•“During this period[market turmoil in Oct-Nov 2008], foreign commercial banks were a source of heavy demand for U.S. dollar funding, thereby putting additional strain on global bank funding markets, including U.S. markets, and further squeezing credit availability in the United States”
Ben Bernake, 2008, Reflections on a Year of Crisis
URL: https://
写留学生论文https://www.51lunwen.org www.federalreserve.gov/newsevents/speech/bernanke20090821a.htmlearning objectives
•Understand how foreign currency forwards are quoted and used for hedging purposes
•Describe how arbitrage in the forwards markets might arise
•Illustrate how firms fund positions by using the forward markets
•Discuss developments in the global money market during the financial crisis 2007-2008
exchange rate risk and hedging
•Exchange rate movements are highly unpredictable and volatile
•Currency risk refers to adverse effects of unanticipated exchange rate changes on the cash flows or firm market value
•Hedging: Firms manage exchange risk by taking offsetting positions to reduce the uncertainty of future cash flows
•Forwards: OTC agreement to exchange currencies at certain exchange rate in the future
•You will sell (buy) foreign currency forward if you receive (pay) some foreign currency in the future. The forward rate is “lked in” at the current date → FX risk is eliminated
•The most active forward markets are for 30, 90, 180, 270, and 360 days, and nowadays up to ten years
foreign exchange forwards
hedging with forwards
•GM needs to pay SF180 million for equipments imported from Switzerland in 3-month. The current spot rate is SF 1.48/$. GM is afraid that SF will appreciate against $
•Option 1: Do nothing now and will pay the spot in 3-month
–If the future spot rate is SF1.48/$, GM will pay: SF180,000,000/SF1.48/$=$121,621,600
–If the future spot rate is SF1.20/$, GM will pay: SF180,000,000/SF1.20/$=$150,000,000
forwards and position funding
•In fact at least prior to summer 2007, European banks constantly need to borrow dollars to fund their positions (such as in residential mortgages in the US)
•If the FX swap implied rate is lower than the dollar cash interest rate, banks are motivated to fund their dollar positions by raising cash in different currencies (such as JPY, GBP or the euro) and use foreign exchange swaps to meet their USD commitments
•As Baba, Packer and Nagano (2008) points out, during the financial crisis, the usual suppliers
写留学生论文https://www.51lunwen.org of dollar funds in interbank markets are not willing to lend, causing abnormal supply/demand imbalances in the global money markets
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