lecture 2 the exchange rate and foreign exchange transactions 国际金融教材.pptVIP

Contents;I. The Foreign Exchange I.1 A Simple Definition Foreign Exchange is the asset denominated in foreign currency that can be used to settle a country’s imbalances of balance of payments. Free convertibility General acceptability Payable;I.2 Functions Value measurement Store of value A means of international settlements A means of intervention;II. Foreign Exchange Market Foreign Exchange Market refers to the market(s) in which international currencies trades take place (Table 2-1-1, Table 2-1-2 and Table 2-1-3 for a survey). II.1 Actors Commercial banks (CBs) Corporations Nonbank financial institutions Central banks;Foreign Exchange Market;Table 2-1-3 Foreign exchange market turnover by currency pair Source: BIS. In billions of US dollars and per cent.;II.3 Market Microstructure;The Exchange Rate;I.2 Basic Concepts Quotation Direct Quotation, also labeled as Price Quotation. The price of a unit of foreign currency in terms of home currency. e.g.2-1-1. US$1=RMB7.3046 Indirect Quotation, or Quantity Quotation. The price of a unit of home currency in terms of the foreign currency. e.g.2-1-2. RMB1=US$0.1369 For a more real example, see Table 2-1-4.;;Nominal rate vs. real rate The Nominal Exchange Rate is the rate publicly announced or released by a country’s monetary authorities. The Real Exchange Rate (RER) is the rate adjusted by the relative prices between the countries under consideration. Let P, P* and S denote domestic and foreign prices, and the exchange rate, respectively. The real exchange rate can be defined as follows, RER=SP*/P See Table 2-1-1 and Table 2-1-2.;Table 2-1-2 Nominal and real rates Source: NBSC; International Statistical Yearbook (2005);Figure 2-1-1 RMB real exchange rate Source: Author’s estimation.;Effective exchange rate The Effective Exchange Rate is a weight average of a money basket made up of a country’s main trading partners’ currencies. The weight can be measured by