INTERNAITIONALMONEIARYANDFINANCIALECONOMICS园咤Chapter2TheMarketforForeignExchangeTosephPDanielsDavidD.VanHooseCoprniueinoloumodincerennoms0ndonerntTheForeignExchangeMarketExchangeRate一Thevalueofonecurrencyrelativetoanothercurrencyasthenumberofunitsofonecurrencyreduiredtopurchaseoneunitoftheothercurrency.Foreign-Currency-DenominatedFinancialInstrument一Afinancialasset,suchasabond,astock,orabankdeposit,whosevalueisdenominatedinthecurrencyofanothernation.SpotMarketCharacteristlcsistheoldestandlargestfinancialmarketintheworld:一HasnocentraltradingfloorwherebuyersandsellersImeet一8opentwenty-fourhoursaday,exceptforshortgapsonWeekends.一Thespotmarketisamarketforimmediatedelivery(2to3dayS,Primarilyaninterbankmarketwhichisthetradingofforeign-currency-denominateddepositsbetweenlargebanks.一Globalbanksaccountforabouttwo-thirdsofthemarketVolumewhileforcigncxchangebrakersanddealersaccountforapproximatcly20percentApproximately8US1.4-1.6trilliondailyinglobaltransactions.AForeignExchangeTransaction。ToshibareceivesadollardenominatedpaymentfromBestBuy,WhichtheypresenttoFujiBank.。ToexchangethedollarPaymentfortheyenequivalent,FujiBankImaycontactanotherbank,suchasCitigroup,OrcontactaFXbroker.hneeCurrencyTradingTablesTypicalFXtablesinadailybusinesspublicationprovidespotandforwardrates.。US8egquivalerztorUS8percurrerzcyisthedollarpriceofaunitofforeigncurrency(eg.,8/6).。CurrezcyperUS8istheforeigncurrencypriceofoneUSdollar(eg.,6/8).SomeAdditionalTerminology:Direct-Indlrect叠2.10teSDirectquoteisthehomecurrencypriceofaforeigncurrency.Indirectquoteistheforeigncurrencypriceofthehomecurrency.AppreciatingandDepreciatingCurrenciesAcurrencythathaslostValuerelativetoanotherCurrencyissaidtohavedepreciated.AcurrencythathasgainedvaluerelativetoanotherCurrencyissaidtohaveQPpyeciated.。Thesetermsrelatetothemarketprocessandaredifferentfromdevaluationandrevaluation(ChapterEAppreciatingandDepreciatingCurrencies。Weusethepercentagechangeformulatocalculatetheamountofappreciationordepreciation.。Example,supposeonMondaytheMexicanpesotradedat11.3855MXN/USD,whereasonTuesdayittradedat11.1245MXN/USD,.。Thepesohasappreciated,asitnowtakesfewerpes0stopurchaseeachdollar.Theamountofappreciationis:(L1.1245一11.3855)/11.3855“100二-2.29%CLross-Rates:UnobservedRates。人cross-rateisanunobservedratethatiscalculatedfromtwoobservedrates.Forexample,thespotratefortheCanadiantdollaris1.3176C8/8,andthespotrateontheeurois1.21538/E.WhatistheCanadiandollarpriceoftheeuro(C8/E)?MNotethat(C8/8).(8/6)=C8/E.Inthisexample,(1.3176).(1.2153)=1.6013C8/E.Bid-AskSpreads。Thebidisthepricethebankiswillingtopayforthecurrency,e.g.,1.2148$/Eisthebidontheeurointermsofthedollar.。TheaskiswhatthebankiswillingtoselltheCurrencyfor,e.g.1.21588/6,istheaskontheeurointermsofthedollar.。ThetypicalratequotedinadailypublicationistheImidpointofthesetwovalues,e.g.,1.2153.