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International International FinanceFinanceKeith PilbeamCity University, London
Palgrave(2006),Third edition
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The structure of the book: Three partsPart 1 The Balance of payments and
macroeconomic policy in an open economy
1 The foreign exchange market 2 The balance of payments 3 Elasticity and absorption approaches to
the balance of payments 4 Macroeconomic policy in an open economy 5 The monetary approach to the balance of
payments
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Part 2 Exchange-rate determination: theory, evidence and policy
6 Purchasing power parity and floating exchange rate experience
7 Modern models of exchange rate determination
8 The portfolio balance model 9 Empirical evidence on exchange rates 10 Fixed, floating and managed
exchange rates
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Part 3 The postwar international monetary system
11 The international monetary system 12 The Eurocurrency and Eurobond markets 13 Currency derivatives: futures, options
and swaps 14 International macroeconomic policy
coordination 15 The international debt crisis 16 Economic and monetary union in Europe 17 Currency crises and the east Asian
financial crisis
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Fourth edition: Part Ⅰ Balance of payments theory
and policy 6 Purchasing power parity theory 15 The Latin American debt crisis 16 The European monetary system
and European monetary union 18 Financial innovation and the
credit crunch
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The teaching contentsTeaching hour: 3×16=48 1,2,3,4,6,10Self-study:
11,12,13,14,15,16,17,18
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The reference-book1.Giancarlo Gandolfo ， International
Finance and Open － economy Macroeconomics ， Springer ， 2002 ；
2.Thomas A. Pugel: International finance (Twelfth edition), 中国人民大学出版社， 2005 （ 1）；
3.Joseph P. Daniels, David D. VanHoose: International monetary and financial economics （ Third edition ） , 高等教育出版社， 2005 （ 1）；
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4. 马君潞，陈平，范小云：《国际金融》，高教出版社， 2011年 6 月第一版；
5.姜波克：《国际金融学》，高教出版社， 1999 （ 1）；
6. 扬长江，姜波克：《国际金融学》，高教出版社 2008年第 3 版；
7.劳伦斯 · S·科普兰：《汇率与国际金融》，中国金融出版社， 2002 （ 3）；
8.WWW.PALGRAVE.COM/BUSINESS/PILBEAM
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成绩评价：1.《国际金融》课程（ 3 学分）20%（平时 1 ） +30%（平时 2 ） +50%（期末） =100%
2.《国际金融》课程设计（ 1 学分）50%（小班讨论） +50%（课程设计小论文） =100%
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The subject matter of International Finance
1.It is concerned with the monetary and macroeconomic relations between countries;
2.It is constantly evolving subject that deals very much with real world issues such as BOP problems and policy, the causes of exchange-rate movements and the implications of macroeconomic linkages between economies.
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Part oneThe Balance of The Balance of payments and payments and
macroeconomic policy macroeconomic policy in an open economyin an open economy
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Chapter 1
The foreign The foreign exchange exchange
marketmarket
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1.1 IntroductionThe main contents of this chapter:1.exchange-rate definitions→1.2;2.various participants and the basic forces
in the market→1.3~1.4;3.various exchange-rate definitions and
economic significance→1.5~1.6;4.the determination of spot rate→1.7~1.8;5.the determination of forward
rate→1.9~1.10.
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1.2 Exchange-Rate Definitions1.2.1 Exchange rate: the price of one
currency in terms of another.1.2.2 Two methods of expressing it: 1.Direct quotation system: domestic
currency units per unit of foreign currency 2.Indirect quotation system: foreign
currency units per unit of domestic currency
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Note:1.the second method is the reciprocal of
the former.2.when talking about a rise or fall in the
exchange rate the meaning will be very different depending upon which definition is used.
3.In this chapter, the second definition is used. In other chapters, the first definition is employed.
4.After 1 January 1999, €1= ￡ ~.
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1.2.3 The bid rate and the offer rateThe bid rate: the rate at which a bank will
buy sterling.The offer rate: the rate at which the bank
will sell sterling in exchange for dollars.
The bid-offer spread: the difference between the bid rate and the offer rate.
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Table 1.2 Exchange rate quotations at close of business, 4 January 2005 (closing mid-points)
Foreign currencyPer £
Foreign currencyPer $
Foreign currencyPer €
Euro zone
1.4169 0.7522 1.0000
United states
1.8834 1.0000 1.3293
United kingdom
1.0000 0.5310 0.7058
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Question:The us$/ ￡ quotation is ￡ 1=us$1.6860-
1.6880. In this quotation, which one is the bid rate and which one is the offer rate? How many bips is the bid-offer spread? If a exporter wants to exchange ￡ 1 into us$, how many us$ can he receive?
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Homework:1.进入路透中文网，查询当日 EUR/USD， GBP/USD， USD/JPY,USD/CHF,USD/CAD,AUD/USD汇率。
2.进入中国货币网，查询当日银行间即期外汇市场人民币汇率中间价（基准汇率）和收盘价，并比较其中的不同。
3.进入中国银行全球门户网站，查询当日人民币对各种货币外汇牌价。
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4.2010年 8 月 19日我国银行间外汇市场增加人民币对马来西亚林吉特的报价交易（ CNY/MYR）。我国为何增加对此货币的交易？对该货币的交易在标价方法、中间汇率形成方式以及汇率浮动区间方面与对其他非美货币的交易有何不同？
5.目前我国银行间即期外汇市场有人民币对哪些外币的交易（按交易启动时间先后顺序、使用国际标准货币符号排列）？在标价方法、波动幅度和价格形成方式（是否直接交易）方面有何不同？
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1.3 Characteristics and Participants of the Foreign Exchange Market
1.3.1 Characteristics1.is a worldwide market;2.is made up primarily of commercial
banks, foreign exchange brokers and other authorized agents;
3. the most heavily traded currency is the US dollar-vehicle currency.
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1.3.2 Participants1.retail clients: be made up of businesses,
international investors, multinational corporations and the like; not directly purchase or sell, rather placing buy/sell orders with the commercial banks.
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2.commercial banks: buy/sell currencies on behalf of their customers or on their own account (proprietary trading).
3.foreign exchange brokers: often banks do not trade directly with one another, rather deal through foreign exchange brokers.
4.central banks: they normally buy and sell currency in the foreign exchange market to keep the external value of their currency stable.
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1.3.3 Bulls and bears in the foreign exchange market
Speculators: bulls: expect a currency to appreciate
in the future (bullish), and take a long position on the currency (buy long);
bears: expect a currency to depreciate in the future (bearish), and take a short position on the currency (sell short).
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1.4 Arbitrage in the Foreign Exchange MarketArbitrage: the exploitation of price
differentials for riskless guaranteed profits.
1.Financial centre arbitrage: this type of arbitrage ensures that the exchange rate quoted in all the foreign exchange markets will be the same.
Example: N:£1=$1.89 L:£1=$1.87 £1=$1.88
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2.Cross currency arbitrage: this type of arbitrage ensures that there is no exchange rate differentials between the cross rate and the actual rate.
Example: £1=$1.88 ，€ 1=$1.30 cross rate ： £1=€1.88/1.30=€1.4462
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If actual rate: £1=€1.50>1.4462 ， sell £ and buy € £ depreciate and € appreciate £1=€(1.50+1.4462)/2=€1.4731
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How to calculate the cross rate?Example 1:Suppose: ￡ 1=$1.8440/80 €1= ￡ 0.8020/60Please calculate $/€.Solution:
€1=$0.8020×1.8440/0.8060×1.8480
=$1.4789/1.4895
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Example 2:Suppose: ￡ 1=$1.8440/80 €1 ＝ $1.4720/60Please calculate ￡ /€.Solution:
€1= ￡ 1.4720÷1.8480/1.4760÷1.8440
= ￡ 0.7965/0.8004
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How to arbitrage?Example 1:Suppose: N:£1=$1.8920/80, L:£1=$1.8720/80.
One arbitrager trade with 1million ￡ , how much £ can he earn?
Solution: £ $1.8920
£1.8920/1.8780=1.0075 He can earn £7500.
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Example 2:￡ 1=$1.9240/80 €1=$1.4530/90￡ 1=€1.3020/80 ￡ 1=$1.9260
￡ 1=€1.9260/1.4560 €1=$1.4560 =€1.3228 ￡ 1=€1.3050<1.3228￡ 1 $1.9240 €1.9240/1.4590 ￡ 1.9240/(1.4590×1.3080)= ￡ 1.0082
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1.5 The Spot and Forward Exchange Rates
1.The spot exchange rate: the quotation between two currencies for immediate delivery; normally two-day lag to allow for verification, paperwork and clearing of payments.
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2.The forward exchange rate: the exchange rate at which economic agents agree today to exchange currencies at some specified time in the future, most commonly for 1 month(30 days), 3 months(90 days),6 months(180 days),9 months(270 days) and 1 year(360 days).
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Spot 1month forward 3months 6months
1.6820/1.6860 40/60 60/100 80/160
Forward premium: F>SForward discount: F<S
Spot 1month 3months1.6820/60 1.6860/1.6920 1.6880/1.6960 6months 1.6900/1.7020
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Homework:6.进入中国货币网外汇市场指南，了解我国外汇市场上人民币对各种外币的交易品种及相关信息。
7.进入中国货币网市场行情页面，了解人民币对各种外币的即期报价和远期报价，并计算相应的远期汇率和远期外汇的升（贴）水率以及升（贴）水年率。
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1.6 Nominal, Real and Effective Exchange Rates
1.6.1 Nominal Exchange Rate1.Nominal exchange rate: the exchange
rate that prevails at a given date.It is merely the price of one currency in
terms of another with no reference made to what this means in terms of purchasing power of goods/services.
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2.Nominal exchange rate index(S) =exchange rate at the report period(S1)/
exchange rate at the base period(S0)
Example: S0=$1.60/ ￡ 1 ， S1=$1.80/ ￡ 1
S=S1/S0=1.80/1.60=112.5%
￡ appreciated 12.5% from the base period to the report period.
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A depreciation or appreciation of the nominal exchange rate does not necessarily imply that the country has become more or less competitive on international markets, for such a measure we have to look at the real exchange rate.
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1.6.2 Real Exchange RateReal exchange rate: is nominal exchange
rate adjusted for relative prices between the countries under consideration.
Expressed as: (IQS)
(DQS)
*P
SPS r
P
PSS r
*
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Table 1.4 Construction of nominal and real exchange rate indices
Period Nominal exchang
e rate
Nominal exchange rate index
UK price index
US price index
Real exchange-rate index
1 $2.00 100 100 100 100
2 $2.00 100 120 100 120
3 $2.40 120 120 120 120
4 $1.80 90 130 117 100
5 $1.50 75 150 125 90
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Sr=SP/P* Sr>1, appreciation, international
competitiveness fall. Sr<1, depreciation, international
competitiveness rise.
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1.6.3 Effective Exchange Rate
n
iiine WSS
1
The effective exchange rate: is a measure of whether or not the currency is appreciating or depreciating against a weighted basket of foreign currencies.
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Table 1.5 Construction of a nominal effective exchange-rate index
period
Nominal exchange
rate index of $/£
Nominal exchange
rate index of €/£
Effective exchange
rate index of £
1 100 100 100
2 100 90 93
3 120 90 99
4 90 80 83
5 75 85 82
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1.6.4 Real Effective Exchange Rate Index
Real effective exchange rate index :is nominal effective exchange rate adjusted for relative prices between the countries under consideration.
n
ii
i
ire W
P
PSS
1 *
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Homework:8.查找有关美元指数（ US dollar index, USDX)的资料，了解它是一种什么类型的指数，是如何编制的，如何对该指数进行分析，其最高值和最低值大约为多少。进入和讯网外汇频道，了解即时美元指数数据。查找美元指数从1999 年 1 月至今的月度时间序列数据。
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9.了解华尔街日报美元指数的具体编制方法，查找该指数至今的月度时间序列数据。
10.了解复旦人民币汇率指数的有关情况；进入国际清算银行（ BIS）查找人民币名义有效汇率（ NEER）和实际有效汇率（ REER）指数，并了解其编制方法。
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1.7 A simple model of the determination of the spot exchange rate
The basic tenet: the exchange rate (the price) of a currency can be analyzed like any other price by a resort to the tools of supply and demand.
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1.7.1 The demand for foreign exchange
The demand for currency is a derived demand: not because they have an intrinsic value in themselves, but rather because of what they can buy.
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Table 1.8 The demand for pounds
Price of UK
export good in
£s
Exchange rate
$/£
Price of UK export good in $s
Quantity of UK exports
Demand for
pounds
10 $1.60 16 1,800 18,000
10 $1.80 18 1,500 15,000
10 $2.00 20 1,200 12,000
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$/£Rate Demand schedule :depicts changes2.00 in the demand for currency with respect to changes1.80 in the exchange rate.
1.60 D 0 12,000 15,000 18,000 Quantity of £s
Figure 1.4 The demand for poundsThe demand curve for pounds slops down from
left to right.
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Factors affecting the demand for UK export:
US income⇧ US tastes in UK goods⇧ The price of US goods⇧ The demand for UK exports⇧The demand for pounds ⇧The demand schedule for pounds shift to
the rightright.
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$/£Rate
2.00
1.60 D D’ 0 12,000 15,000 20000 Quantity of
£sFigure 1.4(1) The change of demand
quantity and the shift of demand schedule
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1.7.2 The supply of foreign exchange
The supply of pounds =the UK demand for
dollars
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Table 1.9 The supply of pounds
Price of US
export good in
$s
Exchange rate
$/£
Price of US export good in £s
Quantity of US exports
Demand for
dollars
Supply of
pounds
20 $1.60 12.50 1,000 20,000 12,500
20 $1.80 11.11 1,350 27,000 15,000
20 $2.00 10.00 1,700 34,000 17,000
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$/£ SRate2.001.80
1.60
0 12,500 15,000 17,000 Quantity of £s
Figure 1.5 The supply of poundsThe supply curve of pounds slops up from
left to right.
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Factors affecting US exports: UK income⇧ UK tastes in US goods⇧ The price of UK goods⇧ The demand for US exports⇧The supply of pounds ⇧The supply schedule of pounds shift to the
rightright.
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$/£ rate2.00 S S’
1.60
0 12,500 17,000 20,000 Quantity of £s
Figure 1.5(1) The change of supply quantity and the shift of supply schedule
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$/£ rate S
1.80
D 0 15,000 Quantity of £s
Figure 1.6 Determination of the dollar-pound exchange rate
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1.8 Alternative exchange-rate regimes
Fixed exchange rate regime Floating exchange rate regime
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1.8.1 Floating exchange-rate regime The authorities do not
intervene to buy or sell their currency in the foreign exchange market. Rather, they allow the value of their currency to change due to fluctuations in the supply and demand of the currency.
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$/£ rate S2.001.80 D2 D1 0 Q1 Q2 Quantity of £sFigure 1.7(a):demand for pounds↑
demand curve shift rightward £↑
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$/£ rate S1 S2
1.801.60
D 0 Q1 Q2 Quantity of £sFigure 1.7(b):supply of pounds↑ supply
curve shift rightward £↓
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1.8.2 Fixed exchange-rate regimeThe authorities do intervene to buy
or sell their currency in the foreign exchange market to eliminate the excess demand or supply for a currency to keep the exchange rate stable.
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$/£ rate S1 intervene S2 1.80
D1 D2 0 Q1 Q2 Quantity of £s
Figure 1.8(a)
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$/£ rate S1 S2
1.80 Intervene D1 D2 0 Q1 Q2 Quantity of £s
Figure 1.8(b)
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1.9 The determination of the forward exchange rate
The forward exchange market: where buyers and sellers agree to exchange currencies at some specified date in the future.
According to their motives for participation in the forward exchange market, the participants can be divided into three groups:
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1.Hedgers——agents( usually firms) that enter the forward exchange market to protect themselves against exchange-rate fluctuations which entail exchange-rate risk.
Exchange risk: the risk of loss due to adverse exchange-rate movement.
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Example: UK importer pay US exporter
$15,500 in one year timeAt present: spot: £1=$1.60 pay £9,687.50 (must have necessary funds at
present) one year forward: £1=$1.55 pay
£10,000 (need not have necessary funds at
present)
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One year later: spot £1=$1.30 pay £11,923>£10,000 £1=$2.00 pay £7,750<£10,000
In effect, hedgers avoid exchange risk by matching their assets and liabilities in the foreign currency.
In the future at present forward market Liabilities buy forward exchange Assets sell forward exchange
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2. Arbitrageurs——agents( usually banks) that aim to make a riskless profit out of discrepancies between interest-rate differentials and what is known as the forward discount or forward premium.
Forward premium: forward rate>spot rate
Forward discount: forward rate<spot rate Expressed as:Forward premium/discount= 100
S
SF
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The presence of arbitrageurs ensures that what is known as the covered interest rate parity (CIP) condition holds continually.
CIP: F 1+r* F-S r*-r S 1+r , S 1+r (IQS)
rrS
SF
*
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An UK investor:UK: 1×(1+r)US: 1×S×(1+r*) FIf S(1+r*) >(1+r), F then buy $ spot, sell $ forward, S F ,Till S(1+r*)/F=(1+r),That is F 1+r* S 1+r
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Example: UK:8%(r) spot:£1=$1.8 US:5%(r*)UK investor: invest in UK: £1×(1+8%) invest in US: £1×1.8×(1+5%)/F [covered interest-rate arbitrage]if £1×(1+8%)= £1×1.8×(1+5%)/F F= [£1×1.8×(1+5%)]/[£1×(1+8%)] =S(1+r*)/(1+r)= $1.75/£
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It says: If domestic interest rate>foreign interest
rate Domestic currency at a forward discount If domestic interest rate<foreign interest
rate Domestic currency at a forward premium
rrS
SF
*
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3. Speculators——agents that hope to make a profit by accepting exchange-rate risk. They believe
the future spot rate≠
the quoted forward rate
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If the quoted forward rate <the future spot rate
Buy forward then sell spot( buy long)(Taking long position)
If the quoted forward rate >the future spot rate
Sell forward then buy spot( sell short)(Taking short position)
Taking ‘open position’
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Homework:11.了解境外人民币 NDF市场的相关情况。（什么是 NDF？为什么会出现这样的市场？与国内人民币远期外汇市场在定价和组织形式方面有什么不同？如何确立国内人民币远期外汇市场在定价方面的主导地位？）
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1.10 The interaction of hedgers, arbitrageurs and speculators
In the forward market, the net demand for the currency sums to zero:
NDH+NDA+NDS=0Where: NDH: net demand of hedgers; NDA: net demand of arbitrageurs; NDS: net demand of speculators.
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The forward rate is determined by the interaction of hedgers, arbitrageurs and speculators and is jointly determined with the spot exchange rate.
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$/£ rate $/£ rate S
$1.80 A $1.75 A
$1.70 D DS DH
0 Q1 Quantity net forward DS1 DH1 net forward of £s sales of £s purchases of £s (a) spot market (b) forward market
Figure 1.9 The joint determination of the spot and forward exchange rate
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Conclusion: Speculation and hedging
determine the level of the spot and forward quotations;
Arbitrage ties the spot and forward market quotations together via the CIP condition.
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Further reading:1.严智杰，《人民币实际有效汇率 REER和美中贸易逆差的关系——基于1996 － 2005 年季度数据的实证分析》，《华东经济管理》， 2007/12 。
2.吴先智，《人民币远期汇率的定价及风险管理》，《新金融》， 2008/01.
3. 黄学军、吴冲锋，《离岸人民币非交割远期与境内即期汇率价格的互动：改革前后》，《金融研究》 2006/11.
4. 林伟斌，《人民币远期汇率定价和市场建设研究》，《金融研究》， 2006/11.
84
5. Callen J. L. & Chan M. L., Kwan C. CY.(1989), Spot and forward exchange rates: a causality analysis, journal of business finance & accounting, 16(1), 105-118.
6. Ross Levine(1989), the pricing of forward exchange rates, Journal of International Money and Finance, Volume 8, Issue 2, June 1989, Pages 163-179.
85
On the web: Obtain spot rates and bid/offer rates
from the Financial Times. Register for free at: http://www.ft.com.
For effective exchange rates for a number of currencies, visit the web site of the Bank of England at http://www.bankofengland.co.uk.
For weekly articles on the global economy, visit the Economist magazine at http://www.economist.com.
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