FOREIGN EXCHANGE DERIVATIVE MARKETS

disusun oleh:

Nabella Zulfa Maulida 041411535011 2014

Yuni Nur Kholifah 041411535012 2014

Yanita Sukmasary Putri 041411535013 2014

Riva Maisyaroh 041411535014 2014

Pending Dwi Puji Astuti 041411535015 2014

S-1 AKUNTANSI

PSDKU UNAIR DI BANYUWANGI

BANYUWANGI

2017
DAFTAR ISI
KATA PENGANTAR.................................................................................................. 3
BAB I...................................................................................................................... 4
PENDAHULUAN....................................................................................................... 4
1.1 LATAR BELAKANG...................................................................................... 4
1.2 RUMUSAN MASALAH.................................................................................4
1. Memberikan gambaran tentang pasar valuta asing........................................4
2. Explain how various factors affect exchange rates.........................................4
3. Explain how to forecast exchange rates..........................................................4
4. Describe the use of foreign exchange rate derivative.....................................4
5. Explain international arbitrage........................................................................4
BAB II..................................................................................................................... 5
ISI.......................................................................................................................... 5
2.1 PEMBAHASAN............................................................................................ 5
16-1 FOREIGN EXCHANGE MARKETS....................................................................5
16-2 FACTORS AFFECTING EXCHANGE RATES......................................................7
16-3 FORECASTING EXCHANGE RATES................................................................8
16-4 FOREIGN EXCHANGE DERIVATIVES..............................................................9
16-5 INTERNATIONAL ARBITRAGE......................................................................11
BAB III.................................................................................................................. 13
PENUTUP.............................................................................................................. 13
3.1. KESIMPULAN............................................................................................ 13
3.2. SARAN..................................................................................................... 13
DAFTAR PUSTAKA................................................................................................. 14
 KATA PENGANTAR

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Banyuwangi, 7 Juni 2017

Penyusun
 BAB I

PENDAHULUAN

1.1 LATAR BELAKANG

In recent years, various derivative instruments have been created to manage or capitalize
on exchange rate movements. These so-called foreign exchange derivatives (or forex
derivatives) include forward contracts, currency futures contracts, currency swaps, and
currency options. Foreign exchange derivatives account for about half of the daily foreign
exchange transaction volume. The potential benefits from using foreign exchange
derivatives are dependent on the expected exchange rate movements. Thus, it is necessary
to understand why exchange rates change over time before exploring the use of foreign
exchange derivatives.

1.2 RUMUSAN MASALAH

1. Memberikan gambaran tentang pasar valuta asing

2. Explain how various factors affect exchange rates

3. Explain how to forecast exchange rates

4. Describe the use of foreign exchange rate derivative

5. Explain international arbitrage

 BAB II
ISI

2.1 PEMBAHASAN

16-1 FOREIGN EXCHANGE MARKETS

Foreign exchange markets consist of a global telecommunications network among the
large commercial banks that serve as financial intermediaries for such exchange. At any
given time, the price at which banks will buy a currency (bid price) is slightly lower than
the price at which they will sell it (ask price).

16-1a Institutional Use of Foreign Exchange Markets

The degree of international investment by financial institutions is influenced by potential
return, risk, and government regulations. Commer- cial banks use international lending as
their primary form of international investing. Mutual funds, pension funds, and insurance
companies purchase foreign securities

Exhibit 16.1 summarizes how financial institutions utilize the foreign exchange markets
and foreign exchange derivatives

16-1b Exchange Rate Quotations

The direct exchange rate specifies the value of a currency in U.S. dollars
The indirect exchange rate specifies the number of units of a currency equal to a U.S.
dollar.

The indirect exchange rate is the reciprocal of the direct exchange rate.

Forward Rate are available and are com- monly quoted next to the respective spot rates.
The forward rates indicate the rate at which a currency can be exchanged in the future.

Cross-Exchange Rates Most exchange rate quotation tables express currencies rel- ative
to the dollar.

16-1c Types of Exchange Rate Systems

A system with no boundaries and in which exchange rates are market determined but still
subject to government intervention is called a dirty float

freely floating system, in which the foreign exchange market is totally free from
government intervention

Pegged Exchange Rate System

For example, Hong Kong has tied the value of its currency (the Hong Kong dol-
lar) to the U.S. dollar (HK$78 $1) since 1983. Thus, its currencys value is
fixed rela- tive to the U.S. dollar, which means that its value moves in tandem
with the U.S. dollar against other currencies, including other Asian currencies.
Thus if the Japanese yen depreciates against the U.S. dollar, it will also depreciate
against the Hong Kong dollar. A country that pegs its currency cannot control its
local interest rate because its interest rate must be aligned with the interest rate of
the currency to which its currency is tied.

16-1d Eurozone Arrangement

In January 1999, the euro replaced the national currencies of eleven European countries;
since then, five more countries have converted their home currency to the euro. The
countries that now use the euro as their home currency are Austria, Belgium, Cyprus,
Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Nether-
lands, Portugal, Slovakia, Slovenia, and Spain. The countries that participate in the euro
make up a region that is referred to as the eurozone. Theten countries inEastern Europe
that joined the European Union in2004 are eligible to participate in the euro if they meet
specific economic goals, including a maximum limit on their budget deficit. Some of these
countries peg their currencys value to the euro, which allows them to assess how their
 economy is affected while that value moves in tandem with the euro against other
currencies.

Eurozone Monetary Policy The European Central Bank (ECB) is responsible for setting
monetary policy for all countries in the eurozone. The banks objective is to maintain price
stability (control inflation) in these countries, as it believes that price sta- bility is
necessary to achieve economic growth.

Eurozone Crisis In the 20102012 period, Greece suffered from a weak economy and a
large increase in its government budget deficit. Its debt rating was lowered substan- tially
by debt rating agencies, which increased the cost of funds borrowed by the govern- ments.
Institutional investors moved their investments out of the euro- zone and into other
regions, which placed downward pressure on the euros exchange rate.

16-1e Abandoning the Euro

Impact of Abandoning the Euro on Eurozone Conditions If multinational corporations
(MNCs) and large institutional investors outside of the eurozone feared other countries
would follow, they may not be willing to invest any more funds in the eurozone, because
they might fear the collapse of the euro.

16-2 FACTORS AFFECTING EXCHANGE RATES

As the value of a currency adjusts to changes in demand and supply conditions, it moves
toward equilibrium. In equilibrium, there is no excess or deficiency of that currency.

A currencys supply and demand are influenced by a variety of factors, including

(1) differential inflation rates

(2) differential interest rates, and

(3) government (central bank) intervention.

16-2a Differential Inflation Rates

Under the reverse situation, where European inflation suddenly becomes much higher than
U.S. inflation, the U.S. demand for euros will decrease while the supply of euros for sale
increases, placing downward pressure on the value of the euro. A well-known theory about
the relationship between inflation and exchange rates, purchasing power parity (PPP)
suggests that the exchange rate will, on average, change by a percentagethat reflects the
inflation differential between thetwo countries of concern.
 16-2b Differential Interest Rates
Interest rate movements affect exchange rates by influencing the capital flows between
countries. An increase in interest rates may attract foreign investors, especially if the
higher interest rates do not reflect an increase in inflationary expectations.

16-2c Central Bank Intervention

Central banks commonly consider adjusting a currencys value to influence economic
conditions.

1. Direct Intervention
A country s government can intervene in the foreign exchange market to affect a
currencys value. Direct intervention occurs when a countrys central bank
(suchastheFederalReserveBankfortheUnitedStatesortheEuropeanCentralBankforthe
eurozonecountries) sells some of its currency reserves for a different currency. central
bank intervention may significantly affect the foreign exchange markets in two ways:
a) It may slow the momentum of adverse exchange rate movements.
b) Commercial banks and other corporations may reassess their foreign exchange
strategies if they believe the central banks will continue to intervene.
2. Indirect Intervention
The Fed can affect the dollars value indirectly by influencing the factors that
determineits value. When countries experience substantial net outflows of funds
(which put severe down- ward pressure on their currency), they commonly use indirect
intervention by raising interest rates to discourage excessive outflows and thus limit
the downward pressure on their currencys value
Indirect Intervention during the Peso Crisis
Indirect Intervention during the Asian Crisis
Indirect Intervention during the Russian Crisis
Indirect Intervention during the Greek Crisis

16-3 FORECASTING EXCHANGE RATES

There are various techniques for forecasting, but no specific technique stands out because
most have had limited success in forecasting future exchange rates. Most fore- casting
techniques can be classified as one of the following types:

Technical forecasting
Fundamental forecasting
Market-based forecasting
Mixed forecasting
 16-3a Technical Forecasting
Technical forecasting involves the use of historical exchange rate data to predict future
values. There are also several time-series models that examine moving averages and thus
allow a forecaster to identify patterns, such as currency tending to decline in value after a
rise in moving average over three consecutive periods. Technical forecasting of exchange
rates is similar to technical forecasting of stock prices.

16-3b Fundamental Forecasting

Fundamental forecasting is based on fundamental relationships between economic vari-
ables and exchange rates. Given current values of these variables along with their histor-
ical impact on a currencys value, corporations can develop exchange rate projections.

16-3c Market-Based Forecasting

Market-based forecasting, or the process of developing forecasts from market indicators, is
usually based on either the spot rate or the forward rate.

16-3d Mixed Forecasting

Because no single forecasting technique has been found to be consistently superior to the
others, some MNCs use a combination of forecasting techniques. This method is referred
to as mixed forecasting. Each of the techniques used is assigned a weight, and the
techniques believed to be more reliable are assigned higher weights.

16-4 FOREIGN EXCHANGE DERIVATIVES

Foreign exchange derivatives can be used to speculate on future exchange rate move-
ments or to hedge anticipated cash inflows or outflows in a given foreign currency.

16-4a Forward Contracts

Forward contracts are contracts, typically negotiated with a commercial bank, that allow
the purchase or sale of a specified amount of a particular foreign currency at a specified
exchange rate (the forward rate) on a specified future date. A forward market facilitates the
trading of forward contracts. This market is not in one physical place; By enabling a firm
to lock in the price to be paid for a foreign currency, forward purchases or sales can hedge
the firms risk that the currencys value may change over time.

Estimating the Forward Premium The forward rate of a currency will some- times exceed
the existing spot rate, thereby exhibiting a premium. At other times, it will be below the
spot rate, exhibiting a discount. Forward contracts are sometimes referred to in terms of
their percentage premium or discount rather than their actual rate.
16-4b Currency Futures Contracts
Futures contracts are standardized, whereas forward contracts can specify whatever
amount and maturity date the firm desires. Forward contracts have this flexibility because
they are negotiated with commercial banks rather than on a trading floor.

16-4c Currency Swaps

A currency swap is an agreement that allows one currency to be periodically swapped for
another at specified exchange rates.

16-4d Currency Options Contracts

Another foreign exchange derivative used for hedging is the currency option.

A currency call option provides the right to purchase a particular currency at a

speci- fied price (called the exercise price) within a specified period. This type of
option can be used to hedge future cash payments denominated in a foreign
currency
A put option provides the right to sell a particular currency at a specified price (the
exercise price) within a specified period.

16-4e Use of Foreign Exchange Derivatives for Hedging

The choice between an obligation type of contract (forward or futures) or an options
contract depends on the expected trend of the spot rate. If the currency in which pay- ables
are denominated appreciates, the firm will benefit more from a futures or forward contract
than from a call option contract. The call option contract requires an up-front fee, but it is
a wiser choice when the firm is less certain of a currencys future direction. The call option
allows the firm to hedge against possible appreciation and also to ignore the contract, and
use the spot market instead, if the currency depreciates. Similarly, put options

16-4f Use of Foreign Exchange Derivatives for Speculating

A speculator who expects the Singapore dollar to appreciate could consider any of the
following strategies.
1. Purchase Singapore dollars forward; when they are received, sell them in the spot
market.
2. Purchase futures contracts on Singapore dollars; when the Singapore dollars are
received, sell them in the spot market.
3. Purchase call options on Singapore dollars; at some point before the expiration date,
when the spot rate exceeds the exercise price, exercise the call option and then sell the
Singapore dollars received in the spot market.

Conversely, a speculator who expects the Singapore dollar to depreciate could consider
any of the following strategies.

1. Sell Singapore dollars forward, and then purchase them in the spot market just before
fulfilling the forward obligation.
2. Sell futures contracts on Singapore dollars; purchase Singapore dollars in the spot
market just before fulfilling the futures obligation.
3. Purchase put options on Singapore dollars; at some point before the expiration date,
when the spot rate is less than the exercise price, purchase Singapore dollars in the spot
market and then exercise the put option.

Speculating with Currency Futures

Speculating with Currency Options

16-5 INTERNATIONAL ARBITRAGE

Exchange rates and exchange rate derivatives are market determined. If they become
misaligned, various forms of arbitrage can occur, forcing realignment. Berikut tipe
international arbitage:

16-5a Locational Arbitrage

Locational arbitrage is the act of capitalizing on a discrepancy between the spot exchange
rate at two different locations by purchasing the currency where it is priced low and selling
it where it is priced high.

16-5b Triangular Arbitrage

If the quoted cross-exchange rate between two foreign currencies is not aligned with the
two corresponding exchange rates, there is a discrepancy in the exchange rate quotations.
Under this condition, investors can engage in triangular arbitrage, which involves buy- ing
or selling the currency that is subject to a mispriced cross-exchange rate.
16-5c Covered Interest Arbitrage
The coexistence of international money markets and forward markets forces a special
relationship, between a forward rate premium and the interest rate differential of two
countries, that is known as interest rate parity. This relationship also has implications for
currency futures contracts, since they are normally priced like forward contracts.
According the interest rate parity, the premium on the forward rate can be deter- mined as

BAB III
PENUTUP
3.1. KESIMPULAN
3.2. SARAN
 DAFTAR PUSTAKA

Madura, Jeff. 2014. Financial Markets and Institutions 11th Edition.