inter finance 国际金融讲义.doc

INTERNATIONAL FINANCEPREFACEI. What is International Finance?Finance - the management of money, especially money controlled by a government, company or large organization; or the provision of money when and where required.International finance studies the relationship of international money and finance. It includes the balance of payments, foreign exchange reserve and foreign exchange rate.II. The Environment of International FinanceEconomic integration (经济一体化): The organization of economic activities so that national boundaries do not matter. Complete economic integration would imply free trade in all goods and services, perfect capital mobility, complete freedom of migration, complete freedom of establishment for businesses, and an unhindered flow of information and ideas. Globalization (全球化): market integration (市场一体化), world governance (世界性管理), global society (全球社会) and mobility of peoples and information (人口与信息的流动)The Worlds Major Economic Cooperation and Free Trade Agreementsl WTO World Trade Organization 143 membersl NAFTA North American Free Trade Agreement The United States, Canada, and Mexicol EU European UnionAustria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain.l ASEAN Association of South-East Asian NationsBrunei (文莱), Cambodia, Indonesia, Laos, Malaysia, Myanmar (缅甸), Philippines, Singapore, Thailand, and Vietnam.l APEC Asia-Pacific Economic Cooperation21 members including Australia, Canada, China, Japan, Korea, Russia, and the United States. APEC promotes open trade and economic cooperation in the region.l Mercosur the “common market of the South”Argentina, Brazil, Paraguay, and Uruguay, Bolivia and Chile are associate members.l Andean Community Bolivia, Colombia, Ecuador, Peru, and Venezuela. In 1998, the Andean Community and Mercosur signed an agreement for the creation of a Free Trade Area. These countries are working with the UN Conference on Trade and Development (UNCTAD) to establish a Latin American common market.l OPEC Organization of Petroleum Exporting CountriesAlgeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.l CIS Commonwealth of Independent StatesArmenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Republic of Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.III. The Growing Importance of International Finance Real sector: produces goods and services, creates wealth of a societyFinancial sector: facilitates real sector, helps real sectors growing fast1. The rapid growth of international trade 2. The increasing volume of international transactions in financial assets3. The creation of financial instrumentsFutures, options and swaps (financial products)IV. The Benefits of Studying International FinanceIt helps the MNCs (Multinational corporations) financial manager decide how international events will affect a firm and which steps can be taken to exploit positive developments and insulate the firm from harmful ones. It helps the manager to anticipate events and to make profitable decisions before the events occur. Events include: Exchange rate profits Interest rate investment Inflation rate prices Asset values returns Jobs, bond and stock prices, food prices, government revenues and other important economic variables are all tied to exchange rates and other developments in the global financial environment.Modern day financial management and investment is international in scope and requires the corresponding knowledge and expertise in order to be successful.III. About the coursePart I: Balance of payments, foreign exchange and exchange rate, exchange rate system (Chapter 1, 2 and 3)Part II: Exchange rate risk and derivative instruments (衍生工具) (Chapter 4 and 5)Part III: Balance of payments theories (Chapter 8 and 9)Part IV: Macroeconomics in an open economy, policy and possible instruments to adjust the macro-economy. (Chapter 10, 11, 12)Chapter I International Balance of PaymentsI. Concept of International Balance of Payments The balance of payments is the record of the economic and financial flows that take place over a specified time period between residents and non-residents of a given country. 国际收支是一国在一定时期内居民与非居民经济与金融流量的记录。 A double-entry bookkeeping system (复式簿记制度) records both sides of any two-party transaction with two separate and offsetting entries: a debit entry and a credit entry.Debit entry (-): transactions that result in a domestic resident making a payment abroad. (借方记录本国居民对外支付的交易)Credit entry (+): transactions that result in a domestic resident receiving a payment from abroad. (贷方记录本国居民接收国外付款的交易)II. Accounts in BOP 1. Current Account (经常项目)l Goods (商品): imports (debit -) and exports (credit +)l Services (劳务): imports (-), exports (+)l Income (收入): it comprises income derived from the ownership of foreign financial assets. It includes interest and dividends (股息) from portfolio investment (证券投资) but excludes the earnings of incorporated enterprises that are not formally distributed (企业未分配利润). Only the income earned on the financial asset is included in the current account, because income earned on assets can be used for current consumption. l Unilateral transfers (单方转移): donations, gifts (private and government) Current account = goods + services + income + unilateral transfers Examples of current account transactions: Transaction 1: A merchandise export Suppose, for example, that a Californian vineyard sells 5000 bottles of wine to a Japanese retailer. The price of the wine is USD 265,000. The Japanese retailer pays for the wine through Fuji Bank in Japan. The US balance of payments will show a credit or a source of USD 265,000 of exports. The US exporter has a short-term claim of $265,000 on the Fuji Bank. Export Short-term claims Debit (-) Credit (+) Debit (-) Credit (+) $265,000 $265,000 Transaction 2: A merchandise import Macys, a department store located in New York, buys USD 200,000 worth of textiles from a South Korean company. The merchandise is billed in US dollars and Macys pays for the merchandise with a check drawn on a New York branch of Citicorp.Import Short-term liabilities Debit (-) Credit (+) Debit (-) Credit (+) $200,000 $200,000 From Transactions 1 and 2 we can calculate the US trade balance for the period which is equal to:Trade balance = Exports Imports = $265,000 $200,000 = $65,000 (surplus) Transaction 3: An export of a non-financial service Martingale is a Frenchman who lives in Paris, France. He decides to spend his two-week vacation traveling around the United States. He buys a round trip ticket on American Air Lines for the equivalent of USD 7000 and spends an extra USD 100 for headphones and drinks while on the plane. His US expenses for hotels, food, transportation and souvenirs comes to the equivalent of USD 14,900. He pays American Air Lines in cash with euros and obtains the USD 14,900 that he spends in the United States by selling euros to a US branch of Citicorp.Service export Short-term claims Debit (-) Credit (+) Debit (-) Credit (+) $22,000 $22,000 Transaction 4: Investment income: The export of a financial service Elepha, Inc., a wholly owned Nigerian subsidiary of the New York based Phi, Inc., has after-tax profits of the equivalent of USD 100,000 and declares a dividend of USD 50,000. Phi uses the dividend to purchase long-term bonds issued by the Nigerian government.Investment income Direct investmentDebit (-) Credit (+) Debit (-) Credit (+) $100,000 $50,000 Long-term claimsDebit (-) Credit (+) $50,000 Transaction 5: A unilateral transfer Mohammed Hassan, who is a citizen of Algeria but has been a resident of the United States for several years, transfers USD 5000 from his account at a New York branch of Citicorp to his ageing fathers account at an Algiers branch of the Algerian National Bank.Unilateral transfers Short-term liabilitiesDebit (-) Credit (+) Debit (-) Credit (+)$5,000 $5,000 2. Capital account (financial account) 资本项目l Direct investment (直接投资): This account includes inflows and outflows of direct investment capital such as equity capital, reinvested earnings, and intercompany transactions between affiliated enterprises. Direct investment refers to purchase more than 10% of an enterprises outstanding stocks. The purpose of direct investment is to establish financial control of a foreign enterprise. l Portfolio investment (证券投资或间接投资): it includes cross-boarder transactions associated with long-term debt and equity securities, money market instruments, and derivative instruments.l Other investment (其他投资): it reflects other financial transactions, including foreign currency deposits, loans, and trade credits.Capital account = Direct investment + Portfolio investment + Other investmentExamples of capital account transactions:Transaction 6: A direct investment An affiliate of BP in Texas has net profit of USD 150,000. The company decides to reinvest it. Direct investment Short-term liabilitiesDebit (-) Credit (+) Debit (-) Credit (+) $150,000 $150,000Transaction 7: A portfolio investment An American buys $50,000 China Petroleum Companys stock. He pays for the stocks with his bank deposits in The Chase Manhattan Bank in New York City. Portfolio investment Short-term liabilitiesDebit (-) Credit (+) Debit (-) Credit (+) $50,000 $50,000 3. Official settlements balance (官方结算项目)A key element in international economic and financial analysis is the amount of international liquidity (国际清偿力) or “reserves” held by the central authority of individual countries. Reserves include monetary gold (货币用黄金), special drawing rights SDRs (特别提款权), the reserve position in the Fund (国际货币基金的储备头寸, 普通提款权) and foreign exchange (外汇)l Monetary gold: held by the authorities as a financial asset.l SDRs: reserves created by the International Monetary Fund (IMF) as bookkeeping entries and credited to the account of IMF member countries according to their established IMF quotas. 特别提款权是由国际货币基金组织创立的储备资产，基金根据会员国在基金的份额而对其分配的账面资产. They may be used in the settlement of balance of payments imbalances among countries participating in the Special Drawing Account administered by the IMF.l The reserve position in the Fund: it is basically the difference between the members quota plus other claims on the Fund less the Funds holdings of that members currency. 基金的储备头寸指会员国在基金的份额加上对基金的其它债权与基金所持有的该会员国货币数量之差。l Foreign exchange: the largest component of total international liquidity. It includes monetary authorities claims on non-residents in the form of bank deposits, Treasury bills, short-term and long-term government securities, and other claims usable in the event of balance of payments need. Official settlements balance = Current account + Capital accountTransaction 8: A reserve transaction NatWest Bank in London pays USD 100,000 to buy GBP 62,500 from the Federal Reserve Bank, the US central bank. Change in reserves Short-term liabilitiesDebit (-) Credit (+) Debit (-) Credit (+) $100,000 $100,0004. Net errors and omissions (错误与遗漏)US balance of payments after Transaction 8 Current account + Exports 265,000 (1) Imports -200,000 (2) = Merchandise Trade balance 65,000 + Exports of non-financial services 22,000 (3) Imports of non-financial services - + Investment income (credit) 100,000 (4) Investment income (debit) - +(-) Private unilateral transfers -5,000 (5) +(-) Official unilateral transfers - = Current account balance 182,000 Capital account +(-) Direct investment 100,000 (4) + (6) +(-) Portfolio investment -50,000 (7) +(-) Other long-term capital -50,000 (4) +(-) Other short-term capital -282,000 (1) + (2) + (3) + (5) + (6) + (7) + (8) = Capital account balance -282,000 Official settlements balance +(-) Change in reserves 100,000 (8) = Official settlements balance 100,000 +(-) Net errors and omissions -III. Equilibrium, Deficits and Surplus (平衡、逆差与顺差) Equilibrium: Official settlements balance = 0 Or: Current account + Capital account (private) = 0 Deficits: Official settlements balance 0 Surplus: Official settlements balance 0 Trade balance surplus and deficit (贸易盈余与逆差): Current account surplus and deficit (经常帐户盈余与逆差): Capital account surplus and deficits (资本帐户盈余与逆差): International investment position (国际投资状况) or international indebtedness (国际借贷) refers to the stocks (存量) of a nations international assets and foreign liabilities at a point in time, usually the end of a year. Flows (流量) change stocks, so it is with the balance of payments and the international investment position.IV. The Macro Meaning of the Current Account Balance (经常账户余额的宏观意义) If all credits must equal all debits, then the balance on goods, services, income, and gifts that is, the current account surplus must equal net foreign investment (对外投资净值), the net accumulation of foreign assets minus foreign liabilities.A countrys current account balance equals the countrys net foreign investment. (CA = If)l Invest at home in domestic capital formation, which is domestic investment (Id). (投资国内)l Invest abroad in net foreign investment (If). (投资国外).That is to say, S = Id + If , or If = S - Id , or equivalently, the countrys current account balance equals national saving that is not invested at home (CA = S - Id)A countrys current account balance is the difference between its domestic production of goods and services and its total expenditures on goods and services.Domestic production of goods and services (Y) equals the demand for the countrys production.Y = C + Id + G + X - M Suppose current account (CA) is equal to X M, then Y = C + Id + G + CASince C + Id + G (E) represents the countrys total expenditures, then CA = Y ESummary: Current account balance (CA)= Net foreign investment (If) = The difference between national saving and domestic investment (S - Id)= The difference between domestic product and national expenditure (Y E)What do they mean for a country that has a current account surplus? l The country has positive net foreign investment (that is, the country is acting as a net lender to or investor in the rest of the world).l The country is saving more than it is investing domestically.l The country is producing more (and has more income from this production) than it is spending on goods and services.The opposite is true for a country with a current account deficit: net foreign borrower, domestic saving less than domestic investment, and spending more than production (or income).V. Reexamine the Relationship between Current Account and Capital Account (重新考察经常账户与资本帐户的关系)Y= C + S + TC + S + T = C + Id + G + CAOr, S Id (G T) = CAPrivate saving can be used to purchase three types of assets: domestic private investment, government debt (G T) or to accumulate foreign assets (If) S = Id + (G T) + If If is the (net) accumulation of foreign assets. (domestic residents purchases of foreign assets in excess of foreign residents purchases of domestic assets) Then, by rearrangementIf = S Id (G T)So, CA = S Id (G T) = If Example: Suppose a nations private saving rate is 5.2 percent of its total output, its private investment rate is 7.3 percent, and its fiscal budget deficit is 3.3 percent CA = If = 5.2 7.3 3.3 = -5.4. In words, this nations residents must borrow from abroad (If = -5.4) to finance their investment expenditures, resulting in a current account deficit in the amount of 5.4 percent of total output.CHAPTER IIFOREIGN EXCHANGE MARKET Customer BuysStructure of $ with ￥Foreign ExchangeMarkets Local Bank Foreign Major Banks Large Exchange Interbank MNCs Broker Market Buy & Sell Local Bank Customer Buys ￥ with $ Foreign exchange is simply another nations currency. Or, foreign exchange is the act of trading different nations moneys. An exchange rate is the price of one nations money in terms of another nations money.I. Spot Market (即期市场)Foreign exchange market is where currencies bought and sold. Foreign exchange spot market is for spot transactions (即期交易). A spot transaction is a straightforward exchange of one currency for another. The spot rate is the current market price, the benchma