国际金融练ch02.doc

Chapter 2: The Market for Foreign Exchange I. Chapter Overview Chapter 2 begins with a description of the foreign exchange market, in particular the spot market. After presenting a table of exchange rates, the section explains currency appreciations and depreciations. It next shows how a pair of bilateral rates can be used to compute the cross rate for a given currency. The section also demonstrates how to compute the bid-ask spread and the bid-ask margin for a currency, and distinguishes between the nominal and real exchange rates. The next section defines the concept of an effective exchange rate as weighted-average value of a currency relative to a selected group of currencies. Examples of such weighting include multilateral weights, which reflect the trade flow of the individual country with all countries included in the index relative to the total trade volume among all countries included in the index, and bilateral weights, which reflect the trade flow of the domestic country with respect to each of the countries relative to the total trade of the domestic country with each of the countries included in the index. A detailed numerical example is provided for a bilateral weighted effective exchange rate for the U.S. The next section provides an example of a composite currency, specifically the International Monetary Funds Special Drawing Rights. Its construction is discussed in detail. The next section of the chapter presents foreign exchange arbitrage. An example of triangular arbitrage is provided. The following section explains and motivates(using the concept of derived demand(the supply of and demand for a currency. It then shows the determination of the equilibrium exchange rate. Finally, it uses the supply and demand diagram to show how a nations would intervene in the foreign exchange market to maintain a given exchange value. The final section of this chapter is devoted to the idea of purchasing power parity, PPP, as a simple theo