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1、CORPORATEFINANCELING-NANOUYANGPROFESSOROFFINANCEINSTITUTEOFCONTEMPORARYFINANCESHANGHAIJIAOTONGUNIVERSITY1ValuingInternationalCashFlowsnM E(Cj,t)E(Ej,t)Nj=1nPV=t=1(1+r)tnE(Cj,t)=expectedcashflowsdenominatedincurrencyjtobereceivedbyparentinperiodt.E(Ej,t)=expectedexchangerateatwhichcurrencyjcanbeconve
2、rtedtoRMBattheendofperiodt.r=weightedaveragecostofcapitalofparent.M=numberofcurrencies.N=numberofperiods.2RegressionModelandExpectation(1)nRegression:measurerelationshipsbetweenvariableswhenestablishingpolicies.nEXPt=b0+b1USDt-1+b2GNPt-1+ut.nEXPt=%changeinChinaexportstotheU.S.b0=aconstant.USD=%chang
3、einthevalueofU.S.dollar.b1=regressioncoefficientmeasuring1%changeinUSDt-1willleadtox%changeinEXPt.GNP=%changeintheU.S.GNP.B2=regressioncoefficientmeasuring1%changeinGNPt-1willleadtox%changeinEXPt.ut=anerrorterm.3RegressionModelandExpectation(2)nIfb0=0.002,b1=0.08,b2=0.36,USD1-1=5%,GNP1-1=-1%,ifinser
4、tthesefiguresintotheregressionmodel,EXP1=3.84%.ItmeansthatoneyearlaterChinaexportstotheU.S.willincrease3.84%.4EquilibriumSpotExchangeRatenE(RMB/$1)SE0DQ0Qof$nWhenDfor$=Sof$,Q0=theequilibriumquantityof$,E0=theequilibriumspotexchangerate.5PriceElasticityofDemandandFutureSpotExchangeRatenE=(Q/Q)/(P/P).
5、nE=priceelasticityofdemand.Q=quantityofgoodsdemanded.P=price.Q=changeinQdemandedforachangeinP(P).IfE1,totalspendinggoesupwhenPdeclines.Efor$couldhaveanimpactonthefuturespotexchangerateof$andRMB.6BalanceofPaymentsandFutureSpotExchangeRate(1)nCredits($inflows)Debits($outflows)na:Exportsofcivilianb:Imp
6、ortsofciviliangoodsgoodsnc:Militarysalesd:MilitarypurchaseabroadabroadnTradebalance=a+c-(b+d)7BalanceofPaymentsandFutureSpotExchangeRate(2)ne:Exportsofservicef:Importsofservices(investmentincome(investmentincomeandfeesearned,paidout,Chinaforeigntourismintourismabroad,China,etc.)etc.)ng:Netunilateral
7、transfers(gifts)nCurrentaccountbalance=a+c+e-(b+d+f+g)8BalanceofPaymentsandFutureSpotExchangeRate(3)nh:Foreignprivatei:ChinaprivateinvestmentinChinainvestmentabroadnj:Foreignofficialk:ChinesegovernmentlendinginChinalendingabroadnCapitalaccountbalance=h+j-(i+k)nl:NetincreaseinChinaofficialreservesnOf
8、ficialreservesbalancenNote:Itemhincludesneterrorsandomissions.9BalanceofPaymentsandFutureSpotExchangeRate(4)nIfChinahasatradesurplusagainsttheU.S.,thevalueofRMBwillbehigherthanthatof$,spotratewillchange.10InflationandFutureSpotExchangeRatenE(RMB/$1)SE1SE0DDQ1Qof$nIfIFinChinathatintheU.S.,supplyof$wi
9、llmovefromStoSbecausetheChinesearelikelytodecreasetheirpurchasesofU.S.imports.Meanwhile,demandfor$willmovefromDtoDbecausetheAmericansarelikelytosubstituteChinaimportsforU.S.products.Thus,spotexchangeratewillmovefromE0toE1.11InterestRateandFutureSpotExchangeRatenAllotherthingsbeingequal,wheninterestr
10、ateinChinaisgreaterthanthatintheU.S.,investorswillswitchfromdollartoRMBtotakeadvantageofthehigherRMBinterestrates.So,demandfor$andsupplyof$willchange,spotexchangeratewillchange.12NationalIncomeandFutureSpotExchangeRatenAnincreaseinChinaincomewillleadtomoreChinaimportsfromtheU.S.asChinesepeoplespends
11、omeofincomeonU.S.products.This,however,wouldcausedemandfor$andsupplyof$tochangeandspotexchangeratetochange.13OtherFactorsAffectingFutureSpotExchangeRatenPoliticalandeconomicenvironment:ifpoliticalandeconomicenvironmentinChinaisbetterthanthatintheU.S.,thevalueofRMBwillbehigherthanthatof$,spotratewill
12、change.nInvestments:ifAmericansinvestinChina,demandfor$andsupplyof$willchange,spotratewillchange.14DepreciationVersusAppreciationnSupposethatonJuly19,2001,U.S.dollardevaluedby17%againstRMB.IfE0=initialRMBvalueofonedollarandE1=post-devaluationRMBvalueofonedollar,thenweknowthat(E1-E0)/E0=-17%.Solvingf
13、orE1intermsofE0yieldsE1=83%E0.Thus,theappreciationofRMBagainstU.S.dollar=(E0-E1)/E1=(E0-83%E0)/(83%E0)=20.48%.15ReasonsforGovernmentInterventionnReduceeconomicexposureariskincurredbyexchangeratefluctuations.nAdjustimportsandexports.IfRMBappreciates,ChinawilllosecomparativeadvantageinpriceagainsttheU
14、.S.,thusreduceexports.nEliminatetheimpactofexchangeratefluctuationsoninflationathome.16ApproachtoGovernmentInterventionnE(RMB/$1)SE1SE0DDQ2Q1Q3Qof$nTomaintainE0inthefaceofE1,eithertheAmericangovernmentortheChinesegovernmentorbothmustsell(Q3-Q2)dollarstopurchase(Q3-Q2)E0RMB,therebyeliminatingthedeman
15、dfor(Q3-Q2)dollars,andsimultaneouslyeliminatingtheexcesssupplyof(Q3Q2)E0RMB.17TermstoKeepExistingExchangeRatenTerms=internationalreserve/balance-of-paymentsdeficit.18SpotQuotations(1)nDirectquotation:RMB/$1.nIndirectquotation:$/1RMB.nBidquote:buyquote.nAskquote:sellquote.19SpotQuotations(2)nAssumeyo
16、uhave10000RMB.AlsoassumetheBankofChinasbidratefor$1is8.4513RMBanditsaskrateis8.4536RMB.Ifyouconvert10000RMBinto$,youget10000/8.4536=$1182.93.Ifyoureconvertthe$1182.93backtoRMB,yougetonly1182.938.4513=9997.30(RMB).Thebid/askspread=10000-9997.30=2.7(RMB).Or,thebid/askspread=(8.4536-8.4513)/8.4536=0.03
17、%.20ForwardQuotationsnOutrightrate:actualrate.90-dayforwardbid=8.2142RMB/$1.nSwaprate:aforwarddifferential=discountfrom,orapremiumon,spotrate.Ifspotrate=8.1023-30RMB/$1,90-dayforwardrate=26-22,90-dayforwardbidhas8.1026-8.1023=0.0003RMBpremium,90-dayforwardaskhas8.1030-8.1022=0.0008RMBdiscount.21Forw
18、ardRatePremiumorDiscountnExchangefor$1RMBFPorFDSpot8.451330-dayforward8.4511-0.03%90-dayforward8.45260.06%180-dayforward8.46180.01%nFP=forwardpremium,FD=forwarddiscount.FPorFD=(forward-spot)/spot(360/daysofforward).22ForwardRateFluctuationandCashFlowsnCashflow$depreciation$appreciationSPSPExportsale
19、sIIorDDDorILocalsalesDDorIIIorDLocalexpensesDDIIImportexpensesIIorDDDorInS=subsidiaryintheU.S.P=parentinChina.I=increase.D=decrease.23CrossExchangeRatenExchangerateofcurrencyAtocurrencyB=exchangerateofRMBtoA/exchangerateofRMBtoB.nIftheexchangerateofRMBtoU.S.$=8.2798RMB/$1,theexchangerateofRMBtoHK$=1
20、.0627RMB/HK$1,theexchangerateofU.S.$toKH$=8.2798/1.0627=7.7913(HK$s/U.S.$1).24InterestRateParityandFutureSpotRatenIRP:r=(1+if)(1+p)-1.Wherer=rateofreturnfrominterestarbitrage(buyforeigncurrencywithhomecurrency,investitonforeigndeposit,convertinterestbacktohomecurrency).if=interestrateofforeigncurren
21、cy.P=forwardpremiumordiscount.nSincer=ih(interestrateofhomecurrency),p=(1+ih)/(1+if)-1 ih-if.nIf6-monthsiRMB=5%,6-monthsi$=6%,p-1%.Chineseinvestorswillreceive1%lesswhenselling$6-monthsfromnowthanwhattheypayfor$atspotrate;and,(ih-if)willinfluencethefuturespotrate.25PurchasingPowerParityandFutureSpotR
22、atenPPP:Pf(1+If)(1+ef)=Ph(1+Ih).WherePf=priceindexofforeigncountry.If=inflationrateofforeigncountry.ef=%changeinvalueofforeigncurrency.h=homecountry.nSincePh=Pf,ef=(1+Ih)/(1+If)-1 Ih-If.nIfIRMB=5%,I$=3%,e$2%.$willappreciateby2%.IfIRMB=4%,I$=7%,e$-3%.$willdepreciateby3%.nBasedonthePPP,Sj,t+1=Sj1+(Ih-
23、If).Sj,t+1=newvalueofspotrateofagivencurrency.Sj=spotrateinequilibrium.Obviously,(Ih-If)couldinfluencethefuturespotrate.26InternationalFisherEffectandFutureSpotRatenIFE:r=(1+if)(1+ef)-1.Wherer=theeffectivereturnontheforeigndeposit.nSincer=ih,ef=(1+ih)/(1+if)-1 ih-if.nIfoneyeariRMB=11%,oneyeari$=12%,
24、e$-1%.Thismeansthat$willdepreciateby1%inordertomakei$equalto11%.Thisalsomeansthat(ih-if)willinfluencethefuturespotrate.27RegressionandFutureSpotratenVRMB=b0+b1INF+b2INC+.WhereVRMB=quarterly%changeinRMBvalue.INF=quarterly%changeininflationdifferentialbetweenChinaandtheU.S.INC=quarterly%changeinincome
25、growthdifferentialbetweenChinaandtheU.S.b1=1%changeinINF,VRMBwillchangebyx%.b2=1%changeinINC,VRMBwillchangebyx%.=anerrorterm.nIfrecentINF=4%andINC=2%,ifb0=0.002,b1=0.8andb2=1,VRMB=5.4%.ThismeansthatRMBshouldappreciateby5.4%,otherthingsheldconstant;and,thefuturespotrateshouldbeadjusted.28SensitivityA
26、nalysisandFutureSpotRatenERt=b0+b1INTt+b2INFt-1+.nWhereERt=%changeinexchangerateovert.INTt=realinterestratedifferentialovert.INFt-1=inflationdifferentialinprevioust.nINT1%changeinER1P-3%0.1%+(-0.7)(-3%)+0.61%=2.8%20%-4%0.1%+(-0.7)(-4%)+0.61%=3.5%50%-5%0.1%+(-0.7)(-5%)+0.61%=4.2%30%nHereb0=0.1%,b1=-0
27、.7,b2=0.6,INF1-1ofRMBand$=1%.Oneyearhence,Theweightedaverageappreciationof$=3.6%.This,however,willinfluencethefuturespotrate.29MarketExpectationandFutureSpotRatenAssumethatthe30-dayforwardrate=$0.12/1RMBandthegeneralexpectationofspeculatorsforthefuturespotratein30days=$0.17/1RMB.Thus,buyingRMB30days
28、forwardat$0.12/1RMBandsellingthemwhenreceivedin30daysat$0.17/1RMBwillearn$0.05/1RMB.Ifalargenumberofspeculatorsimplementthisstrategy,thesubstantialdemandtobuyRMBforwardwillcausetheforwardrateofRMBand$toincreaseuntilthespeculativedemandstops.30SpeculatingonAnticipatedExchangeRates(1)nAssumethatthe30-
29、dayforwardrate=$0.12/1RMBandthegeneralexpectationforthefuturespotratein30days=$0.17/1RMB.Thus,buyingRMB30daysforwardat$0.12/1RMBandsellingthemwhenreceivedin30daysat$0.17/1RMBwillearn$0.05/1RMB.nIfalargenumberofspeculatorsimplementthisstrategy,thesubstantialdemandtobuyRMBforwardwillcausetheforwardrat
30、eofRMBand$toincreaseuntilthespeculativedemandstops.31SpeculatingonAnticipatedExchangeRates(2)nAssume$willappreciatefrom8.2714RMB/$1to8.3714RMB/$1in30days.Alsoassumeshort-termannualinterestratesininter-bankmarketare:nCurrencyLendingrateBorrowingrateRMB6.72%7.20%$6.48%6.96%nYouborrow20millionRMBforins
31、tance.Convertthemto20/8.2714=$2.418million.Lendthe$for30days.Youreceive2.4181+6.48%(30/360)=$2.431million.Convertthe$to2.4318.3714=20.351millionRMB.Youearnaprofitof20.351-201+7.20%(30/360)=0.231millionRMB.32SpeculatingonAnticipatedExchangeRates(3)nAssume$willdepreciatefrom8.2714RMB/$1to8.1714RMB/$1i
32、n30days.Alsoassumeshort-termannualinterestratesininter-bankmarketare:nCurrencyLendingrateBorrowingrateRMB6.72%7.20%$6.48%6.96%nYouborrow$2.418millionforinstance.Convertthemto2.4188.2714=20millionRMB.LendtheRMBfor30days.Youreceive201+6.72%(30/360)=20.112millionRMB.ConverttheRMBto20.112/8.1714=$2.461m
33、illion.Youearnaprofitof2.461-2.4181+6.96%(30/360)=$0.029millionwhichisequalto0.0298.1714=0.237millionRMB.33SpeculatingwithCurrencyFuturesnCurrencyfutures:acontractentitledaspecifiedamountofaspecifiedcurrencyforastatedpriceonaspecifieddate.nIf$willappreciate,youpurchaseafuturecontract.Onthesettlement
34、date,youpurchase$atthespecifiedrateandthensellthemattheappreciatedratetomakeprofit.nIf$willdepreciate,yousellafuturecontract.Onthesettlementdate,youbuy$atthedepreciatedrateandthensellthematthespecifiedratetomakeprofit.34SpeculatingwithCurrencyCallOptionnCurrencycalloption:arighttobuyaspecifiedamount
35、ofaparticularcurrencyataspecifiedpricewithinagivent.nTospeculate,youcanpurchase$calloptions.Once$appreciates,youexercisecalloptionbypurchasing$atthestrikepriceandthensellthemattheappreciatedratetomakeprofit.Oncethe$depreciates,yougiveupcalloption.35SpeculatingwithCurrencyPutOptionnCurrencyputoption:
36、arighttosellaspecifiedamountofaparticularcurrencyataspecifiedpricewithinagivent.nTospeculate,youcanpurchase$putoptions.Once$appreciates,yougiveupputoption.Once$depreciates,youpurchase$atthedepreciatedrateandthenexerciseputoptionbyselling$atthestrikepricetomakeprofit.36LocationalArbitragenBankABankBB
37、idAskBidAskRMB/$18.26148.27148.27188.2723nAssumeyoustartwith100millionRMB.Ifyoubuy$fromBankAattheaskpriceandthensellthemtoBankBatthebidprice,yougain(100/8.2714)8.2718-100=0.005millionRMB.However,thelawofmarketwouldmakeBankAsaskpriceequaltoBankBsbidpriceintheend.37TriangularArbitragenQuotedBidQuotedA
38、skRMB/$18.27148.2814RMB/112.621212.6312/$10.660.66/$1*0.76*0.86*n/$1=(RMB/$1)(RMB/1)=calculatedcrossexchangerate./$1*=quotedcrossexchangerate.nAssumeyoustartwith100millionRMB.Ifyoupurchase100/8.2714=$12.09million,convertthemto12.090.76=9.19million,andthenexchangethefor9.1912.6212=115.99millionRMB,yo
39、ugain115.99-100=15.99millionRMB.38CoveredinterestArbitragenAssumeyoustartwith8millionRMB.Alsoassumespotrate=8.2741RMB/$1,90-dayforwardrate=8.2714RMB/$1,90-dayinterestrateonRMB=2%,and90-dayinterestrateon$=4%.nTohaveanarbitrage,youcovertRMBto8/8.2741=$0.967million,deposittheminanAmericanBank,andthense
40、tupaforwardcontracttosellthemsimultaneously.Bythetimethedepositmatures,yougain0.967(1+4%)8.2714-8=0.318millionRMB.39TransactionExposureandInvoicePolicynTransactionexposure:adegreetowhichthevalueoffuturecashtransactionscanbeaffectedbyexchangeratefluctuations.nAssumeanAmericanexportersendsgoodsinvoice
41、din$toaChinesefirm.AlsoassumetheChinesefirmexportsproductsinvoicedin$toothercorporationsintheU.S.nThe$receivablesfromtheChinesefirmsexportscanbeusedtopayoffitsfuturepayablesin$.This,therefore,reducestransactionexposure.40TransactionExposureandFutureContractHedgenTohedgeRMBvalueonfuturepayablesin$,bu
42、yacontractandlockintheamountofRMB.nTohedgeRMBvalueoffuturereceivablesin$,sellacontractandlockintheamountofRMB.41TransactionExposureandForwardContractHedgenIfyoupay$in30days,youcanbuyfromabankaforwardcontracttolockinthe30-dayforwardrate.nIfyouexpectreceivablesin$in30days,youcansellaforwardcontracttol
43、ockinthe30-dayforwardrate.42TransactionExposureandNon-deliverableForwardContractHedgenNon-deliverableForwardContract:aforwardcontractwithoutactualexchangeofcurrencies.nAssumeyouwillneed$100millionin90days.Alsoassumeyoubuy$100milliononJuly1.nIfspotrate=8.2714RMB/$1,RMBposition=1008.2714=827.14million
44、.IfratebyJuly1=8.3714RMB/$1,RMBposition=1008.3714=837.14million,youwillreceive837.14-827.14=10millionRMBfromthebank.IfratebyJuly1=8.1714RMB/$1,RMBposition=1008.1714=817.14million,youwillowethebank827.14-817.14=10millionRMB.nNon-deliverableForwardContracthedgesexchangerisk.43TransactionExposureandMon
45、eyMarketHedgeonPayablesnTakeamoneymarketpositiontocoverafuturepayablesposition.nIfyoupay$1millionin30days,iftheannualinterestrateof$is5%,youneed1000000/1+(6%/12)=$995025tohedgethepayables.And,ifthespotrateis8.2714RMB/$1,youneed9950258.2714=8230250(RMB)topurchase$995025andinvestthem.Whentheymaturein3
46、0days,youwillbeabletocoverthepayablesregardlessofhowexchangeratechangesover30days.44TransactionExposureandMoneyMarketHedgeonReceivablesnTakeamoneymarketpositiontocoverafuturereceivablesposition.nIfyoureceive$400000in90days,iftheannualinterestrateof$is8%,youneed400000/1+(8%/4)=$392157tohedgethereceiv
47、ables.And,ifyouborrow$392157andconvertthemintoRMBandinvesttheRMB,thenusereceivablestopayofftheloanin90days,youcannotonlyearnprofitonRMBinvestment,butalsogetridoftransactionexposure.45HedgingPayableswithCurrencyCallOptionnAssumeyouwillpay$10000in90days.Alsoassumethereisacalloptionwithanexercisepriceo
48、f8.3114RMBfor$1.If,however,premiumpaidoneachcalloption=0.32RMB,spotratein90days=8.2714RMB/$1,youneed(0.32+8.3114)10000=86314(RMB)tohedge$10000payables.But,youwillnotexercisethecalloptionbecauseyoucanpurchasethe$10000at8.2714RMBfor$1inthespotmarket.46HedgingReceivableswithCurrencyPutOptionnAssumeyour
49、eceive$60000in90days.Alsoassumethereisaputoptionwithanexercisepriceof$1for8.3114RMB.If,however,premiumoneachputoption=0.24RMB,spotratein90days=8.2714RMB/$1,youwillreceive(8.3114-0.24)60000=484284(RMB)forhedging$60000receivables.But,youwillexercisetheputoptionbecauseyoucansell$60000at$1for8.3114RMBra
50、therthan$1for8.2714RMB.47TransactionExposureandCurrencySwapnCurrencyswap:atechniqueforhedginglong-termtransactionexposure.nAssumeyoureceive$intheU.S.in5years.Atthesametime,anAmericanispaidRMBinChina.Ifthetwosidesarrangeacurrencyswapallowingforanexchangeof$forRMBin5yearsatsomenegotiatedexchangerate,y