The Zimbabwe government redenominated
the ZWD again on February 2, 2009 at a rate
of 1,000,000,000,000 old ZWD to 1 new
ZWD.
Forecasting
Exchange Rate
Exchange Rate Determination
The Theoretical Thread
Balance of
Payments
Approach
International
Parity
Condition
Asset Market
Approach
Technical
Analysis
International Parity Condition
Chapter 4
Eiteman, Stonehill, and Moffet
Forward rate as an
unbiased predictor
(E)
Forecast change in spot
exchange rate
Purchasing Power
Parity
+4%
(A)
(yen strengthens)
Forward premium on foreign
currency
+4%
(yen strengthens)
International
Fisher Effect
(C )
Interest
Rate Parity
Difference in nominal interest
rates
(D)
-4%
(less in Japan)
Forecast difference in rates
of inflation
-4%
(less in Japan
Fischer
Effect
(B)
Purchasing Power Parity
(Absolute)
If the identical product or service can be sold
in two different markets, and no restrictions
exist on the sale or transportation costs of
moving the product between markets, the
product’s price should be the same in both
markets. This is called the law of one price
If the two markets are two different
countries, the product’s price may be stated in
different currency terms, but the price of the
product should be still the same
Big Mac PPP (in 2009)
Countries
United States
Argentina
Australia
Indonesia
Japan
Malaysia
Philippines
Singapore
Thailand
Turkey
Big Mac Prices
Local
Currency
Dollars
3.57
11.50
4.34
20,900.00
320.00
6.77
99.39
4.22
64.49
5.65
3.57
2.97
3.56
2.23
3.55
1.99
2.15
2.99
1.94
3.65
Exchange Rates
PPP
1.00
3.2213
1.2157
5,854.34
89.64
1.8964
27.84
1.1821
18.06
1.5826
Actual
1.00
3.8704
1.2200
9,354.54
90.15
3.4082
46.33
1.4110
33.19
1.5482
Sources: The Economist - July, 16th 2009
% Under (-)/Over(+)
Valuation Against Dollar
-16.77%
-0.35%
-37.42%
-0.57%
-44.36%
-39.91%
-16.22%
-45.58%
2.22%
Actual USD/GBP and PPP
Exchange Rates
Actual Rate
PPP Rate
Actual DEM/USD and PPP
Exchange Rates
Actual Rate
PPP Rate
Actual JPY/USD and PPP
Exchange Rates
Actual Rate
PPP Rate
Actual CAD/USD and PPP
Exchange Rates
Actual Rate
PPP Rate
Actual MXN/USD and PPP
Exchange Rates
Actual Rate
PPP Rate
Evidence on PPP
• PPP probably doesn’t hold precisely in the real world for
a variety of reasons.
– Haircuts cost 10 times as much in the developed
world as in the developing world. (Transaction Costs)
– Sticky Prices (Exchange Rate Pass Through) and Non
Competitive Markets
– Shipping costs, as well as tariffs and quotas can lead
to deviations from PPP.
– Can We Make Profit from It ?
• PPP-determined exchange rates still provide a valuable
benchmark.
• PPP holds up well over the very long run but poorly for
shorter time periods
• The theory holds better for countries with relatively high
rates of inflation and underdeveloped capital markets
Exchange Rate Pass-Through
Relative Purchasing Power
Parity
If the spot exchange rate between two countries starts in
equilibrium, any change in the differential rate of inflation
between them tends to be offset over the long run by an
equal but opposite change in the spot exchange rate
For instance, Inflation in Japan is 4% lower than the inflation in
U.S., therefore, relative PPP would predict that the Yen would
appreciate by 4% per annum with respect to the U.S dollar
Relative Purchasing Power Parity
The spot exchange rate should change in an amount
equal to but in the opposite direction of the difference in
inflation rate between two countries
Beginning Rate – Ending Rate
Ending Rate
I$ - I¥
X 100 =
1 + I¥
Contoh Soal
• Misalkan tingkat inflasi di Denmark pada tahun
2009 adalah 1.30%, sedangkan tingkat inflasi di
India adalah 14.97%. Saat ini kurs yang berlaku
adalah Rupee 8.3972/Kroner. Jika relative
purchasing power parity berlaku, maka berapa
perkiraan kurs tukar tersebut satu tahun
mendatang ?
The Fisher Effect
The Fisher Effect states that nominal interest rates in each
country are equal to the required real rate of return plus
compensation for expected inflation
i = r +  + r
Where i is the nominal rate of interest, r is the real
rate of interest, and  is the expected rate of inflation
over the period of time for which funds are to be lent.
The final compound term, r, is frequently dropped
from consideration due to its relatively minor value
International Fischer Effect
The spot exchange rate should change in an amount
equal to but in the opposite direction of the difference in
interest rate between two countries
Beginning Rate – Ending Rate
Ending Rate
i$ - i¥
X 100 =
1 + i¥
International Fischer Effect
• Assume that one year interest rates
are 3% in US and 5% in the Euro zone.
The spot rate between the Euro and
the dollar is €1.02/$. Assuming
International Fisher Effect holds,
what should the €/$ rate be one year
hence ?
International Fischer Effect
1.02 - X
X
=
3% - 5%
1 + 5%
1.071 – 1.05 X = -0.02X
1.03 X = 1.071
X = 1.0398
Dengan demikian,
perkiraan rate untuk
satu tahun kedepan
adalah Euro 1.0398/$
(jika memenuhi kondisi
International Fischer
Effect)
Interest Rate Parity
The difference in the national interest rates for
securities of similar risk and maturity should be
equal to, but opposite in sign to, the forward rate
discount or premium for the foreign currency,
except for transaction costs
Interest Rate Parity
Interest Rate Parity
Forward Premium
Selisih Interest Rates
3.96%
4%
Invest dalam US$. Misalkan anda punya uang sebesar CHF 1.480.000
Tukar uang tersebut menjadi dollar, dan mendapatkan US $ 1.000.000
Investasikan uang tersebut dalam US$ dan mendapatkan $ 1.020.000
Tukarkan uang tersebut menjadi CHF, dan anda akan memperoleh
$ 1.020.000 X 1.4655 = CHF 1.494.810
Jika anda mendepositokan uang tersebut dalam CHF, maka tiga bulan
kemudian, anda akan mendapatkan CHF 1.480.000 X 1.01 =
CHF 1.494.800, hanya terdapat selisih sebesar CHF 10 (dianggap tidak
material)
Covered Interest Arbitrage
The spot and forward exchange markets are not,
however, constantly, in the state of equilibrium.
When the market is not in equilibrium, the
potential for “riskless” or arbitrage profit exists.
This is called covered interest arbitrage
Covered Interest Arbitrage
Spot Exchange Rate
6 Month Forward Rate
¥ 106.00/$
¥ 103.5/$
6 Month Eurodollar rate
7% per annum
6 month Euroyen rate
4% per annum
Amount of money
$ 1.000.000
Covered Interest Arbitrage
Forward Premium
Selisih Interest Rates
4.83%
3%
Lebih baik investasikan uang dalam bentuk Yen. Tukarkan uang
$ 1.000.000 menjadi 106.000.000 Yen. Investasikan selama 180 hari
dan mendapatkan bunga 2% menjadi 108,120,000 Yen. Tukar uang
tersebut menjadi dollar (dengan kurs forward), dan anda akan mendapatkan
$ 1.044.638.
Pinjaman dalam bentuk dollar, anda bayarkan dengan tingkat bunga 3.5%
Jumlah yang anda bayarkan adalah $ 1,035,000. Anda masih mendapat
keuntungan sebesar $ 9,638 (tanpa resiko)
Soal Covered Interest Arbitrage
• James Chang, a foreign exchange trader at JP Morgan
Chase, can invest $ 5 million or the foreign currency
equivalent of the bank’s short term fund in a covered
interest arbitrage with Denmark. He has the following
quotes
Spot Exchange Rate
DKr 7.5000/$
Three Month Forward Rate
DKr 7.5375/$
Three Month Dollar Interest Rate
3% per year
Three Month Krone Interest Rate
5% per year
• Can James Chang make a covered interest arbitrage profit ?
Soal Covered Interest Arbitrage
• Assume that interest rates in the US increase
to 4% per year (1% for 90 days) but all other
rates remain the same. Can James Chang make
a 90 day covered interest arbitrage profit ?
• Assume that interest rates in the Euro zone
increase to 6% per year (1.5% for 90 days),
but all other rates remain the same, including
the original US interest rate of 3% per year.
Calculate whether James Chang could make a
90-day covered interest arbitrage profit ?
Uncovered Interest Arbitrage
• Investors borrow in countries and
currencies exhibiting relatively low
interest rates and convert the proceeds
into currencies that offer much higher
interest rates.
• The transaction is “uncovered” because
the investor does not sell the higher
yielding currency proceeds forward,
choosing to remain uncovered
Carrytrade
Istilah carry trade, umumnya, mengacu pada strategi carry trade dalam
perdagangan mata uang. Tak perlu pusing, sejatinya, ini adalah strategi yang
sederhana saja. Dalam carry trade, investor meminjam uang dari negara
berbunga rendah dan membiakkannya di negara lain yang masih memasang
bunga tinggi. Jadi, ini mirip dengan strategi "beli di harga rendah dan jual di
harga tinggi".
Praktik yang paling sering terjadi, investor meminjam dana dari perbankan
Jepang dan kemudian membiakkan dana itu di negara-negara lainnya seperti
Australia, Selandia Baru, Amerika, dan juga Indonesia. Maklum, saat ini bunga
di Jepang adalah yang paling rendah, hanya 0,5%.
Ambil contoh, misalnya, seorang investor, meminjam dana di Jepang sebesar
1.000 yen, mengonversinya menjadi rupiah, dan menginvestasikan di
Indonesia. Dengan kurs Rp 73,9 per yen, artinya dalam rupiah dana itu setara
dengan Rp 73.900.
Nah, cukup dengan menginvestasikan dana itu di Sertitikat Bank Indonesia
(SBI) yang berbunga 8,25%, investor itu sudah akan langsung menikmati
keuntungan bunga 7,75%. Jika ia menginvestasikan dana ini di saham atau
obligasi, tentu, keuntungannya bisa berlipat-lipat.
Icelandic Mess
Uttlesford is just one of dozens of local authorities in Britain that have parked money,
nearly $1.5 billion in total, in Icelandic bank accounts, which were aggressively
promoted in this country as high-yielding, but safe, investments.
Well-known charities, nonprofit groups and institutions such as Oxford University
and a cancer hospital in northern England put their funds in Icelandic banks. So did
millions of individual Britons, who opened their accounts over the Internet and
happily watched their balances grow, at least online. The British government’s own
watchdog agency for public spending confessed to having $16 million tied up in
Iceland, whose banking industry was so heavily leveraged that some called the
country one giant Viking hedge fund.
When those banks started sinking with stunning swiftness around the beginning of
October, Reykjavik was forced to intervene and, essentially, nationalize Iceland’s
largest financial institutions. Investors here in Britain panicked as their money was
now frozen by the Icelandic government as it tried to sort out the banking mess. The
British government’s pledge to back up individual investors’ deposits up to $80,000
failed to calm nerves, and also did not apply to bodies such as local governments
and charities. (quoted from LA Times)
Jawaban Denmark A
Forward Discount
Selisih Interest Rate
(1.99013)
2
Jika invest dalam DKr maka akan mendapatkan kelebihan
tingkat bunga sebesar 2% per tahun, namun ada depresiasi
mata uang DKr sebesar 1,97421%. Dengan demikian lebih
baik investasi pada Dkr
Tukar uang $ 5.000.000 menjadi DKr dan mendapatkan
DKr 37.500.000. Investasikan uang tersebut selama tiga bulan
dan mendapatkan uang sebesar 37.500.000 (1+0.0125) =
DKr 37.968.750. Tukarkan ke $ dan mendapatkan
$ 5.037.513,93
Bayar hutang sebesar $ 5.000.000 (1+0.0075) =
$ 5.037.500. Keuntungan yang diperoleh adalah
$ 5.037.513,93 - $ 5.037.500 = $ 13.9309
Jawaban Denmark B.a
Forward Discount
Selisih Interest Rate
(1.97421)
1
Jika invest dalam DKr maka akan mendapatkan kelebihan
tingkat bunga sebesar 1% per tahun, namun ada depresiasi
mata uang DKr sebesar 1,97421%. Dengan demikian lebih
baik investasi pada US $
Tukar uang DKr 37.500.000 menjadi US$ dan mendapatkan
US $ 5.000.000. Investasikan uang tersebut selama tiga bulan
dan mendapatkan uang sebesar $ 5.000.000 (1+0.01) =
$ 5.005.000. Tukarkan ke DKr dan mendapatkan
DKr 37.723.686
Bayar hutang sebesar $ 37.500.000 (1+0.0125) =
$ 37.546.875, atau setara dengan $ 4.981.541,55
Keuntungan yang diperoleh $ 23.458,45
Jawaban Denmark B.b
Forward Discount
Selisih Interest Rate
(1.97421)
3
Jika invest dalam DKr maka akan mendapatkan kelebihan
tingkat bunga sebesar 3% per tahun, namun ada depresiasi
mata uang DKr sebesar 1,97421%. Dengan demikian lebih
baik investasi pada DKr
Tukar uang $ 5.000.000 menjadi DKr dan mendapatkan
DKr 37.500.000. Investasikan uang tersebut selama tiga bulan
dan mendapatkan uang sebesar DKr 37.500.000 (1+0.015)
$ 38.062.500. Tukarkan ke US $ dan mendapatkan
US $ 5.049.952,24
Bayar hutang sebesar $ 5.000.000 (1+0.0075) =
$ 5.037.500, dan keuntungan yang diperoleh adalah
$ 5.049.952,24 - $ 5.037.500 = $ 12.452,24