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TERMINOLOGY A foreign exchange rate is the price of one currency expressed in terms of another currency currency can be viewed as an asset and exchange rate as asset price A Quotation ( or quote) is a statement of willingness to transact at an announced rate

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TERMINOLOGY A pair of currencies in a quotation: Commodity/Quote currency: the currency whose price is being quoted Base/Term currency: the currency used to quote the commodity

currency USD/EUR = 1.2170

Or $1.2170/€ Meaning: 1 EUR = 1.2170 USD

No. of unit of commodity currency is always 1 and that of term currency is changing

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BID AND ASK RATES • Bid rate: is the price at which a dealer will buy the foreign currency

(or the commodity currency) • Ask rate: is the price at which a dealer will sell the foreign currency

(or the commodity currency) Note: 1. bid for one currency is ask for the opposite currency

USD/EUR = 1.2170/1.2178 Meaning: buying EUR at $1.2170 and selling EUR for $1.2178

Buying EUR with USD is equivalent to selling USD for EUR 2. Ask price is always higher than bid, the dealers buy at bid and then sell for a higher price and earn the difference.

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BID-ASK SPREAD • Bid-ask spread: the difference between bid and ask prices

• Measures ‐ Bid - Ask Spread = Ask – Bid ‐ Midpoint price = (Ask + Bid)/2 ‐ Percent spread (%)

‐ (Ask – Bid)/Bid ‐ (Ask – Bid)/Ask ‐ (Ask – Bid)/Midpoint price

• Understanding: This is before-tax profit for dealer

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BID-ASK SPREAD • Dependent on

‐ Order cost (+) ‐ Inventory cost (+) ‐ Competition (-) ‐ Volume (-) ‐ Frequency of trading (-) ‐ Volatility (+)

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DIRECT AND INDIRECT QUOTATIONS • A direct quote is when the commodity currency is foreign currency

and base currency is domestic currency tell us the price of a foreign currency in terms of domestic currency

Ex: In Hanoi, VND/USD = 20825/20865 • An indirect quote is reverse tell us the price of domestic

currency in terms of foreign currency to know price of a foreign currency, we have to take reciprocal of the quote ( i.e. take 1 divided by the quote)

Ex: In London, CAD/GBP = 2.2398/2.2392 Equivalent to GBP/CAD = 0.4465/0.4466 in direct quotation

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DIRECT AND INDIRECT QUOTATIONS Whether it is direct or indirect quotations must be seen from the perspective of the home country VD: From the perspective of the US

Note: In either ways, the bids are always for buying foreign currency (ie. EUR) and the asks are for selling EUR.

Agreed that: using direct quotation throughout this course.

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Direct quotation Indirect quotation

1.3023 – 1.3024 $/€ 0.7879 – 0.7878 €/$

AMERICAN – EUROPEAN TERMS

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European terms American terms Foreign currency price of one dollar Dollar price of one foreign currency

SF1,6000/$ $0,6250/SF

¥90,5000/$ $0,01105/¥

€0,7717/$ $1,2950/€

Note: 1. Foreign vs Domestic currency is not concerned no home country 2. For practical reasons, EUR, GBP, Australian dollars (AUD), New Zealand dollars

(NZD), Special Drawing Rights (SDR) has always been quoted in American terms.

CROSS RATES Many currency pairs are inactively traded their exchange rate is determined through their relationship to a widely traded third currency.

Ex1 : Cross rate without bid-ask spread

USD/JPY = 82.04

USD/MXN = 12.2324

Ex2: Cross rate with bid-ask spread

USD/VND = 16350/16450.

USD/JPY = 109.55/111.05

At which rate will you sell JPY for VND?

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Trader Dealer Quotes

JPY (sell)

USD (sell)

1 USD=111.05JPY

USD (sell)

USD (buy)

1 USD=16350VND

111.05 JPY = 16350 VND JPY/VND =16350/111.05 1 JPY = 147.23 VND

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CROSS RATES Case 1: Cross rate of 2 currencies at the base positions VND/USD = 16350/16450. JPY/USD = 109,55/111,05

VND/JPY =

Case 2: Cross rate of 2 currencies at the commodity positions VND/USD = 16350/16450

VND/EUR = 24250/24830

USD/EUR =

147,23/ 150,16

1,4742/ 1,5187

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CROSS RATES Case 3: Cross rate of 2 currencies at the opposite positions In Singapore : VND/USD = 16350/16450

USD/GBP = 1,8932/1,9337

VND/GBP =

30954/ 31809

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CROSS RATE 1. Your company borrowed 500.000HKD from the bank. After paying for a 1.000.000 JPY contract, your company decided to invest the remaining into a French mutual fund at 2000EUR per a certificate. How many certificates can your company buy? Given the following quotations:

JPY/USD = 105.40/108.40 HKD/USD = 7.7860/90 USD/EUR = 1.6120/40

2. You observed the following quotes: Vietinbank JPY/USD = 80.600 – 80.660 Vietcombank: VND/USD = 20,570 – 20,750 Eximbank: VND/JPY = 251 – 259 What would you do to make a profit?

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LỊCH SỬ HỆ THỐNG TIỀN TỆ QUỐC TẾ

1. Tỉ giá cố định:

1.1. Chế độ tỉ giá không dùng đồng bản địa (no separate legal tender)

1.2. Chế độ tỉ giá Neo cứng theo một đồng tiền mạnh (currency board)

1.3. Chế độ Neo cố định (Conventional fixed peg arangements)

ẢN VỊ VÀNG Gold standard

BRETTON WOODS Bretton woods

Giới thiệu

BRETTON WOODS

BRETTON WOODS The establishment of the so-called 3 financial and economic pillars of the world: IMF, World Bank and WTO

BRETTON WOODS On 15/8/1971, President Nixon abandoned the gold-dollar linkage. The US no longer sells gold for dollars

http://www.youtube.com/watch?v=iRzr1QU6K1o

HIỆN NAY Today exchange rate system under IMF classficiations

SIMPLE CLASSIFICATIONS Fixed: the value of currency is fixed to a reference foreign currency or a basket of currency with or without margin of fluctuations and central rate adjustment. Managed floating: the monetary authorities influences the movements of exchange rate through active intervention in the forex market without specifying or committing to a preannounced path. Freely Floating: the exchange rate is market-determined with any intervention aimed at moderating the rate of change or preventing undue fluctuation rather than establishing a level for it.

Where is Vietnam standing?

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APPRECIATION VS. DEPRECIATION Depreciation of a currency refers to a fall in the value of a floating currency which requires more units of that currency to buy 1 unit of foreign currency Increased exchange rate under direct quotation and decreased exchange rate under indirect quotation Appreciation of a currency refers to a rise in the value of a floating currency which requires less units of that currency to buy 1 unit of foreign currency Decreased exchange rate under direct quotation and increased exchange rate under indirect quotation

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APPRECIATION VS. DEPRECIATION

USD appreciate relative to VND American products become more expensive in Vietnam

VND depreciate relative to USD Vietnamese products become cheaper in US

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Price in US Rate Price in Vietnam

$499/ Iphone 5 16GB $499/ Iphone 5 16GB (home country)

21000VND/$ 21500VND/$

10.479.000 VND 10.728.500 VND

$714.3 $697.7

21000VND/$ 21500VND/$

15.000.000 VND/MT of rice 15.000.000 VND/MT of rice (home country)

When a country currency depreciates, goods and services from that country become cheaper in foreign markets and foreign goods and services become more expensive in that country

DEVALUATION VS. REVALUATION Under a fixed exchange rate system, devaluation and revaluation are official downward and upward changes in the value of a country's currency relative to other currencies. This is done by monetary authorities formally setting a new fixed rate with respect to foreign reference currency.

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MEASURING A CHANGE IN THE SPOT RATE Measuring a change in the foreign currency for quotations expressed in home currency terms (direct):

Quotations expressed in foreign currency terms (indirect):

B Y N D H 32

MEASURING A CHANGE IN THE SPOT RATE The Australian dollar was quoted at A$1.8445/US$ on Aug 19, 2002, while on March 2, 2004 it was quoted at A$1.335/US$.

What is the appreciation/depreciation of the US$ ?

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