThe Current AccountA current account deficit generates net borrowing from abroad.In 2003, the U.S. balance on current account was a debit (–) item balance, estimated at just over $530 billion – a record number both in dollar terms and relative to the nation’s total output of goods and services (the GDP).The Capital AccountThe capital accounts in a nation’s BOP are often divided into two major subcategories: net private capital flows between private individuals and institutions; and net official capital flows, involving governments, central banks, and various government agencies. Capital investment activity abroad also may be divided into short-term capital flows, direct investments, and portfolio investments.The Capital AccountIn 2003, there was a net private capital inflow into the U.S. from abroad of $295 billion.America’s net investment position went from positive to negative about two decades ago and has continued to head downward.This has enabled the U.S. to finance a substantial portion of its merchandise trade deficit and has supported the creation of new U.S. businesses and additional jobs.Official TransactionsWhen a nation has a BOP deficit, it must settle up with other nations by surrendering assets or claims to foreign accounts. Official capital flows usually consist of the movement of assets that are readily transferable in order to make international payments – e.g. transferring the ownership of gold, convertible foreign currencies, deposits held in the IMF, SDRs.Disequilibrium in the Balance of PaymentsThe U.S. has relied on foreign credit, foreign capital inflows, and its stock of gold, foreign currencies, and other official assets to settle its BOP deficits. However, the amount of these financial devices is limited. Relying on foreign capital inflows can be dangerous too.The Problem of Different Monetary UnitsIn International Trade and FinanceDifferent monetary units are used as the standard of value in different countries.When goods and services are sold or when capital flows across national boundaries, currency exchange is often necessary.Currency exchange is risky. Speculative currency flows may also complicate government policies aimed at curbing inflation and ensuring economic growth.The Problem of Different Monetary UnitsIn International Trade and FinanceThe gold standard – During the 17th and 18th centuries, major trading nations in Western Europe made their currencies freely convertible into gold at predetermined prices.The gold exchange standard – Each currency was freely convertible into gold at a fixed rate, and also free convertible into other currencies at relatively stable prices.The Problem of Different Monetary UnitsIn International Trade and FinanceThe modified exchange standard (Bretton Woods System) – Foreign currency prices were linked to the U.S. dollar and to gold.The managed floating currency standard – Each nation chooses its own exchange rate policy, consistent with the structure of its economy and its goals. Examples of policies used include pegging, managed float, and free floating.Determining Foreign Currency ValuesIn Today’s MarketsThe foreign exchange market is an over-the-counter market, with no central trading location, no set hours of trading, and no formal code of rules.There are three major sections:  the spot market,  the forward market, and  the currency futures and options market.Foreign exchange rates are quoted as bid (buy) and ask (sell) prices by dealers.Determining Foreign Currency ValuesIn Today’s MarketsRecent Foreign Exchange Rates:The U.S. Dollar vs. Other Key Currencies(Figures Are Currency Units per U.S. Dollar Except as Noted)Determining Foreign Currency ValuesIn Today’s MarketsHow to Calculate Foreign Exchange RatesSource: Based on a similar exhibit developed originally by the Public Information Center of the Federal Reserve Bank of Chicago.Determining Foreign Currency ValuesIn Today’s MarketsDetermining Foreign Currency ValuesIn Today’s MarketsDetermining Foreign Currency ValuesIn Today’s MarketsForeign exchange rates are affected by a number of factors, including:balance of payments positionsspeculation over future currency valuesdomestic political and economic conditionscentral bank interventionsThese factors may be expressed in terms of the market forces of demand and supply.Determining Foreign Currency ValuesIn Today’s MarketsPrice of $ in terms of £ (£/$)Quantity of $Supply of $(demand for £)SDemand for $(supply of £)D•D2S2•Determining Foreign Currency ValuesIn Today’s Markets23 - 26The Forward Market for CurrenciesA forward contract is an agreement to deliver a specified amount of foreign currency at a set price on some future date.There are several ways of measuring and quoting forward exchange rates:outright rate, e.g. $1.14/€ for delivery in 6 monthsswap rate, e.g. 2¢ discount from spot ($1.16/€)annualized percentage rate, e.g. 3.45% discountFunctions of the Forward Exchange MarketThe functions of forward contracts can be grouped into four categories:commercial covering by exporters and importers of goods and serviceshedging an investment position in a foreign currencyspeculation on future currency pricescovered interest arbitrageFunctions of the Forward Exchange MarketA condition known as interest rate parity exists when the interest rate differential between two nations is exactly equal to the forward discount or premium on their two currencies.When parity exists, the currency markets are in equilibrium and capital funds do not flow from one country to another.The Market for Foreign Currency FuturesForeign currency futures are contracts calling for the future delivery of a specific currency at a price agreed today, although there is usually no intent to actually deliver the currencies.They are attractive to both foreign exchange hedgers and foreign exchange speculators.Importers of goods typically use the buying hedge, while those expecting foreign currency earnings usually use the selling hedge.Other Innovative Methods forDealing with Currency RiskThe recent volatility of foreign exchange rates has given rise to an ever-widening circle of devices to deal with currency risk.Currency optionsOptions on currency futuresCurrency swapsLocal loans and dual-currency bondsPrepayments, barter, or selective currency pricingRisk-adjusted pricingOther Innovative Methods forDealing with Currency RiskGovernment InterventionIn the Foreign Exchange MarketsA strong and stable currency encourages investment in the home country, stimulating its economic development. The US$ is also a vehicle currency that facilitates trade and investment between many nations.Hence, the United States, as well as foreign governments, have intervened in the foreign exchange market to stabilize currency values and insulate domestic economic conditions from developments abroad.Markets on the NetChicago Mercantile Exchange at www.cme.comEuropean Central Bank at www.ecb.intEuropean Community Activities at www.ecuactivities.be/FOREX News at www.forexnews.comInternational Monetary Fund at www.imf.orgMarkets on the NetThe Euro at www.euro.gov.uk/World Bank at www.worldbank.orgWorld Trade Organization at www.wto.orgChapter ReviewIntroduction to International Transactions and Currency ValuesThe Balance of Payments (BOP) AccountsThe U.S. Balance of International PaymentsThe Current AccountThe Capital AccountOfficial TransactionsDisequilibrium in the Balance of PaymentsChapter ReviewThe Problem of Different Monetary Units in International Trade and FinanceThe Gold StandardThe Gold Exchange StandardThe Modified Exchange StandardThe Managed Floating Currency StandardChapter ReviewDetermining Foreign Currency Values in Today’s MarketsEssential Features of the Foreign Exchange MarketExchange Rate QuotationsFactors Affecting Foreign Exchange RatesSupply and Demand for Foreign ExchangeChapter ReviewThe Forward Market for CurrenciesMethods of Quoting Forward Exchange RatesFunctions of the Forward Exchange MarketCommercial CoveringHedging an Investment PositionSpeculation on Future Currency PricesCovered Interest ArbitrageThe Principle of Interest Rate ParityChapter ReviewThe Market for Foreign Currency FuturesOther Innovative Methods for Dealing with Currency RiskGovernment Intervention in the Foreign Exchange Markets