International-Financial-Management---Bekaert-2e---Solutions---Ch07Word格式.doc

International-Financial-Management---Bekaert-2e---Solutions---Ch07Word格式.doc

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Chapter 7

SpeculationandRiskintheForeignExchangeMarket

QUESTIONS

1.Whataretwowaystospeculateinthecurrencymarketswithoutinvestinganymoneyupfront?

Answer:

Tobelongintheforeigncurrency,onecanborrowdomesticcurrency,converttoforeigncurrencyinthespotforeignexchangemarket,andinvestintheforeignmoneymarketwhileleavingthetransactionexchangeriskunhedged.Thealternativewayistoenterintoaforwardcontracttobuytheforeigncurrencyforward.Tobeshortintheforeigncurrency,onecanborrowforeigncurrency,converttodomesticcurrencyinthespotforeignexchangemarket,andinvestinthedomesticmoneymarketwhileleavingthetransactionexchangeriskunhedged.Thealternativewayistoenterintoaforwardcontracttoselltheforeigncurrencyforward.

2.Whatdofinancialeconomistsmeanwhentheydiscusstheconditionalexpectationofthefuturespotexchangerate?

Theconditionalexpectationofthefuturespotexchangerateistheprobabilityweightedaverageofthefuturepossibleexchangerates.Itisthemeanoftheconditionalprobabilitydistributionoffuturespotrates.

3.Whatisthemaindeterminantofthevariabilityofforwardmarketreturns?

Themainandonlydeterminantofthevariabilityofforwardmarketreturnsisthevarianceofthefutureexchangerate.

4.Describehowyouconstructtheuncertainyen-denominatedreturnfrominvesting1yenintheSwissfrancmoneymarket.

IfyouinvestyenintheSwissmoneymarket,youfirstmustconvertfromyenintoSwissfrancsinthespotforeignexchangemarket.WiththeSwissfrancsthatyouget,youinvestintheSwissmoneymarket,leavingtheinvestmentunhedged.Attheendoftheinvestmenthorizon,youconvertfromSwissfrancsbackintoyenatthefuturespotexchangerate.

5.Whatisahedgedforeigncurrencyinvestment?

WhathappensifyouhedgeyourreturninQuestion4?

Ahedgedforeigncurrencyinvestmentsellstheknownforeigncurrencyreturnintheforwardmarketatthetimeoftheinvestment.Thiseliminatesexposuretoforeignexchangerisk,butitalsoelementspossiblegainsfromappreciationoftheforeigncurrency.Byinterestrateparity,weknowthatthedomesticcurrencyreturnfromthehedgedforeigncurrencyinvestmentisjustthedomesticcurrencymoneymarketreturn.

6.Whatdoesitmeanforthe90-dayforwardexchangeratetobeanunbiasedpredictorofthefuturespotexchangerate?

Iftheforwardexchangeratefor90daysisanunbiasedpredictorofthefuturespotrate,theforwardrateisequaltotheexpectedfuturespotrate.Whiletherewillbeforecasterrorsthatmaybelarge,therewillnotbesystematicerrorsononesideortheother.Therefore,theexpectedforwardmarketreturniszero.

7.Whyisittruethatthehypothesisthattheforwardexchangerateisanunbiasedpredictorofthefuturespotexchangerateisequivalenttothehypothesisthattheforwardpremium（ordiscount）onaforeigncurrencyisanunbiasedpredictoroftherateofitsappreciation（ordepreciation）?

Whentheforwardexchangerateisanunbiasedpredictorofthefuturespotexchangerate,weknowthattheforwardrateequalstheconditionalexpectationofthefuturespotrate.Forexample,atthe90daymaturity,wehave

Becausethecurrentspotrate,S（t）,isintheinformationsetthatisusedtotaketheconditionalexpectation,wecandividebyitonbothsidesoftheaboveequation.Subtractingonefrombothsidesthengives

Thisequationstatesthattheforwardpremiumontheforeigncurrencyequalstheexpectedrateofappreciationoftheforeigncurrency.

8.Itisoftenclaimedthattheforwardexchangerateissetbyarbitragetosatisfy（covered）interestrateparity.Explainhowinterestrateparitycanbesatisfiedandhowtheforwardexchangeratecanbesetbyspeculatorsinreferencetotheexpectedfuturespotexchangerate.

Interestrateparityisanoarbitragerelationbetween4variables,thespotandforwardexchangeratesandtheinterestratesonthetwocurrencies.Iftheforwardexchangerateissetbyspeculatorsinreferencetotheexpectedfuturespotexchangerate,thecurrentspotrateorthetwointerestratescanadjusttosatisfyinterestrateparity.Thespeculativedimensionoftradingmustalsobesatisfiedinequilibrium.

9.Itissometimesassertedthatinvestorswhohedgetheirforeigncurrencybondorstockreturnsremovetheforeignexchangeriskassociatedwiththeinvestment,reducethevolatilityoftheirdomesticcurrencyreturns,andthusgeta“freelunch”becausethemeanreturnindomesticcurrencyremainsthesameasthemeanreturnintheforeigncurrency.Isthistrueorfalse?

Why?

Ifforwardratesareunbiasedpredictorsoffuturespotrates,hedgingforeigncurrencyinvestmentsdoesnotchangetheirexpectedreturnsandeffectivelyremovesasourceofvolatility.Somewouldsaythatthisprovidesa“freelunch”becausevolatilityisreducedwithoutareductioninmean.Byhedgingforeigninvestments,youcanincreaseyourSharperatioforthisparticularassetclass,whichallowsyoutoleverthereturntothesamevolatilityandgetmorereturn.But,thereisno“freelunch”becauseinthiscasetheforeignexchangeriskisnotapricedrisk.Ifthereisariskpremiumintheforeignexchangemarket,thestatementiswrong.Hedgedforeignbondandequityinvestmentswouldhavedifferentexpectedreturnsthanunhedgedinvestments.

10.Itisoftenarguedthatforwardexchangeratesshouldbeunbiasedpredictorsoffuturespotexchangeratesiftheforeignexchangemarketisefficient.Isthistrueorfalse?

Marketefficiencymeansthatassetpricesaccuratelyincorporateallavailableinformationandexpectedreturnsonassetscorrespondtotruesourcesofrisk.Ifforwardratesarebiasedpredictorsoffuturespotexchangerates,thesourceofthebiascouldbeanequilibriumriskpremium.Thus,theclaimthatforwardexchangeratesshouldbeunbiasedpredictorsoffuturespotexchangeratesiftheforeignexchangemarketisefficientiswrong.

11.WhatisthepredictionoftheCAPMfortherelationshipbetweentheforwardexchangerateandtheexpectedfuturespotexchangerate?

TheCAPMpredictsthattheexpectedexcessreturnonanassetisthebetaoftheassettimestheexpectedexcessreturnonthemarketportfolio.Thebetaisthecovarianceofthereturnontheassetwiththereturnonthemarketportfoliodividedbythevarianceofthemarketportfolio.ByapplyingtheCAPMtouncoveredforeignmoneymarketinvestmentsandusinginterestrateparity,onecandemonstratethattheexpectedreturnonaforwardcontractequalsthebetaofthereturnontheforwardcontracttimestheexpectedexcessreturnonthemarketportfolio.Theexpectedreturnonaforwardcontracttopurchaseforeigncurrencyisthedifferencebetweentheexpectedfuturespotexchangerateandtheforwardexchangeratescaledbythecurrentspotrate.Ifthechangeinthefuturespotrateispositivelycorrelatedwiththereturnonthemarketportfolio,forwardrateswouldbelessthanexpectedfuturespotrates,andifthechangeinthefuturespotrateisnegativelycorrelatedwiththereturnonthemarketportfolio,forwardrateswouldbegreaterthanexpectedfuturespotrates.

12.IftheCAPMexplainsdeviationsoftheforwardexchangeratefromtheexpectedfuturespotexchangerate,explainwhyonepartyinvolvedinaforwardcontractwouldbewillingtoenterintoacontractwithanexpectedloss.

Ifthepartythatislongintheforwardmarkethasanexpectedprofit,thepartythatisshortintheforwardmarkethasanexpectedloss.TheCAPMexplainsthisseemingdilemmabecausethepartythatislongwouldhaveariskyasset.Thecovarianceoftheprofitonthelongpositionwiththereturnonthemarketportfoliowouldbepositive,andthispositivecovarianceiswhatmakesthecontractrisky.Thepersonwhoisontheshortsideoftheforwardcontractwouldhaveanassetwhosecovariancewiththeworldmarketportfoliowasnegative.Theywouldreceiveprofitwhenthemarketportfoliowasdoingpoorly,andtheywouldbewillingtotakeanexpectedlossbecauseofthedesirablepropertyofthenegativecovariance,whichislikehavingportfolioinsurance.

13.Whyisitonlythecovarianceofanasset’sreturnwiththereturnontheworldmarketportfoliothatdetermineswhetherthereisariskpremiumassociatedwiththeasset’sexpectedreturn?

Theuncertainpartofanasset’sreturncanbebrokenintotwocomponents.Thenon-diversifiablepartisdeterminedbythecovarianceofthereturnontheassetwiththereturnonthemarketportfolio.Thispartisthesourceofriskandthepartthatgivesrisetoariskpremiumontheasset.Theothercomponentoftheuncertainpartofanasset’sreturnisthepartthatisdiversifiableandthereforedoesnotcontributetothevarianceofalarge,well-diversifiedportfolio.Thislatterpartisthereforenotasourceofrisktoaninvestorwhoholdsalarge,well-diversifiedportfolio.

14.Whatistherationalexpectationshypothesis,andhowisitappliedtotestsofhypothesesaboutexpectedreturnsinfinancialmarkets?

Therationalexpectationshypothesisstatesthatwecanbreaktherealizationofareturnintoanexpectedreturnthatdependsonthecurrentinformationsetandanunexpectedcomponentthatdependsonlyonnewinformationandconsequentlydoesnotdependinanywayonthecurrentinformationset.Theoriesofriskpremiumsgeneratehypothesesthatrelateunob