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How CHIPS Works
How CHIPS Works
Currency Arbitrage
Currency Arbitrage
Hedging with Forwards
Hedging with Forwards
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Автор: P.V. Viswanath. Чтобы познакомиться с картинкой полного размера, нажмите на её эскиз. Чтобы можно было использовать все картинки для урока английского языка, скачайте бесплатно презентацию «The Foreign Exchange Market.ppt» со всеми картинками в zip-архиве размером 466 КБ.

The Foreign Exchange Market

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1The Foreign Exchange Market. 14meet an obligation for full value on due
International Corporate Finance P.V. date and thereafter because it is
Viswanath. insolvent. Liquidity risk refers to the
2Market Organization. The forex market risk that a counterparty will not settle
is an electronically linked network of for full value at due date but could do so
banks, forex brokers and dealers. Trading at some unspecified time thereafter,
is done by phone, telex or SWIFT (Society causing the party which did not receive
for Worldwide Interbank Financial its expected payment to have to finance
Telecommunications), an international the shortfall at short notice. P.V.
bank-communications network. The purpose Viswanath. 14.
of the market is to permit transfers of 15The Case of Bankhaus Herstatt. On 26th
purchasing power denominated in one June 1974 the Bundesaufsichtsamt f?r das
currency to another. P.V. Viswanath. 2. Kreditwesen withdrew the banking licence
3Market Organization. The interbank of Bankhaus Herstatt, a small bank in
market is a wholesale market in which Cologne active in the FX market, and
major banks trade with each other. In the ordered it into liquidation during the
spot market, currencies trade for banking day but after the close of the
immediately delivery (within 2 business interbank payments system in Germany.
days). In the forward market, contracts Prior to the announcement of Herstatt's
are made to buy and sell for future closure, several of its counterparties
delivery. The swap market involves had, through their branches or
packages of spot and forward contracts. correspondents, irrevocably paid Deutsche
P.V. Viswanath. 3. Mark to Herstatt on that day through the
4Participants. Foreign Exchange Brokers German payments system against anticipated
– specialists in matching net supplier and receipts of US dollars later the same day
demander banks. Arbitrageurs – seek to in New York in respect of maturing spot
earn risk-free profits by taking advantage and forward transactions. P.V. Viswanath.
of differences in interest rates among 15.
countries Traders use forward contracts to 16The Case of Bankhaus Herstatt. Upon
eliminate or cover the risk of loss on the termination of Herstatt's business at
export or import orders denominated in 10.30 a.m. New York time on 26th June
foreign currencies. Hedgers (mostly (3.30 p.m. in Frankfurt), Herstatt's New
multinationals) engage in forward York correspondent bank suspended outgoing
contracts to protect the home currency US dollar payments from Herstatt's
value of various foreign account. This action left Herstatt's
currency-denominated assets and counterparty banks exposed for the full
liabilities Speculators expose themselves value of the Deutsche Mark deliveries made
to currency risk in order to profit from (credit risk and liquidity risk).
exchange rate fluctuations. P.V. Moreover, banks which had entered into
Viswanath. 4. forward trades with Herstatt not yet due
5Clearing System. Most electronic funds for settlement lost money in replacing the
transfers involving international contracts in the market (replacement
transactions take place through the risk), and others had deposits with
Clearing House Interbank Payments System Herstatt (traditional counterparty credit
(CHIPS), a computerized network developed risk). (Source:
by the New York Clearing House http://riskinstitute.ch/140960.htm). P.V.
Association. Most large US banks and US Viswanath. 16.
branches of foreign banks are members of 17The BCCI case, 1991. An institution in
CHIPS. At the beginning of the day, each London was due to settle on 5th July 1991
bank puts in a security deposit into a dollar/sterling foreign exchange
(prefunds) its CHIPS account. Interbank transaction into which it had entered two
transfers during the day are processed days previously with BCCI SA, London. The
electronically through CHIPS. At the end sterling payment was duly made in London
of the day, all CHIPS member bank balances on 5th July. BCCI had sent a message to
are netted out and their balances remitted its New York correspondent on 4th July (a
back to them using Fedwire. P.V. public holiday in the United States) to
Viswanath. 5. make the corresponding US dollar payment
6How Fedwire Works. The Fedwire system for value on 5th July. The payment message
is used by the Fed’s member banks to make was delayed beyond the time of the
interbank transactions. CHIPS is a correspondent bank's initial release of
clearing system, while Fedwire is a payments (at 7 a.m.) by the operation of a
mechanism to accomplish any interbank bilateral credit limit placed on BCCI's
transaction. In a typical funds transfer, correspondent by the recipient CHIPS
an individual or a business instructs its member. P.V. Viswanath. 17.
bank to send a funds transfer. The sending 18The BCCI case, 1991. The payment
bank debits the sender's account and remained in the queue until shortly before
initiates a fedwire funds transfer. The 4 p.m. (New York time), when it was
Federal Reserve, in turn, debits the cancelled by BCCI's correspondent, shortly
account of the sending bank and credits after the correspondent had received a
the account of the receiving bank; the Fed message from BCCI's provisional
notifies the receiving bank about the liquidators in London on the subject of
transfer. The receiving bank credits the the action it should take with regard to
recipient's account and notifies the payment instructions from BCCI London. In
recipient of the receipt of the funds. The this way, BCCI's counterparty lost the
transfer is final when the funds are principal amount of the contract. A major
received. Funds can be used by the Japanese bank also suffered a principal
recipient immediately thereafter. P.V. loss in respect of a dollar/yen deal due
Viswanath. 6. for settlement on 5th July, since yen had
7How CHIPS Works. P.V. Viswanath. 7. been paid to BCCI SA Tokyo that day,
8Spot Quotations: Direct and Indirect. through the Foreign Exchange Yen Clearing
Direct quotation – home currency price of System, and the assets of BCCI SA in New
the foreign currency quoted. In the US, York State were frozen before settlement
this would be equivalent to quoting in: of the US dollar leg of the transaction
American terms (no. of US$ per unit of took place. P.V. Viswanath. 18.
foreign currency). e.g. on 6/2/04, $1.2216 19The BCCI case, 1991. The UK
per €. This would be an indirect quote in institution's loss illustrates a
Europe. Indirect quotation – foreign particular aspect of the difficulties
currency price of the home currency. In which face the private sector under
the US, this would be equivalent to current circumstances in any attempt to
quoting in: European terms (no. of units coordinate the timing of payments; in this
of foreign currency per $). e.g. on instance, the loss would almost certainly
6/2/04, €0.8186 per $. This would be a not have occurred but for the measures in
direct quote in Europe. P.V. Viswanath. 8. place to reduce risk domestically within
9Bid-ask spread. The bid price of a CHIPS (the bilateral credit limit).
security is the price which the person Moreover, the closure of BCCI by the
quoting (e.g. a dealer) is willing to pay banking supervisors illustrates that it is
for it – the price at which anybody can generally not possible to close a bank
sell it. The ask price is the price at which is active in the foreign exchange
which the dealer is willing to sell it – market at a time when all the relevant
the price at which anybody can buy it. The payments systems have settled all its
bid-ask spread is the difference. The transactions due on a given day. In this
direct (American) quote for the euro on case, the closure required the Luxembourg
6/2/04 was 1.2262 -67, i.e. you could buy Court to appoint a liquidator, an action
a € for 1.2267 (ask), but if you wanted to which under Luxembourg law can take place
sell it, you could get only $1.2262. The only within the normal business day of the
spread is 0.0005 per €. The percentage Court. P.V. Viswanath. 19.
spread is 100(Ask-Bid)/Ask = 20Forward Exchange Rates. The forward
100(0.0005)/1.2267 = 0.04%. P.V. exchange rate is the rate that is
Viswanath. 9. contracted today for the exchange of
10Cross rates. Most currencies are currencies at a specified rate in the
quoted against the dollar; hence it may be future. A contract for such a simple
necessary to work out the cross rates for exchange is an outright forward contract.
currencies other than the dollar. For A swap contract is a combination of a spot
example, the euro was quoted on 6/2/04 at contract and a forward contract A swap-in
1.2208 -12 (direct), while the yen was Canadian is an agreement to buy Canadian
quoted at 109.99 -04 (indirect). A dollars spot and sell Canadian dollars
Japanese trader who wants to buy the euro forward. A swap-out is the reverse. A
would, implicitly be buying the dollar for forward-forward involves two forward
yen and then trading the dollar for euros. contracts of different maturities. P.V.
100 yen would buy $(100/110.04) or Viswanath. 20.
$0.9088; this could be used to buy 21Hedging with Forwards. The forward
€0.9088/1.2212 = €0.7442 €1 would buy market can be used to hedge foreign
$1.2208, which would buy 1.2208(109.99) = exchange risk. Suppose a US company buys
134.28 yen; to buy 100 yen, you would need textiles from England with payment of ?1
€100/134.28 = €0.7447. Hence the m. due in 90 days. The importer is
(indirect) cross quote in Japan would be implicitly short pounds. If the pound were
€0.7442 -7. P.V. Viswanath. 10. to rally during the next 90 days, the
11Currency Arbitrage. If traders quote importer would lose out – he would have to
currencies in terms of more than one base pay a larger amount in dollars. He could
currency, the possibility exists that the go long in the forward market, i.e., buy
different quotes may be inconsistent. pounds for forward delivery in 90 days.
Thus, if one dealer quotes the dollar Suppose he can negotiate a forward rate of
against the € and the same or another $1.72 per ?1. In 90 days, the bank will
dealer quotes € against the yen, and there give him ?1m. and he will give the bank
is also a dollar quote against the yen, $1.72m., irrespective of how the exchange
then consistency requires that the cross rate changes. Implicitly, his loss/gain in
dollar-yen quote equal the direct the forward market is offset by his
dollar-yen quote. If it doesn’t, the gain/loss in the spot market. P.V.
possibility of making money by trading Viswanath. 21.
against these dealers exists, assuming 22Hedging with Forwards. P.V. Viswanath.
that the discrepancy is sufficiently large 22.
to outweigh the bid-ask spreads in the two 23Forward Market Transactions. If the
transactions. P.V. Viswanath. 11. actual price is quoted, it’s called an
12Currency Arbitrage. Suppose the pound outright quote. In the interbank market,
is bid at $1.5422 in New York and the euro the forward rate is quoted as a
is offered at $0.9251 in Frankfurt and discount/premium from the spot. This is
simultaneously, the pound is quoted at called the swap rate. The difference is
€1.6650, ask, in London. An arbitrageur known as points. On 6/2/04, the spot
can sell ?1 for $1.5422 in New York, buy GBP/USD quote was 1.8350/ 1.8355 on
1.5422/0.9251 = €1.6671 with the dollars Moneyline. The one-year forward rate was
in Frankfurt, and finally buy quoted as -536.25/-533.25 This implies an
1.6671/1.6650 = ? 1.0012391 with the outright quote of (1.8350-.053625)/
euros, in London for a profit of 0.124%. (1.8355-.053325) or 1.781375/ 1.782175.
P.V. Viswanath. 12. P.V. Viswanath. 23.
13Currency Arbitrage. P.V. Viswanath. 24Forward rates. On June 2, 2004, the
13. GBP/USD spot rate was 1.8302/1.8323 and
14Settlement risk. Settlement risk is the forward rates on www.ozforex.com.au
the risk that a settlement in a transfer were: We can compute the implied forward
system does not take place as expected. discount as (forward – spot)/spot x
This can happen if one party defaults on (360/#days). Hence the 3-month pound bid
its clearing obligations to one or more is quoted at a discount of 3.33%, since
counterparties. Settlement risk comprises [(1.81509-1.8302)/ 1.8302]x(360/90) =
both credit and liquidity risks. The -0.033. P.V. Viswanath. 24.
former arises when a counterparty cannot
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