Economics - macro

Currency exchange
rate
 Overall
I. Definition
II. Interest rate parity, spot and forward rate
III. Exchange rate regimes
IV. Effects of FX rate on international trade and capital
flows
 I. Definition
Relationship of nominal and real FX rate?
Exchange rate : Tỷ lệ trao đổi của 2 currency Real FX rate (goods)  Nominal FX rate (currency)
=> Thông qua inflation
- Nominal FX rate: Tỷ giá trao đổi giữa 2 đồng tiền Formula: Quote theo VND/USD
- Real FX rate: Tỷ giá trao đổi giữa cùng 1 hàng hóa
ở 2 quốc gia FX nominal = FX real x

VD: Macdonald có thể tạo ra same quality hambugers *Đồng nào ghi trước thì đồng đó nằm trên
Nếu: 2H ở VN = 1H ở US
=> Real FX rate = 2 VNĐ/USD Ví dụ:
Tại T0, FXreal = FXnominal = 1.7 USD/GBP, CPIUS =
Trong TH 22,700 VNĐ/USD CPIUK
- VNĐ: domestic, pricing currency T1, FXnominal = 1.6 USD/GBP, CPIUS = 110, CPIUK
- USD: Foreign, base currency = 112
=> FXreal tại T1 = ?
=> Nếu quote pricing/base  direct
base/pricing  undirect Cross rate : Tỷ giá chéo

*Lưu ý: Luôn phải xác định đồng nào là base, đồng VD: Cho 1.7799 CHF/USD, 2.2529 NZD/USD => Tính
nào là pricing CHF/NZD?
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 I. Definition
Module Quiz

1. One year ago, the nominal exchange rate for USD/EUR was 1.300. Since then, the real exchange rate has
increased by 3%. This most likely implies that:
A. the nominal exchange rate is less than USD/EUR 1.235.
B. the purchasing power of the euro has increased approximately 3% in terms of U.S. goods.
C. inflation in the euro zone was approximately 3% higher than inflation in the United States.

2. Sell-side participants in the foreign exchange market are most likely to include:
A. banks.
B. hedge funds.
C. insurance companies.

3. Suppose that the quote for British pounds (GBP) in New York is USD/GBP 1.3110. What is the quote for U.S.
dollars (USD) in London (GBP/USD)?
A. 0.3110.
B. 0.7628.
C. 1.3110.

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 I. Definition
Module Quiz

4. The Canadian dollar (CAD) exchange rate with the Japanese yen (JPY) changes from JPY/CAD 75 to
JPY/CAD 78. The CAD has:
A. depreciated by 3.8%, and the JPY has appreciated by 4.0%.
B. appreciated by 3.8%, and the JPY has depreciated by 4.0%.
C. appreciated by 4.0%, and the JPY has depreciated by 3.8%.

5. Today’s spot rate for the Indonesian rupiah (IDR) is IDR/USD 2,400.00, and the New Zealand dollar trades at
NZD/USD 1.6000. The NZD/IDR cross rate is:
A. 0.00067.
B. 1,492.53.
C. 3,840.00.

6. The NZD is trading at USD/NZD 0.3500, and the SEK is trading at NZD/SEK 0.3100. The USD/SEK cross rate
is:
A. 0.1085.
B. 8.8573.
C. 9.2166.

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 II. Interest rate parity, spot and forward rate
- Spot rate: Tỷ giá giao ngay VD2: Rus = 2% Rvn = 8%
- Forward rate: Tỷ giá trong tương lai => Dùng để Borrow Invest
hedging 1USD 22.000 VNĐ

=> Mối quan hệ sẽ thông qua interest rate parity

CIRP : Covered interest rate parity

VD1: Rus = 2%, Rvn = 8%

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 II. Interest rate parity, spot and forward rate
UIRP : Uncovered interest rate parity International Fisher Effect (IFE) : CIRP + UIRP = IFE

- Based on inflation, not abitrage

- VNĐ  so với USD đúng = Nominal Rvn – Nominal
Rus = 6%

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 II. Interest rate parity, spot and forward rate

* Lưu ý:
- Trong thực tế, high i/r rate sẽ giúp  currency value
- CIRP và UIRP chỉ sử dụng để ngăn chặn abitrage
Ví dụ
Quotation
S0 = 4.5671 ABE/DUB, Rabe = 5%, Rdub = 3%
VD: Cho S = AUD/EUR => F0 after 3 month = ?
Nếu F quoted at +3.5 points (pips)
=> F = 0.7313 + = 0.73165

* Lưu ý:
- (+3.5) = Premium của base currency Nhắc lại năm 2008 VN:
- (-3.5) = Discount của base currency S = 18.000 VNĐ/USD, Rvn = 30% , Rus = 5%
- Đối với pricing currency thì sẽ ngược lại => F0 = 22.286 VNĐ/USD
- Đề có thể cho + - % (VD trong sách) Tuy nhiên, VN áp dụng Managed floating FX rate với
+- 3%
=> Nếu hedge with F0 = 22.286  realize loss ngay
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lập tức
 II. Interest rate parity, spot and forward rate

Module Quiz

1. The spot CHF/GBP exchange rate is 1.3050. In the 180-day forward market, the CHF/GBP exchange rate is –
42.5 points. The 180-day forward CHF/GBP exchange rate is closest to:
A. 1.2625.
B. 1.3008.
C. 1.3093.

2. The spot rate on the New Zealand dollar (NZD) is NZD/USD 1.4286, and the 180-day forward rate is
NZD/USD 1.3889. This difference means:
A. interest rates are lower in the United States than in New Zealand.
B. interest rates are higher in the United States than in New Zealand.
C. it takes more NZD to buy one USD in the forward market than in the spot market.

3. The current spot rate for the British pound in terms of U.S. dollars is $1.533 and the 180-day forward rate is
$1.508. Relative to the pound, the dollar is trading closest to a 180-day forward:
A. discount of 1.63%.
B. premium of 1.66%.
C. discount of 1.66%.
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 II. Interest rate parity, spot and forward rate

Module Quiz

4. The annual interest rates in the United States (USD) and Sweden (SEK) are 4% and 7% per year, respectively.
If the current spot rate is SEK/USD 9.5238, then the 1-year forward rate in SEK/USD is:
A. 9.2568.
B. 9.7985.
C. 10.2884.

5. The annual risk-free interest rate is 10% in the United States (USD) and 4% in Switzerland (CHF), and the 1-
year forward rate is USD/CHF 0.80. Today’s USD/CHF spot rate is closest to:
A. 0.7564.
B. 0.8462.
C. 0.8888.

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 III. Exchange rate regimes

Not have their own currency

- Use other currency  dollarization  không thể 3. Target zone: Vẫn là fixed FX rate nhưng 2%
chủ động thực hiện fiscal or monetary policy để tác => More flexible do wider range
động economy
4. Crawling peg: adjust with inflation
- Monetary Union (EURO): Đồng tiền chung => Passive: + inflation
Active: + inflation + forecast
Not have their own currency
5. Manament of FX within crawling bands: FX rate
1. Currency board management (hội đồng tiền tệ):
sẽ dao động với width of the bands tăng dần qua từng
commit a fixed FX rate
thời kỳ (3%  5%)
=> Spurious stability
=> Easier for crisis (VD: UK – Geogre Soros)
6. Managed floating FX rate: Thả nổi có quản lý,
2. Conventional fixed peg arrangement: Vẫn là fixed based on economic target.
FX rate nhưng biến động 1%
=> Intervention bằng cách: 7. Independent floating: Thả nổi hoàn toàn
- Direct: Buy/sell foreign currency (Sbv buy/sell USD) => Market determination
- Undirect: Change i/r rate policies, regulations
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 IV. Effects of FX rate on international trade and capital
flows Approach
Elasticities J-Curve Approach
Tiếp cận theo elasticities of goods Việc phá giá VND  USD,
VND
VD: Theo lý thuyết, nếu VN  i/r  VND   X, M => Các existing debt  and
Tuy nhiên, nếu VN chỉ XNK các mặt hàng thiết yếu SPA 
với low elasticities => In ST,  trade deficit but
just
=>  Qexport <  Pexport In LT, recover và growth
 Qimport <  Pimport

=> Citizen vẫn phải import goods with higher price và Absorption Approach
export goods with lower price
- Account for both CA and KA => sửa lỗi Elasticities
=> Trade deficit tiếp tục tăng mạnh approach

- Balance of trade = Income – Expenditure

=> BT = Y – E

=> X – M = S – I + T – G => = -
Drawback: only focus on CA, ignore KA 12
 IV. Effects of FX rate on international trade and capital
flows
Module Quiz
1. The monetary authority of The Stoddard Islands will exchange its currency for U.S. dollars at a one-for-one ratio. As a result, the
exchange rate of the Stoddard Islands currency with the U.S. dollar is 1.00, and many businesses in the Islands will accept U.S.
dollars in transactions. This exchange rate regime is best described as:
A. a fixed peg.
B. dollarization.
C. a currency board.
2. A country that wishes to narrow its trade deficit devalues its currency. If domestic demand for imports is perfectly price-inelastic,
whether devaluing the currency will result in a narrower trade deficit is least likely to depend on:
A. the size of the currency devaluation.
B. the country’s ratio of imports to exports.
C. price elasticity of demand for the country’s exports.
3. A devaluation of a country’s currency to improve its trade deficit would most likely benefit a producer of:
A. luxury goods for export.
B. export goods that have no close substitutes.
C. an export good that represents a relatively small proportion of consumer expenditures.
4. Other things equal, which of the following is most likely to decrease a country’s trade deficit?
A. Increase its capital account surplus.
B. Decrease expenditures relative to income.
C. Decrease domestic saving relative to domestic investment.

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