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Level 1 CFA Economics: Currency Exchange Rates-Lecture 2 - YouTube
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The advanced exchange rate (also referred to as the forward rate or the forward price ) is the exchange rate at which the bank agrees to exchange one currency for another in the future when entering a forward contract with an investor. Multinational companies, banks, and other financial institutions enter into forward contracts to take advantage of the forward rate for hedging purposes. The advanced exchange rate is determined by the parity relationship between the spot rate and the difference in interest rates between the two countries, reflecting the economic balance in the foreign exchange market where arbitrage opportunities are eliminated. When in equilibrium, and when interest rates vary in two countries, the parity condition implies that the advanced interest rate includes premiums or discounts that reflect the difference in interest rates. Future exchange rates have important theoretical implications to forecast future spot rates. Financial economists have proposed the hypothesis that advanced rates accurately predict future spot rates, where empirical evidence mixes.


Video Forward exchange rate



Introduction

The forward exchange rate is the rate at which commercial banks are willing to commit to exchange one currency with another in certain future dates. The forward rate is the forward price type. This is the exchange rate negotiated today between the bank and the client when entering a forward contract agreeing to buy or sell a certain amount of foreign currency in the future. Multinational companies and financial institutions often use the forward market to hedge future debt or foreign currency receivables against foreign exchange risk by using forward contracts to lock forward exchange rates. Hedging with forward contracts is usually used for larger transactions, while futures contracts are used for smaller transactions. This is due to adjustments made to banks by over-the-counter forward exchange contracts, versus the standardization of futures traded futures contracts. Banks typically cite forward rates for major currencies in a period of one, three, six, nine, or twelve months, but in some cases, quotes for larger maturities are available for up to five or ten years.

Maps Forward exchange rate



Relationship with closed interest rate parity

Closed interest rate parity is a non-arbitration condition in the foreign exchange market that depends on the availability of the forward market. This can be reset to provide an advanced exchange rate as a function of another variable. The forward exchange rate depends on three known variables: spot rate, domestic interest rate, and foreign interest rate. This effectively means that the forward rates are the price of the forward contract, which derives its value from the spot contract price and the addition of information about the available interest rate.

The following equation represents the parity of the closed interest rate, a condition in which the investor removes the exposure to foreign exchange risk (unanticipated exchange rate changes) with the effective use of forward exchange risk contracts closed . Under these circumstances, domestic investors will get the same results from investing in domestic assets or converting currency at spot rates, investing in foreign currency assets in countries with different interest rates, and redeeming foreign currency for domestic currency in negotiable value exchange forward. Investors will be indifferent to deposit rates in these countries because of the balance generated from the advanced exchange rate. This condition allows no arbitrage opportunity due to the return of domestic deposits, 1 i d , equal to the return of foreign deposits, [S/F] (1 i f ). If these two returns are not equated with the use of forward contracts, there will be potential arbitrage opportunities in which, for example, investors may borrow currencies in countries with lower interest rates, convert to foreign currency in today's spot exchange rates, and invest in foreign countries with higher interest rates.

             (         1                            me                 Â                          )         =                   S     Â¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯                         (         1                            me                 Â                          )               {\ displaystyle (1 i_ {f}) = {\ frac {S} {F}} (1 i_ {d})}  Â

Where

F is the forward exchange rate
S is the current spot rate
i d is the interest rate in the domestic currency (base currency)
i f is the interest rate in the foreign currency (cited currency)

Persamaan ini dapat diatur sedemikian rupa sehingga memecahkan untuk tingkat maju:

                        F          =          S                                                 (                1                                                saya                                     d                                               )                                          (                1                                                saya                                     f                                               )                                                   {\ displaystyle F = S {\ frac {(1 i_ {d})} {(1 i_ {f})}}}   

Spot and Forward Exchange Rate - YouTube
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Meneruskan premi atau diskon

The equilibrium resulting from the relationship between forward and spot rates in the context of closed interest rate parity is responsible for eliminating or correcting market inefficiencies that will create the potential for arbitrage gain. Thus, arbitration opportunities quickly pass. In order for this balance to survive under the interest rate differential between the two countries, the forward exchange rate should generally differ from the spot rate, so the condition without arbitration is maintained. Therefore, the forward rates are said to contain premium or discount, reflecting the interest rate differential between the two countries. The following equation shows how premiums or forward discounts are calculated.

Nilai tukar forward berbeda dengan premium atau diskon kurs spot:

                        F          =          S          (          1                   P         )                  {\ displaystyle F = S (1 P)}   

Where

P is premium (if positive) or discount (if negative)

Persamaan ini dapat disusun kembali sebagai berikut untuk memecahkan premi/diskon ke depan:

                        P          =                                  F              S                              -          1                  {\ displaystyle P = {\ frac {F} {S}} - 1}   

Dalam prakteknya, premi dan diskon ke depan dikutip sebagai persentase penyimpangan tahunan dari nilai tukar spot, dalam hal mana perlu untuk menghitung jumlah hari untuk pengiriman seperti pada contoh berikut.

                                   P                         N                              =          (                                  F              S                              -          1         )                                  360              d                                      {\ displaystyle P_ {N} = ({\ frac {F} {S}} - 1) {\ frac {360} {d}}}   

Where

N shows the maturity of the offered exchange rate offer
d indicates the number of days for delivery

Misalnya, untuk menghitung premi atau diskon ke depan selama 6 bulan untuk euro versus dolar yang dapat dikirimkan dalam 30 hari, dengan penawaran harga spot sebesar 1.2238 $/EUR dan kuotasi tingkat maju 6-bulan sebesar 1.2260 $/EUR:

                                   P                         6                              =          (                                  1.2260              1.2238                              -          1         )                                  360              30                              =          0,021572          =          2,16         %                  {\ displaystyle P_ {6} = ({\ frac {1.2260} {1.2238}} - 1) {\ frac {360} {30}} = 0.021572 = 2.16 \% }   

The result is 0.021572 positive, so one would say that the euro is trading at 0.021572 or 2.16% premium against the dollar for delivery in 30 days. Conversely, if someone works this example in euro terms rather than dollars, his perspective will be reversed and people will say that the dollar is trading at a discount against the Euro.

Currency speculation or risk management?
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Estimating upcoming spot rate

Unspecified hypothesis

The unconditional hypothesis states that the conditions of rational expectations and the neutrality of risk afforded, the forward exchange rate is an unbiased predictor of the future spot exchange rate. Without introducing a foreign exchange risk premium (due to the assumption of risk neutrality), the following equation illustrates the unbiased hypothesis.

                      F                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂï <½                          =                  E                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂï <½                         (        S                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂï <½     Â       Â                          )               {\ displaystyle F_ {t} = E_ {t} (S_ {t k})}  Â

dimana

                                   F                         t                                      {\ displaystyle F_ {t}}    adalah nilai tukar maju pada saat t
                                   E                         t                              (                     S                         t                           k                             )                  {\ displaystyle E_ {t} (S_ {t k})}    adalah kurs spot masa depan yang diharapkan pada waktu t k
k adalah jumlah periode di masa depan dari waktu t

The empirical refutation of the unbiased hypothesis is a well-recognized puzzle among financial researchers. Empirical evidence for cointegration between the forward rate and the future spot rate varies. The researchers have published papers showing the empirical failure of the hypothesis by performing regression analysis of changes realized in the spot rate at a forward premium and finding a negative slope coefficient. These researchers offer many reasons for the failure. One center of thought around the relaxation of risk neutrality, while still assuming rational expectations, so that the foreign exchange risk premium may exist that can explain the difference between forward rates and future spot rates.

Persamaan berikut merepresentasikan forward rates sebagai sama dengan spot rate masa depan dan premi risiko (jangan disamakan dengan forward premium ):

                                   F                         t                              =                     E                         t                              (                     S                         t                           1                             )                              P                         t                                      {\ displaystyle F_ {t} = E_ {t} (S_ {t 1}) P_ {t}}   

Nilai tukar spot saat ini dapat diperkenalkan sehingga persamaan tersebut menyelesaikan untuk diferensial forward-spot (perbedaan antara forward rate dan kurs spot saat ini):

                                   F                         t                              -                     S                         t                              =                     E                         t                              (                     S                         t                           1                              -                     S                         t                             )                              P                         t                                      {\ displaystyle F_ {t} -S_ {t} = E_ {t} (S_ {t 1} -S_ {t}) P_ {t}}   

Eugene Fama menyimpulkan bahwa korelasi positif yang besar dari perbedaan antara nilai tukar maju dan variasi sinyal kurs spot saat ini dari waktu ke waktu dalam komponen premium dari diferensial forward-spot                                    F                         t                              -                     S                         t                                      {\ displaystyle F_ {t} -S_ {t}}    atau dalam perkiraan perubahan yang diharapkan dalam nilai tukar spot. Fama menyarankan bahwa koefisien kemiringan dalam regresi perbedaan antara forward rate dan spot rate masa depan                                    F                         t                              -                     S                         t                           1                                      {\ displaystyle F_ {t} -S_ {t 1}}    , dan perubahan yang diharapkan dalam kurs spot                                    E                         t                              (                     S                         t                           1                              -                     S                         t                             )                  {\ displaystyle E_ {t} (S_ {t 1} -S_ {t})}    , pada diferensial forward-spot                                    F                         t                              -                     S                         t                                      {\ displaystyle F_ {t} -S_ {t}}    yang berbeda dari nol menyiratkan variasi dari waktu ke waktu di kedua komponen diferensial forward-spot: premium dan perubahan yang diharapkan dalam kurs spot. Temuan Fama dicari untuk divalidasi secara empiris oleh badan penelitian yang signifikan, akhirnya menemukan bahwa varians besar dalam perubahan yang diharapkan dalam kurs spot hanya dapat dipertanggungjawabkan oleh koefisien penghindaran risiko yang dianggap "tidak dapat diterima tinggi". Peneliti lain telah menemukan bahwa hipotesis tidak bias telah ditolak dalam kedua kasus di mana ada bukti risiko premia bervariasi dari waktu ke waktu dan kasus di mana risiko premia adalah konstan.

Other reasons for the failure of forward-biased hypotheses include considering conditional bias to be exogenous variables described by policies aimed at leveling interest rates and stabilizing exchange rates, or considering that economies that allow discrete changes can facilitate excessive returns in developed markets. Some researchers have debated the empirical failure of the hypothesis and attempted to explain conflicting evidence as a result of contaminated data and even inappropriate timing of forward contracts. Economists pointed out that the forward rate could serve as a useful proxy for the future spot exchange rate between the currency and the average liquidity premia to zero during the onset of the floating exchange rate regime in the 1970s. The study examined the introduction of endogenous breaks to test the structural stability of concurrent points and advanced time series exchange rates have found some evidence to support forward rates in both the short and long term.

Forward Pricing (Foreign Currency) - CFA Tutor - YouTube
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See also

  • Foreign exchange Derivatives

Spot and Forward Rates - YouTube
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References

Source of the article : Wikipedia

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