Solution-国际财务管理-切奥尔尤恩-课后习题答案-第五章

IM-29CHAPTER5THEMARKETFORFOREIGNEXCHANGESUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMSQUESTIONS1.Giveafulldefinitionofthemarketforforeignexchange.Answer:Broadlydefined,theforeignexchange(FX)marketencompassestheconversionofpurchasingpowerfromonecurrencyintoanother,bankdepositsofforeigncurrency,theextensionofcreditdenominatedinaforeigncurrency,foreigntradefinancing,andtradinginforeigncurrencyoptionsandfuturescontracts.2.Whatisthedifferencebetweentheretailorclientmarketandthewholesaleorinterbankmarketforforeignexchange?Answer:Themarketforforeignexchangecanbeviewedasatwo-tiermarket.Onetieristhewholesaleorinterbankmarketandtheothertieristheretailorclientmarket.InternationalbanksprovidethecoreoftheFXmarket.Theystandwillingtobuyorsellforeigncurrencyfortheirownaccount.Theseinternationalbanksservetheirretailclients,corporationsorindividuals,inconductingforeigncommerceormakinginternationalinvestmentinfinancialassetsthatrequiresforeignexchange.Retailtransactionsaccountforonlyabout14percentofFXtrades.Theother86percentisinterbanktradesbetweeninternationalbanks,ornon-bankdealerslargeenoughtotransactintheinterbankmarket.3.Whoarethemarketparticipantsintheforeignexchangemarket?Answer:ThemarketparticipantsthatcomprisetheFXmarketcanbecategorizedintofivegroups:internationalbanks,bankcustomers,non-bankdealers,FXbrokers,andcentralbanks.InternationalbanksprovidethecoreoftheFXmarket.Approximately100to200banksworldwidemakeamarketinforeignexchange,i.e.,theystandwillingtobuyorsellforeigncurrencyfortheirownaccount.Theseinternationalbanksservetheirretailclients,thebankcustomers,inconductingforeigncommerceormakinginternationalinvestmentinfinancialassetsthatrequiresforeignexchange.Non-bankdealersarelargenon-bankfinancialinstitutions,suchasinvestmentbanks,mutualfunds,pensionfunds,andhedgefunds,whosesizeandfrequencyoftradesmakeitcost-effectivetoestablishtheirowndealingroomstoIM-30tradedirectlyintheinterbankmarketfortheirforeignexchangeneeds.Mostinterbanktradesarespeculativeorarbitragetransactionswheremarketparticipantsattempttocorrectlyjudgethefuturedirectionofpricemovementsinonecurrencyversusanotherorattempttoprofitfromtemporarypricediscrepanciesincurrenciesbetweencompetingdealers.FXbrokersmatchdealerorderstobuyandsellcurrenciesforafee,butdonottakeapositionthemselves.Interbanktradersuseabrokerprimarilytodisseminateasquicklyaspossibleacurrencyquotetomanyotherdealers.Centralbankssometimesinterveneintheforeignexchangemarketinanattempttoinfluencethepriceofitscurrencyagainstthatofamajortradingpartner,oracountrythatit“fixes”or“pegs”itscurrencyagainst.Interventionistheprocessofusingforeigncurrencyreservestobuyone’sowncurrencyinordertodecreaseitssupplyandthusincreaseitsvalueintheforeignexchangemarket,oralternatively,sellingone’sowncurrencyforforeigncurrencyinordertoincreaseitssupplyandloweritsprice.4.Howareforeignexchangetransactionsbetweeninternationalbankssettled?Answer:Theinterbankmarketisanetworkofcorrespondentbankingrelationships,withlargecommercialbanksmaintainingdemanddepositaccountswithoneanother,calledcorrespondentbankaccounts.Thecorrespondentbankaccountnetworkallowsfortheefficientfunctioningoftheforeignexchangemarket.Asanexampleofhowthenetworkofcorrespondentbankaccountsfacilitiesinternationalforeignexchangetransactions,consideraU.S.importerdesiringtopurchasemerchandiseinvoicedinguildersfromaDutchexporter.TheU.S.importerwillcontacthisbankandinquireabouttheexchangerate.IftheU.S.importeracceptstheofferedexchangerate,thebankwilldebittheU.S.importer’saccountforthepurchaseoftheDutchguilders.ThebankwillinstructitscorrespondentbankintheNetherlandstodebititscorrespondentbankaccounttheappropriateamountofguildersandtocredittheDutchexporter’sbankaccount.Theimporter’sbankwillthendebititsbookstooffsetthedebitofU.S.importer’saccount,reflectingthedecreaseinitscorrespondentbankaccountbalance.5.Whatismeantbyacurrencytradingatadiscountoratapremiumintheforwardmarket?Answer:Theforwardmarketinvolvescontractingtodayforthefuturepurchaseorsaleofforeignexchange.Theforwardpricemaybethesameasthespotprice,butusuallyitishigher(atapremium)orlower(atadiscount)thanthespotprice.IM-316.WhydoesmostinterbankcurrencytradingworldwideinvolvetheU.S.dollar?Answer:Tradingincurrenciesworldwideisagainstacommoncurrencythathasinternationalappeal.ThatcurrencyhasbeentheU.S.dollarsincetheendofWorldWarII.However,theeuroandJapaneseyenhavestartedtobeusedmuchmoreasinternationalcurrenciesinrecentyears.Moreimportantly,tradingwouldbeexceedinglycumbersomeanddifficulttomanageifeachtradermadeamarketagainstallothercurrencies.7.Banksfinditnecessarytoaccommodatetheirclients’needstobuyorsellFXforward,inmanyinstancesforhedgingpurposes.Howcanthebankeliminatethecurrencyexposureithascreatedforitselfbyaccommodatingaclient’sforwardtransaction?Answer:Swaptransactionsprovideameansforthebanktomitigatethecurrencyexposureinaforwardtrade.Aswaptransactionisthesimultaneoussale(orpurchase)ofspotforeignexchangeagainstaforwardpurchase(orsale)ofanapproximatelyequalamountoftheforeigncurrency.Toillust