2-1exchangerateandforeignexchangetransactions.pptVIP

Chinese Finance Research Institute II. Forward Exchange Market II.1 Concepts Delivered at a predetermined date in the contract. II.2 Interest Arbitrage e.g.2-1-4. Suppose the deposit interest rate in London is 8% annually, and 10% in New York. This simply means there is an interest spread of 2% and a potential profit when transferring funds from London to New York. Is it the case? Suppose again, a British has ￡100 million, and he or she deposits the money in a bank running its businesses in London. Foreign Exchange Transactions A year later, the British will receive an income of about ￡108 million (=100+100?8%) . Assume the spot rate of the pound against the dollar is ￡1=US$2. Then the British sells the pound for the U.S. $ and deposits the US$200 million in a bank in New York. A year later, he or she will receive US$220 million. If the exchange rate of the pound to the US dollar does not change, surely, he or she will have an extra income of ￡2 million. But if the exchange rate changes, and he or she does not know exactly what it will be a year later, what can the British do? Foreign Exchange Transactions Exchange Rate Regimes I. The International Monetary System I.1 Definition The International Monetary System refers to the framework of rules, regulations and conventions that govern the financial relations between countries (Moosa, 2005, pp. 142). I.2 Components Public component: including government agreements and the functions of international public institutions. Private component: including the banking system and finance industry. Exchange Rate Regimes I.3 Classification of The International Monetary System The exchange rate regime The nature of international reserves: a pure commodity standard, a pure fiat standard, and a mixed standard. I.4 Evolution of International Monetary System For more detailed information on the topic, see Moosa (2005) and Krugman and Obstfeld (2003), etc,. Exchange Rate Regimes II. Exchange Rate Regime