Chapter 13 Balance of Payment 13.1 Introduction
International finance: examination of the monetary aspects of international economics
Balance of Payment: a summary statement in which all the transactions of the nation’s residents with the
foreigners are recorded during a certain period.
Main purpose of BOP: inform the government of the international position of the nation; to help it in its
The official reserve assets:
✓ Gold holdings of monetary authorities黄金储备 ✓ Special Drawing Rights特别提款权 (paper gold)
International reserves created on the books of the IMF and distributed to member nations according to importance in international trade
✓ The reserve position in the IMF 在IMF的头寸
monetary, fiscal and trade policies.
BOP traits: The BOP aggregates all the trades into a few categories
Only the net balance of each type of international capital flow is included
International transaction: Exchange of a good, service or assets between the residents of two nations. Gifts and certain transfers + International Transactions
People Concerning BOP: Diplomats, soldiers, tourists and workers belong to motherland
Corporation: motherland/ foreign branches: local International institutions: nowhere
13.2 BOP Accounting Principles
Credit transactions: involve the receipt of payments from foreigners +
Exports, unilateral transfers and goods received, capital inflow Capital inflow:
an increase in foreign assets in the nation/本国持有外国资产上升 a reduction in the nation’s assets abroad/本国在外资产减少
Debit transactions: involve the making of payments to the foreigners -
Imports, unilateral transfers or gifts paid, capital outflow Capital Outflow:
an increase in the nation’s assets abroad a reduction in foreign assets in the nation
Double-Entry Bookkeeping: each international transaction is recorded twice, once as a credit and once
as a debit of an equal amount.
5 Examples in Textbooks
13.3 The International Transactions of the USA
In a few instances, the sum of the subtotals differs slightly from the total because of rounding. Exports of goods, services and income Imports of goods, services and income Unilateral transfers, net US-owned assets abroad, net Foreign-owned assets in the US Allocation of special drawing rights Statistical Discrepancy Memoranda Balance on goods trade Balance on services Balance on goods and services Balance on income Balance on goods, services and income Unilateral current transfers, net Balance on current account The reserves paid in by the nation on joining the IMF, which the nation can then borrow automatically and without questions asked in case of need
✓ The official foreign currency holdings of monetary authorities外汇储备
Statistical Discrepancy: This is required to make the total credits equal to the total debits, as required by
double-entry bookkeeping.
13.4 Accounting Balances and Disequilibrium in International Transactions Autonomous transactions: transactions in current account + capital account
Take place for business or profit motives and independently of BOP considerations
Items above the line
Current account:
All sales and purchases of currency produced goods and services, investment incomes, and unilateral transfers
Link between the nation’s international transactions and its national income
Current account surplus stimulates domestic production and income. Current account deficit dampens domestic production and income.
Capital account:
The changes in US-owned assets abroad and foreign-owned assets in the US other than official reserve assets
Change in reserves reflects government policy rather than the market force.
Accommodating transactions: Transactions in official reserve assets
Items below the line
The accommodating items form the Official Reserve Account.
The balance on the official reserve account is called the Official Settlements Balance.
Deficit in the BOP:
The excess of debits over credits in the current and capital accounts The excess of credits over debits in official reserve account Surplus in the BOP:
The excess of debits over credits in official reserve account
The excess of credits over debits in the current and capital accounts
Chapter 14 Foreign Exchange Markets and Exchange rates 14.1 Introduction
Foreign exchange market: The market in which individuals, firms and banks buy and sell foreign
currencies or foreign exchange.
14.2 Functions of the Foreign Exchange Markets The principle function:
The transfer of funds or purchasing power from one nation and currency to another
This is usually accomplished by an electronic transfer and increasingly through the Internet.
Through the internet, a domestic bank instructs its correspondent bank in a foreign monetary center to pay a special amount of the local currency to a person, firm or an account.
外汇供给：外国游客来访 出口 接受外国投资 外汇需求：本国人外出游 进口 对外投资
4 levels of transactors or participants: Traditional users The immediate users and suppliers of foreign currencies Commercial bank A cleaning houses between the users and earners of foreign exchange Foreign exchange broker As Clearinghouses for surpluses and shortages between the interbank or wholesale commercial banks market Central bank Act as the seller or buyer of last resort when the nation’s total foreign exchange earnings and expenditures are unequal
International currency / Vehicle currency
Some nations’ currencies are globally accepted and used as vehicle currencies.
The US receives a seignorage benefit when the dollar is used as a vehicle currency.
铸币税：国家发行货币吸纳黄金之后，货币贬值，使得持币方财富减少，发行方财富增加。
London is by far the largest foreign exchange market in the world.
Other functions: The credit function
Credit is usually needed when goods are in transit and also to allow the buyers’ time to resell the goods and make the payment.
Provide the facilities for hedging and speculation.
14.3 Foreign Exchange Rates
Exchange rate: Domestic currency price of a unit of the foreign currency
Foreign currency price of a unit of domestic currency
¥/$
S$
Under a flexible exchange rate system, the exchange rate is determined by the intersection of the market demand and supply curves. Demand Negatively inclined From debit transaction Supply Positively inclined From credit transaction D$
$/day
Depreciation: 本币贬值 An increase in the domestic price of the foreign currency Appreciation: 本币升值 A decline in the domestic price of the foreign currency. Cross exchange rates
Effective exchange rates: A weighed average of the exchange rates between the domestic currency and
the nation’s most important trade partners, with weights given by the relative importance of the nation’s trade with each of these trade partners. 一国货币相对于该国最重要的一些贸易伙伴国货币汇率的加权平均值
Arbitrage: 套利The purchase of a currency in the monetary center where it is cheaper, for immediate
resell in the monetary center where it is more expensive in order to make a profit
As arbitrage takes place, the exchange rate between the two currencies tend to be equalized and eliminating the profitability of further arbitrage. Arbitrage increases the demand for the currency in the monetary center where the currency is cheaper. Arbitrage increases the supply of the currency where the currency is more expensive. Two-point arbitrage / Triangular arbitrage
The exchange rate and the BOP
The demand for the foreign currency arises from the autonomous debit transactions of the local nation
that involve payments to the foreign country.
The supply of the foreign currency arises from the autonomous credit transactions of the local nation
that involve payments from the foreign country. Demand Negatively inclined From debit transaction Supply Positively inclined From credit transaction 14.4 Spot and Forward Rates, Currency Swaps, Futures and Options Spot and forward rates
Spot Rates / Spot Transactions:
The payment and receipt of the foreign exchange within two business days after the transaction is agreed upon.
Forward Rates / Forward Transaction:
An agreement today to buy or sell a specified amount of foreign currency at a specified future date at a rate agreed upon today.
One month, three months, or six months
Forward contracts can be renegotiated for one or more periods when they become due.
Forward discount: the forward rate is below the present spot rate Forward premium: the forward rate is above the present spot rate If <0 Forward discount If >0 Forward premium
Currency Swap: 货币掉期A spot sale of a currency combined with a forward repurchase of the same
currency as part of a single transaction.
比在即期市场上交换，再用交换的货币购买远期的合约省费用。
Swap Rate: the difference between the spot and forward rates in the currency swap
Most interbank trading involving the purchase or sale of currencies for future delivery is done not by forward exchange contracts alone but combined with spot transactions in the form of currency swaps.
大多数银行之间的远期外汇买卖不是以远期合约形式完成的，而是与即期交易结合，构成掉期合约。
Foreign Exchange Futures and Options 外汇期货 外汇期权 Foreign Exchange Future:
Originated from the International Monetary Market of the Chicago Mercantile Exchange
A forward contract for standardized currency amounts and selected calendar dates traded on an organized market (exchange)
The future markets differ from a forward market:
Only a few currencies are traded in future market.
Future trades occur in standardized contracts only, for a few specified delivery dates. Future markets are subject to daily limits on exchange rate fluctuations Future trades take place only in a few geographical locations.
Future contracts are usually for smaller amounts than forward contracts. Future contracts are more expensive.
Future contracts can be sold at any time up until maturity on an organized futures market.
Foreign Exchange Option:
A contract giving the purchaser the right, but not the obligation to buy (a call option) or to sell (a put option) a standard amount of a traded currency on a stated date (the European option) or at any time before a stated date (the American Option) at a stated price (the strike or exercise price).
✓ Foreign exchange options are in standardized sized equal to future trades.
✓ The buyer of the option has the choice to purchase or forgo the purchase if it turns out to be
unprofitable.
✓ The seller of the option, however, must fulfill the contract if the buyer so desires.
✓ The buyer pays the seller a premium (the option price) ranging from 1 to 5 percent of the
contract’s value for this privilege when entering the contract.
14.5 Foreign Exchange Risks, Hedging, and Speculation foreign exchange risk (open position)
When a future payment must be made or received in a foreign currency, because spot exchange rates vary overtime in the absense of intervention. transaction exposure transactions involving future payments and receipts in a foreign currency accounting exposure the need to value inventories held abroad in terms of domestic currency economic exposure estimating the domestic currency value of the future profitability of the firm Hedging
the avoidance of a foreign exchange risk, the covering of an open position can be achieved in spot, forward, futures or options market
Speculation
acceptance of foreign exchange risk in the hope of making a profit
can be achieved in spot, forward, futures or options market stablizing speculation 稳定性投机——高卖低买
the purchase of foreign currency when the domestic price of the foreign currency falls, or the sale when it rises
moderate flucturations in currency values
destablizing speculation 不稳定性投机——追涨杀跌
the sale of currency when the domestic price of the foreign currency falls or the purchase when it rises.
serves to amplify flucturations in exchange rate values.
14.6 Interest Arbitrage and the Efficiency of Foreign Exchange Market Interest arbitrage
the international flow of short-term liquid capital to earn higher returns abroad covered interest arbitrage / uncovered interest arbitrage
foreign exchange risk←possible depreciation of the foreign currency covered interest arbitrage: the foreign exchange risk is covered
uncovered interest arbitrage: the foreign exchange risk is uncovered
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