Скачать презентацию Chapter 6 Interest Rate Parity 熊家财 江西财经大学会计学院 xiongjc-p 163 Скачать презентацию Chapter 6 Interest Rate Parity 熊家财 江西财经大学会计学院 xiongjc-p 163

e1f6e34ee4c7d56bdeddfa58e9218013.ppt

  • Количество слайдов: 42

Chapter 6: Interest Rate Parity 熊家财 江西财经大学会计学院 xiongjc-p@163. com 1 Chapter 6: Interest Rate Parity 熊家财 江西财经大学会计学院 xiongjc-p@163. com 1

Chapter 6: Interest Rate Parity 6. 1 Theory of Covered Interest Rate Parity 6. Chapter 6: Interest Rate Parity 6. 1 Theory of Covered Interest Rate Parity 6. 2 Covered Interest Rate Parity in Practice 6. 3 Problems Related to Testing Interest Rate Parity 6. 4 Hedging Transaction Risk in the Money Market 6. 5 The Term Structure of Forward Premiums and Discounts 2

Ex 6. 1 Kim’s choice n Kim Deal, a portfolio manager for UBS, a Ex 6. 1 Kim’s choice n Kim Deal, a portfolio manager for UBS, a Euro bank, is considering two alternative investment of € 10 million - invest in euro deposits for 1 year - invest in yen deposits for 1 year Suppose Kim has the following data: EUR interest rate 3. 5200% per annum(p. a) JPY interest rate 0. 5938% p. a Spot exchange rate ¥ 146. 0300/ € 1 -year forward exchange rate ¥ 141. 9021/ € 3

Ex 6. 1 Kim’s choice n n Choice 1: Invest in euro deposit for Ex 6. 1 Kim’s choice n n Choice 1: Invest in euro deposit for 1 year, after 1 year she will have € 10 000 ×(1+3. 5200%)= € 10 352 000 Choice 2: Invest in yen deposit for 1 year: - convert euro € 10 million to JPY: € 10 000 × (¥ 146. 0300/ €)=¥ 1 460 300 000 - invest her yen at 0. 5938% for 1 year: ¥ 1 460 300 000 × (1+ 0. 5938% )=¥ 1 468 971 261 - convert yen to euro at ¥ 146. 0300/ € ¥ 1 468 971 261 / (¥ 146. 0300/ €)= € 10 325 005 4

Ex 6. 2 Kevin’s choice n Suppose Kevin has $10 million to invest, and Ex 6. 2 Kevin’s choice n Suppose Kevin has $10 million to invest, and he has the following data: USD interest rate 8. 0% per annum(p. a) GBP interest rate 12. 0 % p. a Spot exchange rate $ 1. 6/ £ 1 -year forward exchange rate $ 1. 53/ £ 5

Ex 6. 2 Kevin’s choice n Choice 1: Invest in dollar deposit for 1 Ex 6. 2 Kevin’s choice n Choice 1: Invest in dollar deposit for 1 year, after 1 year she will have $ 10 000 ×(1+8. 0%)= € 10 800 000 n Choice 2: Invest in GBP deposit for 1 year: - convert $10 million to GBP: € 10 000 ÷ ($ 1. 6/ £)=£ 6 250 000 - invest her GBP at 0. 5938% for 1 year: £ 6 250 000 × (1+12% )= £ 7 000 - convert GBP to dollar at $ 1. 53/ £ £ 7 000 × $ 1. 53/ £=$ 10 710 000 6

Ex 6. 2 Kevin’s choice –Arbitrage borrow pound and invest in dollar n n Ex 6. 2 Kevin’s choice –Arbitrage borrow pound and invest in dollar n n Kevin borrow £ 1 000 at 12%, in 1 year he will owe £ 1 000 * 1. 12= £ 1 120 000 Invest in dollar - convert pound in to dollar: £ 1 000 × $ 1. 6/ £ = $ 1 600 000 - invest dollar at 8% for 1 year: $ 1 600 000 × 1. 08 = $ 1 728 000 - sell the dollar by engaging in a forward contract $ 1 728 000 ÷ ($1. 53/ £)= £ 1 129 411. 76 7

Ex 6. 2 Kevin’s choice –Arbitrage borrow pound and invest in dollar n n Ex 6. 2 Kevin’s choice –Arbitrage borrow pound and invest in dollar n n Borrow pound – raise the pound interest rate 12% ↑ Convert pound into dollar--- depreciate dollar-pound exchange rate $ 1. 6/ £ ↓ invest in dollar -- lower the dollar interest 8% ↓ forward purchase of pounds would raise the dollar – pound forward exchange rate $ 1. 53/ £ ↑ £ 1 000 * (1+12%) < £ 1 000 × $ 1. 6/ £ × (1+8%) ÷ ($1. 53/ £) 8

6. 1 The Theory of Covered Interest Rate Parity: Overview • The Intuition Behind 6. 1 The Theory of Covered Interest Rate Parity: Overview • The Intuition Behind Interest Rate Parity • Two Ways to Buy a Currency Forward • Why There Must Be Interest Rate Parity • Deriving Interest Rate Parity 9

6. 1 Theory of Covered Interest Rate Parity • The Intuition Behind Interest Rate 6. 1 Theory of Covered Interest Rate Parity • The Intuition Behind Interest Rate Parity • Two Ways to Buy a Currency Forward • Why There Must Be Interest Rate Parity • Deriving Interest Rate Parity 10

6. 1 Theory of Covered Interest Rate Parity • Two Ways to Buy a 6. 1 Theory of Covered Interest Rate Parity • Two Ways to Buy a Currency Forward • Buy a forward contract 11

6. 1 Theory of Covered Interest Rate Parity • Why There Must Be Interest 6. 1 Theory of Covered Interest Rate Parity • Why There Must Be Interest Rate Parity • Covered interest rate arbitrage 12

6. 1 Theory of Covered Interest Rate Parity • Deriving Interest Rate Parity • 6. 1 Theory of Covered Interest Rate Parity • Deriving Interest Rate Parity • A general expression for interest rate parity • Interest rate parity and forward premiums and discounts 13

A general expression for interest rate parity Notation: i= domestic currency interest rate for A general expression for interest rate parity Notation: i= domestic currency interest rate for 1 period i* = foreign currency interest rate for 1 period S= the spot exchange rate (Domestic currency/ foreign currency) F= the one-period forward exchange rate (Domestic currency/ foreign currency) 14

A general expression for interest rate parity Consider an investor who has one unit A general expression for interest rate parity Consider an investor who has one unit of domestic currency and is considering two alternative investment - invest in domestic currency - invest in foreign currency 15

A general expression for interest rate parity Alternative 1: invest 1 unit in domestic A general expression for interest rate parity Alternative 1: invest 1 unit in domestic currency, get [1+i] Alternative 2: invest 1 unit in foreign currency - convert one unit domestic into foreign currency: 1/S - invest in foreign currency: get [1/S] * [1+i*] - convert foreign into domestic: get [1/S] * [1+i*] * [F] No arbitrage: [1+i] = [1/S] * [1+i*] * [F] 16

Interest rate parity and forward premiums and discounts (1) [1+i] = [1/S] * [1+i*] Interest rate parity and forward premiums and discounts (1) [1+i] = [1/S] * [1+i*] * [F] 17

Exhibit 6. 1 Diagram of Covered Interest Arbitrage 18 Exhibit 6. 1 Diagram of Covered Interest Arbitrage 18

Exhibit 6. 2 Kevin Anthony’s Arbitrage 19 Exhibit 6. 2 Kevin Anthony’s Arbitrage 19

6. 2 Covered Interest Rate Parity in Practice • The External Currency Market • 6. 2 Covered Interest Rate Parity in Practice • The External Currency Market • Transaction costs in the external currency market • How the external currency market affects other capital markets • London interbank offer rate (LIBOR) 20

Exhibit 6. 3 Interest Rates in the External Currency Market 21 Exhibit 6. 3 Interest Rates in the External Currency Market 21

6. 2 Covered Interest Rate Parity in Practice n Covered Interest Arbitrage with Transaction 6. 2 Covered Interest Rate Parity in Practice n Covered Interest Arbitrage with Transaction Costs q An empirical test 22

Exhibit 6. 4 Covered Interest Rate Parity with Bid-Ask Rates 23 Exhibit 6. 4 Covered Interest Rate Parity with Bid-Ask Rates 23

Exhibit 6. 5 – Panel A $/£ Covered Interest Arbitrage into £ 24 Exhibit 6. 5 – Panel A $/£ Covered Interest Arbitrage into £ 24

Exhibit 6. 5 – Panel B $/£ Covered Interest Arbitrage into £ 25 Exhibit 6. 5 – Panel B $/£ Covered Interest Arbitrage into £ 25

6. 3 Problems Related to Testing Interest Rate Parity n n Default Risks Exchange 6. 3 Problems Related to Testing Interest Rate Parity n n Default Risks Exchange Controls Political Risk The Thrilla in Manila 26

Exhibit 6. 6 External and Internal FRF Interest Rates and Difference 27 Exhibit 6. 6 External and Internal FRF Interest Rates and Difference 27

6. 4 Hedging Transaction Risk in the Money Market Hedging Transaction Risk - Money 6. 4 Hedging Transaction Risk in the Money Market Hedging Transaction Risk - Money Market: Overview • Introduction • Hedging a Foreign Currency Liability • Hedging a Foreign Currency Receivable 28

6. 4 Hedging Transaction Risk in the Money Market • Introduction • Synthetic forward 6. 4 Hedging Transaction Risk in the Money Market • Introduction • Synthetic forward • Money market hedge 29

6. 4 Hedging Transaction Risk in the Money Market • Hedging a Foreign Currency 6. 4 Hedging Transaction Risk in the Money Market • Hedging a Foreign Currency Liability EX 6. 3 Zachy has just contract to import Wine from France. You has to pay € 4 million in 90 days. You have the following data: spot exchange rate $ 1. 10/ € 90 -days forward exchange rate $ 1. 08/ € 90 -days dollar interest rate: 6. 00% p. a. 90 -days euro interest rate 13. 519% p. a 30

Hedging a Foreign Currency Liability n Eliminate the risk by buying euro forward. -- Hedging a Foreign Currency Liability n Eliminate the risk by buying euro forward. -- The dollar paid in 90 days is equal to: € 4 000 * $ 1. 08/ € = $ 4 320 000 -- the present value of these dollar: $ 4 320 000 ÷[1+ 6%*(1/4)]= $ 4 256 157. 64 31

Hedging a Foreign Currency Liability n n hedge the risk in the money market Hedging a Foreign Currency Liability n n hedge the risk in the money market Acquire € 4 million euro asset in 90 days -- The PV of € 4 million at 13. 519% p. a is € 4 000 ÷ [1+13. 519%*(1/4)] =€ 3 869 229. 71 -- the dollar cost : € 3 869 229. 71 * $ 1. 10/ € = $ 4 256 152. 68 32

6. 4 Hedging Transaction Risk in the Money Market • Hedging a Foreign Currency 6. 4 Hedging Transaction Risk in the Money Market • Hedging a Foreign Currency Receivable Ex 6. 4 Sland have agreed to ship sweater to Japan, and will receive ¥ 500 000 in 30 days. You have the following data: spot exchange rate 30 -days forward exchange rate 30 -days pound interest rate: 30 -days yen interest rate ¥ 179. 5 / £ ¥ 180 / £ 2. 70% p. a. 6. 01% p. a 33

Hedging a Foreign Currency Receivable n Eliminate the risk by selling yen forward. -- Hedging a Foreign Currency Receivable n Eliminate the risk by selling yen forward. -- The pound receive in 30 days is equal to: ¥ 500 000 / (¥ 180 / £ )= £ 2 777 778 n hedge the risk in the money market Acquire ¥ 50 million yen liability in 30 days -- The PV of ¥ 50 million yen at 6. 05% p. a is n ¥ 50 000 million ÷ [1+6. 05%*(1/4)] = ¥ 497 508 313 -- sell yen for pound : ¥ 497 508 313 ÷ (¥ 179. 5 / £)= ¥ 179. 5 / £ 34

Hedging a Foreign Currency Liability n n hedge the risk in the money market Hedging a Foreign Currency Liability n n hedge the risk in the money market Acquire ¥ 50 million yen liability in 30 days -- The PV of ¥ 50 million yen at 6. 05% p. a is ¥ 50 000 million ÷ [1+6. 05%*(1/4)] = ¥ 497 508 313 -- sell yen for pound : ¥ 497 508 313 ÷ (¥ 179. 5 / £)=£ 2 771 634 -- invest pound at 2. 70% £ 2 771 634 *[1+2. 7%*(30/365)]= £ 2777 785 35

6. 5 The Term Structure of Forward Premiums and Discounts n The Term Structure 6. 5 The Term Structure of Forward Premiums and Discounts n The Term Structure of Interest Rates q q Spot Interest Rates A Review of Bond Pricing Yields to Maturity Deriving Long-Term Spot Interest Rates 36

6. 5 The Term Structure of Forward Premiums and Discounts n Long-Term Forward Rates 6. 5 The Term Structure of Forward Premiums and Discounts n Long-Term Forward Rates and Premiums 37

Problem 1. Assume that you are an importer of grain into Japan from the Problem 1. Assume that you are an importer of grain into Japan from the United States. You have agreed to make a payment in dollars, and you are scheduled to pay $377, 287 in 90 days after you receive your grain. You face the following exchange rates and interest rates: Spot exchange rate: 90 -day forward exchange rate: 90 -day dollar interest rate: ¥ 106. 35/$ ¥ 106. 02/$ 3. 25% p. a. 90 -day yen interest 1. 9375% rate: p. a. Describe the nature and extent of your transaction foreign exchange risk. b. Explain two ways to hedge the risk. c. Which of the alternatives in part b is superior?

n n A. Any weakening of the yen versus the dollar will increase the n n A. Any weakening of the yen versus the dollar will increase the yen cost of your grain. The possible loss is unbounded. B. Choice 1: buying dollars forward at ¥ 106. 02/$ Choice 2: determine the present value of the dollars that you owe and buy that amount of dollars today in the spot market.

C : The cost of two choices: (1) buying dollars forward at ¥ 106. C : The cost of two choices: (1) buying dollars forward at ¥ 106. 02/$ $377, 287 × ¥ 106. 02/$ = ¥ 39, 999, 967. 74 in 90 days. (2) The present value of $377, 287 at 3. 25% $377, 287 / [1+(3. 25/100) (90/360) ] = $374, 246. 25 Purchasing this amount of dollars in the spot market costs ¥ 106. 35/$ × $374, 246. 25 = ¥ 39, 801, 088. 69 the future value of this Yen is ¥ 39, 801, 088. 69 * [1+ (1. 9375/100) (90/360) ]= ¥ 39, 993, 875. 2 1

Problem 2. Assume that you are an exporter of grain from Japan to the Problem 2. Assume that you are an exporter of grain from Japan to the United States. You are scheduled to receive $377, 287 in 90 days after you exporter your grain. You face the following exchange rates and interest rates: Spot exchange rate: 90 -day forward exchange rate: 90 -day dollar interest rate: ¥ 106. 35/$ ¥ 106. 02/$ 3. 25% p. a. 90 -day yen interest 1. 9375% rate: p. a. 1. a. Explain two ways to hedge the risk. 2. b. Which of the alternatives in part b is superior?

Choice 1: selling dollars forward at ¥ 106. 02/$ $377, 287 × ¥ 106. Choice 1: selling dollars forward at ¥ 106. 02/$ $377, 287 × ¥ 106. 02/$ = ¥ 39, 999, 967. 74 in 90 days. n Choice 2: a. determine the present value of the dollars that you receive and sell that amount of dollars today in the spot market. b. The present value of $377, 287 at 3. 25% $377, 287 / [1+(3. 25/100) (90/360) ] =$374, 246. 25 c. sell dollar it for Yen in the spot market ¥ 106. 35/$ $374, 246. 25 × ¥ 106. 35/$ = ¥ 39, 801, 088. 69 d. invest yen at 1. 9375% , the future value of yen is ¥ 39, 801, 088. 69 * [1+ (1. 9375/100) (90/360) ]= ¥ 39, 993, 875. 2 1 n