MODULE 7 the Foreign Exchange Market
Total Page:16
File Type:pdf, Size:1020Kb
Load more
Recommended publications
-
Chapter 13 * February 2021
DoD 7000.14-R DoD Financial Management Regulation Volume 5, Chapter 13 * February 2021 VOLUME0B 5, CHAPTER 13: “FOREIGN DISBURSING OPERATIONS” SUMMARY OF MAJOR CHANGES All changes are in blue font. Substantive revisions are identified by an asterisk (*) symbol preceding the section, paragraph, table, or figure that includes the revision. Unless otherwise noted, chapters referenced are contained in this volume. Hyperlinks are in bold, italic, blue, and underlined font. The previous version dated April 2019 is archived. PARAGRAPH EXPLANATION OF CHANGE/REVISION PURPOSE All Updated hyperlinks and formatting to comply with current Revision administrative instructions. 130203 Added guidance to the paragraph titled “Currency Custody Addition Accounts” from the Treasury Daily Reporting Policy Memo (FPM 19-14). 130402.F Added guidance to the subparagraph titled “Gains and Addition Deficiencies by Revaluation” from the Treasury Daily Reporting Policy Memo (FPM 19-14). Figure 13-1 Replaced Figure 13-1, which displayed the sample for Revision Department of Defense (DD) Form 2664, (Currency Exchange Record) with a sample form of the “Certificate of Change in Purchase Rate.” The DD Form 2664 can be found at DD Forms Management (https://www.esd.whs.mil/Directives/forms/). Figure 13-2 Replaced Figures 13-2, which displayed the sample DD Form Revision 2668, (Request for Bid (Purchase/Sale)) with a sample form of the “Certificate of Adjustment Due to Rounding.” The DD Form 2668 can be found at DD Forms Management (https://www.esd.whs.mil/Directives/forms/). Figure 13-3 Removed Figures 13-3, which displayed the sample DD Form Deletion 2668, (Request for Bid (Purchase/Sale) – Sale Purchase) from the chapter. -
On the Effectiveness of Exchange Rate Interventions in Emerging Markets
On the effectiveness of exchange rate interventions in emerging markets Christian Daude, Eduardo Levy Yeyati and Arne Nagengast CID Working Paper No. 288 September 2014 Copyright 2014 Daude, Christian; Levy Yeyati, Eduardo; Nagengast, Arne; and the President and Fellows of Harvard College Working Papers Center for International Development at Harvard University On the effectiveness of exchange rate interventions in emerging markets Christian Daude Organisation for Economic Co-operation and Development Eduardo Levy Yeyati Universidad Torcuato Di Tella Arne Nagengast Deutsche Bundesbank Abstract We analyze the effectiveness of exchange rate interventions for a panel of 18 emerging market economies during the period 2003-2011. Using an error-correction model approach we find that on average intervention is effective in moving the real exchange rate in the desired direction, controlling for deviations from the equilibrium and short-term changes in fundamentals and global financial variables. Our results are robust to different samples and estimation methods. We find little evidence of asymmetries in the effect of sales and purchases, but some evidence of more effective interventions for large deviations from the equilibrium. We also explore differences across countries according to the possible transmission channels and nature of some global shocks. JEL-classification: F31, F37 Keywords: exchange rate; FX intervention; equilibrium exchange rate 1 1. INTRODUCTION Few macroeconomic policy topics have been as hotly debated as the exchange rate -
Revaluation of Financial Statement Due To
Academy of Accounting and Financial Studies Journal Volume 25, Special Issue 2, 2021 REVALUATION OF FINANCIAL STATEMENT DUE TO DEVALUATION OF CURRENCY– DOES FINANCIAL STATEMENT SHOW ACCURATE VALUE OF YOUR ORGANIZATION? Muhammad Nabeel Mustafa*, SZABIST University Haroon ur Rashid Khan, SZABIST University Salman Ahmed Shaikh, SZABIST University ABSTRACT Purpose: Debtors are current asset has a time of 120 days at max. During this time, the value of debtors gets changed. This study explores the effect of this time value of money. The objective of this research is to sight see the effect of the time value of money, normal inflation, and purchasing power on the comprehensive debtors/receivable side of the balance sheet, which can be devalued if key macroeconomic factors determine the devaluation percentage of a single currency. Methodology: Concerning these significant questions of the research, we grasped a pragmatic philosophy with an inductive approach. A mono-method of qualitative based on grounded theory was endorsed, which helped to unfold a new model through qualitative data analysis. Results: A new strategy is developed, which utters three components; normal inflation, time value of money, and purchasing power revealing significant contribution in literature. The effect of these constructs was not incorporated in the financial statement, showing vague financial valuation. These constructs have a significant impact on the financial statement of any organization especially with items having time components in the balance sheet, such as receivables and payables. Research Limitations: This research is limited to only one currency i.e., Pakistani Rupee but can be implemented on any currency. Practical Implication: The strategy will help auditors to pass the adjustment entry in the balance sheet to adjust the value of the currency at the year-end. -
Arbitrage-Free Affine Models of the Forward Price of Foreign Currency
Federal Reserve Bank of New York Staff Reports Arbitrage-Free Affine Models of the Forward Price of Foreign Currency J. Benson Durham Staff Report No. 665 February 2014 Revised April 2015 This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the author and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author. Arbitrage-Free Affine Models of the Forward Price of Foreign Currency J. Benson Durham Federal Reserve Bank of New York Staff Reports, no. 665 February 2014; revised April 2015 JEL classification: G10, G12, G15 Abstract Common affine term structure models (ATSMs) suggest that bond yields include both expected short rates and term premiums, in violation of the strictest forms of the expectations hypothesis (EH). Similarly, forward foreign exchange contracts likely include not only expected depreciation but also a sizeable premium, which similarly contradicts pure interest rate parity (IRP) and complicates inferences about anticipated returns on foreign currency exposure. Closely following the underlying logic of ubiquitous term structure models in parallel, and rather than the usual econometric approach, this study derives arbitrage-free affine forward currency models (AFCMs) with closed-form expressions for both unobservable variables. Model calibration to eleven forward U.S. dollar currency pair term structures, and notably without any information from corresponding term structures, from the mid-to-late 1990s through early 2015 fits the data closely and suggests that the premium is indeed nonzero and variable, but not to the degree implied by previous econometric studies. -
Currency Politics: the Political Economy of Exchange Rate Policy
© Copyright, Princeton University Press. No part of this book may be distributed, posted, or reproduced in any form by digital or mechanical means without prior written permission of the publisher. Introduction The Political Economy of Currency Choice The Political Economy of Currency Choice he exchange rate is the most important price in any economy, for it affects all other prices. The exchange rate is itself set or strongly influenced by government policy. Currency policy thereforeT may be a government’s single most significant economic pol- icy. This is especially the case in an open economy, in which the rela- tionship between the national and international economies is crucial to virtually all other economic conditions. Policymakers who have to answer, directly or indirectly, to constit- uents, such as voters, interest groups, and investors, are the ones who make currency policy. Like all policies, the choices available to currency policymakers involve trade- offs. Currency policies have both benefits and costs, and create both winners and losers. Those who make ex- change rate policies must evaluate the trade- offs, weigh the costs and benefits, and consider the winners and losers of their actions. Exchange rate policy provides an extraordinary window on a na- tion’s political economy. This is particularly true in countries whose economies are open to the rest of the world economy, because in such a situation currency policy has a profound impact on a whole range of For general queries, contact [email protected] Frieden.indb 1 10/23/2014 8:19:54 AM © Copyright, Princeton University Press. No part of this book may be distributed, posted, or reproduced in any form by digital or mechanical means without prior written permission of the publisher. -
Chapter 1717
ChapterChapter 1717 FixedFixed ExchangeExchange RatesRates andand ForeignForeign ExchangeExchange InterventionIntervention Copyright © 2003 Pearson Education, Inc. Slide 17-1 Chapter 17 Learning Goals • How a central bank must manage monetary policy so as to fix its currency's value in the foreign exchange market. • The relationship between the central bank's foreign exchange reserves, its purchases and sales in the foreign exchange market, and the money supply. • How monetary, fiscal, and sterilized intervention policies affect the economy under a fixed exchange rate. • Some causes and effects of balance of payments crises. • How alternative multilateral systems for pegging exchange rates work. Copyright © 2003 Pearson Education, Inc. Slide 17-2 Chapter Organization ! Why Study Fixed Exchange Rates? ! Central Bank Intervention and the Money Supply ! How the Central Bank Fixes the Exchange Rates ! Stabilization Policies with a Fixed Exchange Rate ! Balance of Payments Crises and Capital Flight ! Managed Floating and Sterilized Intervention ! Reserve Currencies in the World Monetary System ! The Gold Standard ! Liquidity Traps Copyright © 2003 Pearson Education, Inc. Slide 17-3 Chapter Organization ! Summary ! Appendix I: Equilibrium in the Foreign Exchange Market with Imperfect Asset Substitutability ! Appendix III: The Timing of Balance of Payments Crises Copyright © 2003 Pearson Education, Inc. Slide 17-4 Introduction ! In reality, the assumption of complete exchange rate flexibility is rarely accurate. • Industrialized countries operate under a hybrid system of managed floating exchange rates. – A system in which governments attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. • A number of developing countries have retained some form of government exchange rate fixing. ! How do central banks intervene in the foreign exchange market? Copyright © 2003 Pearson Education, Inc. -
EXCHANGE RATE PASS-THROUGH INTO IMPORT PRICES Jose´ Manuel Campa and Linda S
EXCHANGE RATE PASS-THROUGH INTO IMPORT PRICES Jose´ Manuel Campa and Linda S. Goldberg* Abstract—We provide cross-country and time series evidence on the can be raised, then, about whether measured degrees of mon- extent of exchange rate pass-through into the import prices of 23 OECD countries. We find compelling evidence of partial pass-through in the short etary policy effectiveness are fragile and regime-specific if the run,especiallywithinmanufacturingindustries.Overthelongrun,producer- degree of exchange rate pass-through is highly endogenous to currency pricing is more prevalent for many types of imported goods. macroeconomic variables.2 The degree of aggregate exchange Countries with higher rates of exchange rate volatility have higher pass-through elasticities, although macroeconomic variables have played rate pass-through, and its determinants, are therefore important a minor role in the evolution of pass-through elasticities over time. Far for the effectiveness of macroeconomic policy. more important for pass-through changes in these countries have been the Although pass-through of exchange rate movements into dramatic shifts in the composition of country import bundles. a country’s import prices is central to these macroeconomic stabilization arguments, to date only limited relevant evi- I. Introduction dence on this relationship has been available.3 The first goal hough exchange rate pass-through has long been of of our paper is to provide extensive cross-country and time Tinterest, the focus of this interest has evolved consid- series evidence on exchange rate pass-through into the erably over time. After a long period of debate over the law import prices of 23 OECD countries. -
Arxiv:2101.09738V2 [Q-Fin.GN] 21 Jul 2021
Currency Network Risk Mykola Babiak* Jozef Baruník** Lancaster University Management School Charles University First draft: December 2020 This draft: July 22, 2021 Abstract This paper identifies new currency risk stemming from a network of idiosyncratic option-based currency volatilities and shows how such network risk is priced in the cross-section of currency returns. A portfolio that buys net-receivers and sells net- transmitters of short-term linkages between currency volatilities generates a significant Sharpe ratio. The network strategy formed on causal connections is uncorrelated with popular benchmarks and generates a significant alpha, while network returns formed on aggregate connections, which are driven by a strong correlation component, are partially subsumed by standard factors. Long-term linkages are priced less, indicating a downward-sloping term structure of network risk. Keywords: Foreign exchange rate, network risk, idiosyncratic volatility, currency predictability, term structure JEL: G12, G15, F31 arXiv:2101.09738v2 [q-fin.GN] 21 Jul 2021 *Department of Accounting & Finance, Lancaster University Management School, LA1 4YX, UK, E-mail: [email protected]. **Institute of Economic Studies, Charles University, Opletalova 26, 110 00, Prague, CR and Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 18200, Prague, Czech Republic, E-mail: [email protected]. 1 1 Introduction Volatility has played a central role in economics and finance. In currency markets, a global volatility risk has been proposed by prior literature as a key driver of carry trade returns. While the global volatility risk factor is intuitively appealing, there is little evi- dence on how idiosyncratic currency volatilities relate to each other. -
Explaining Exchange Rate Behavior
EXPLAININGEXCHANGE RATE BEHAVIOR: AN AUGMENTEDVERSION OF THEMONETARY APPROACH Thomas M. Humphrey Prominent among competing theories of exchange The monetary approach has a long history dating rate determination in a regime of floating exchange back at least to the early 1800s when David Ricardo, rates is the monetary approach. This approach rests John Wheatley, and other British bullionist writers on the view that the exchange rate between two used it to explain the fall of the paper pound on the foreign exchanges following Britain’s switch from national currencies is determined by the respective fixed to floating exchange rates during the Napole- national money supplies and demands in the two onic wars. Later it was employed by the Swedish countries and the resulting effects on their general economist Gustav Cassel to explain the fall of the price levels.1 To reach this conclusion the monetary external value of the German mark during the famous approach combines the quantity theory of money with hyperinflation episode of the early 1920s. Most re- the purchasing power parity theory of exchange rates. cently, however, it has been employed, albeit with The quantity theory says that the general price level mixed results,4 to explain the behavior of floating is determined by the demand-adjusted money stock, exchange rates in the post-1973 era of generalized i.e., by the nominal stock of money per unit of real floating. money demand.2 And the purchasing power parity The main shortcoming of the monetary approach is doctrine holds that the exchange rate tends to equal that ii ignores the effect of real relative price changes the ratio of the price levels in the two countries con- on the exchange rate. -
Foreign Exchange Training Manual
CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE LEHMAN BROTHERS FOREIGN EXCHANGE TRAINING MANUAL Confidential Treatment Requested By Lehman Brothers Holdings, Inc. LBEX-LL 3356480 CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE TABLE OF CONTENTS CONTENTS ....................................................................................................................................... PAGE FOREIGN EXCHANGE SPOT: INTRODUCTION ...................................................................... 1 FXSPOT: AN INTRODUCTION TO FOREIGN EXCHANGE SPOT TRANSACTIONS ........... 2 INTRODUCTION ...................................................................................................................... 2 WJ-IAT IS AN OUTRIGHT? ..................................................................................................... 3 VALUE DATES ........................................................................................................................... 4 CREDIT AND SETTLEMENT RISKS .................................................................................. 6 EXCHANGE RATE QUOTATION TERMS ...................................................................... 7 RECIPROCAL QUOTATION TERMS (RATES) ............................................................. 10 EXCHANGE RATE MOVEMENTS ................................................................................... 11 SHORTCUT ............................................................................................................................... -
Rethinking Forward and Spot Exchange Rates in Internationsal Trading
RETHINKING FORWARD AND SPOT EXCHANGE RATES IN INTERNATIONSAL TRADING Guan Jun Wang, Savannah State University ABSTRACT This study uses alternative testing methods to re-examines the relation between the forward exchange rate and corresponding future spot rate from both perspectives of the same currency pair traders using both direct and indirect quotations in empirical study as opposed to the conventional logarithm regression method, from one side of traders’ (often dollar sellers) perspective, using one way currency pair quotation (often direct quotation). Most of the empirical testing results in this paper indicate that the forward exchange rates are downward biased from the dollar sellers’ perspective, and upward biased from the dollar buyers’ perspective. The paper further contends that non-risk neutrality assumption may potentially explain the existence of the bias. JEL Classifications: F31, F37, C12 INTRODUCTION Any international transaction involving foreign currency exchange is risky due to economic, technical and political factors which can result in volatile exchange rates thus hamper international trading. The forward exchange contract is an effective hedging tool to lower such risk because it can lock an exchange rate for a specific amount of currency for a future date transaction and thus enables traders to calculate the exact quantity and payment of the import and export prior to the transaction date without considering the future exchange rate fluctuation. However hedging in the forward exchange market is not without cost, and the real costs are the differential between the forward rate and the future spot rate if the future spot rate turns out to be favorable to one party, and otherwise, gain will result. -
Does Dollar Depreciation Cause Inflation?
16 B. W. Hafer R. W Hater is a research officer at the Federal Reserve Bank of St Louis. Kevin L. Kliesen provided research assistance. Does Dollar Depreciation Cause Inflation? URING the past few years, the rate of in- THE RELATIONSHIP BETWEEN’ flation has risen from 1.1 percent in 1986, THE EXCHANGE RATE AND measured by the consumer price index, to 4.4 INFLATION percent in t988. Though this rate of pt’ice in- crease pales in comparison to the double-digit What is the foreign exchange rate? Simply inflation of the mid-1970s and early 1980s, it is high enough to cause concern among economic put, the price of a unit of one currency in terms of another. Why would one want to pur- analysts, financial market participants and chase another currency? There are several policymakers. Among the various explanations reasons. One is the need of foreign currency to for the recent acceleration in inflation is the purchase foreign goods. Another is the need of decline in the foreign exchange value of the foreign currency to trade in other countries’ dollar since 1985.’ According to this view, the financial assets. Purchases of financial assets, decline in the value of the dollar raises the like stocks or bonds, in another country can dollar price of imported goods and, therefore, only be completed if one exchanges dollars for the prices paid by U.S. citizens as well. The con- the foreign currency. sequence is inflation. Or is it? The purpose of this article is to provide a The dollar’s foreign exchange value, common- framework in which to evaluate the claim that ly measured against a weighted average of a decline in the dollar’s foreign exchange value foreign currencies, has varied considerably raises the rate of inflation in the United States.