Commodity Price,Carry Trade,and the Volatility and Liquidity of Asian Currencies

This study examines how the volatility and liquidity of 10 Asian exchange rates against the US dollar change with volatilities in commodity price and carry trade over the period of January 2000 to June 2010. We find that uncertainties in commodity markets and carry trades are significantly correlated with the volatilities and the bid‐ask spreads of most Asian currencies. The correlation with carry trade is generally stronger and has been rising over the sample period. While high volatilities in carry trade are associated with high volatilities in many Asian currencies, high volatilities in commodity price do not coincide with excessive volatilities in Asian currencies. This suggests that investors and policymakers should be more concerned with the volatility in carry trade.     

Cross Hedging with Currency Forward Contracts

This study examines the behavior of a competitive exporting firm that exports to a foreign country and faces multiple sources of exchange rate uncertainty. Although there are no hedging instruments between the home and foreign currencies, there is a third country that has well‐developed currency forward markets to which the firm has access. The firm's optimal cross‐hedging decision is shown to depend both on the degree of incompleteness of the currency forward markets in the third country, and on the correlation structure of the random spot exchange rates. Furthermore, the firm is shown to be more eager to produce and expand its exports to the foreign country when the missing currency forward contracts between the home and foreign currencies can be synthesized by the existing currency forward contracts. In this case of perfect cross hedging, the separation theorem holds but the full‐hedging theorem may or may not hold. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark     

Do futures lead price discovery in electronic foreign exchange markets?

Using intraday data, this study investigates the contribution to the price discovery of Euro and Japanese Yen exchange rates in three foreign exchange markets based on electronic trading systems: the CME GLOBEX regular futures, E‐mini futures, and the EBS interdealer spot market. Contrary to evidence in equity markets and more recent evidence in foreign exchange markets, the spot market is found to consistently lead the price discovery process for both currencies during the sample period. Furthermore, E‐mini futures do not contribute more to the price discovery than the electronically traded regular futures. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:137–156, 2009     

Interdependence of Major Exchange Rates in Ghana: A Wavelet Coherence Analysis

ABSTRACT

We have employed the three-dimensional continuous Morlet wavelet transform methodology to explore the co-movement amongst the returns of four major currencies in Ghana (dollar, euro, pound, and yen) for the period May 1999 to February 2018. The analysis reveals that the dynamics of the interdependence of the currencies is time-varying and heterogeneous. Our empirical findings demonstrate that the currencies are closely linked or interconnected. The lead–lag relationships between the returns of the exchange rates established that volatilities in the euro and yen significantly affect movements in the other currencies in daily and weekly exchange rate returns. The presence of lead–lag effects and stronger co-movements at short-run fluctuations may induce arbitrage and diversification opportunities to investors, albeit with limited space. The differences in the co-movements of returns and the evidence of contagion among the foreign exchange markets provide reliable incentive to the monetary authorities for unflinching strides to halt the speeding exchange rates.     

Hedging with mismatched currencies

This article presents a model of a risk-averse multinational firm facing risk exposure to a foreign currency cash flow. Forward markets do not exist between the firm's own currency and the foreign currency, but do exist for a third currency. Because a triangular parity condition holds among these three currencies, the available forward markets, albeit incomplete, provide a useful avenue for the firm to indirectly hedge against its foreign exchange rate risk exposure. This article offers analytical insights into the optimal cross-hedging strategies of the firm. In particular, the results show that separate unbiasedness of the forward markets does not necessarily imply a perfect full hedge that eliminates the entire foreign exchange rate risk exposure of the firm. The optimal cross-hedging strategies depend largely on the firm's marginal utility function and on the correlation of the random spot exchange rates. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19:859–875, 1999     

Market integration and contagion: Evidence from Asian emerging stock and foreign exchange markets

This paper examines whether Asian emerging stock markets (India, Korea, Malaysia, Philippines, Taiwan, and Thailand) have become integrated into world capital markets since their official liberalization dates by estimating and testing a dynamic integrated international capital asset pricing model (ICAPM) in the absence of purchasing power parity (PPP) using an asymmetric multivariate GARCH(1,1)-in-Mean approach. Also examined in this paper is whether there are pure contagion effects between stock and foreign exchange markets for each Asian country during the 1997 Asian crisis. The empirical results show that first, both currency and world market risks are priced and time-varying, suggesting that an international asset pricing model under PPP and constant price of risk might give rise to model misspecification. Second, the stock markets for India, Korea, Malaysia, Philippines, and Thailand were segmented from the world capital markets before their liberalization dates, but all six markets have become fully integrated since then. Third, the market liberalization has reduced the cost of capital and price volatility for most of the countries. Finally, as for the contagion effects, strong positive impact of return shocks originating from the domestic stock market to its foreign exchange market during the crisis is found. This dynamic relationship between stock market and foreign exchange market is consistent with stock-oriented exchange rate models.     

AMU Deviation Indicators for Coordinated Exchange Rate Policies in East Asia and their Relationships with Effective Exchange Rates

After the Asian currency crisis in 1997, the monetary authorities of East Asian countries have been strengthening their regional monetary cooperation. In this paper, we propose a deviation measurement for coordinated exchange rate policies in East Asia to enhance the monetary authorities’ surveillance process for their regional monetary cooperation. We calculate an Asian Monetary Unit (AMU) as a weighted average of East Asian currencies following the method used to calculate the European Currency Unit (ECU). Also, we calculate AMU Deviation Indicators which show how much each of the East Asian currencies deviates from a hypothetical benchmark rate in terms of the AMU. Furthermore, we investigate relationships between the AMU Deviation Indicators and the effective exchange rates, which mean international price competitiveness in terms of international trade. We found strong relationships between the AMU Deviation Indicators and the effective exchange rates except for some currencies. The results suggest that monitoring the AMU Deviation Indicator will be useful for the monetary authorities’ surveillance in East Asia in order to stabilise their effective exchange rate or price competitiveness among the East Asian countries.     

An Asian Currency Unit: Simulations for Its Effects on East Asia

An Asian currency unit (ACU) is necessary to deepen Asian financial markets and to convert national currencies into a single monetary policy. However, the experiences of the European Currency Unit and the European Exchange Rate Mechanism crisis in 1992–93 have indicated the danger of the so‐called gradual approach. This study evaluates the effects of welfare should the ACU indicator become a long‐term constraint of the People's Republic of China and Japan, the big two in East Asia. Our results indicate that the constraints of countries’ own baskets (e.g. real effective exchange rates) are still better before the launch of a true single currency. That is, pegging to an ACU indicator could hardly be sustained in the long‐run if East Asian countries have not reached a consensus about a regional monetary union.     

The arrival of the Euro and its implications for Asia

The third stage of the European Economic and Monetary Union (EMU) commenced on January 1, 1999 with the launch of the European single currency, the euro. The first round of participants comprises 11 of the 15 European Union (EU) nations, dubbed “Euroland.” The potential implications of EMU for Asia are immense. The euro's emergence as an international currency and its impact on Asia can be assessed in 3 different domains: (1) as a medium of exchange for Europe's trade with Asia; (2) as a store of value in stocks and bonds in world capital markets; and (3) as part of official foreign exchange reserves of Asian central banks. Our analysis suggests that there is potential for the euro to play a bigger role in EU-Asia trade links, which will be underpinned by the collective importance of Euroland as a much-enlarged trading and investment partner for Asia. However, in the short term at least, Asian equity markets are unlikely to benefit from significant inflows of capital from the EU as the former have been decimated by the region's financial crisis. As for Asian bond markets, rapid deterioration of sovereign ratings of countries in the region over the past 12 months would make it difficult for Asian companies to raise funds through euro-denominated debt instruments. As for official foreign exchange reserves, the bulk of Asian reserves is currently held in US dollar assets. Judging from Asian trade and debt figures, it seems unlikely that the euro would challenge the US dollar as a reserve currency any time in the near future. Nevertheless, in the longer term, the euro's introduction could make it easier for Asian central banks to diversify their reserves from the greenback to the euro. The internationalization of the euro is likely to happen only gradually, whether in terms of international trade denomination and settlement, denominating international financial assets, or as a reserve currency. Since the magnitude of shock that the single European currency would bring to the international monetary system is still unknown, only very tentative conclusions for the impact on Asian countries can be drawn at this point in time.     

How are Exchange Rates Managed? Evidence of an Anchor‐Based Heuristic

Central banks often intervene in the foreign exchange market to obtain desirable exchange rates. How this is done has remained totally opaque although central banks are likely to adopt a satisficing rather than optimizing strategy as they need to intervene frequently in a timely manner under incomplete information. In this paper, we propose a simple exchange rate management rule that spreads the volatilities originated from the anchor currencies among the exchange rates with the domestic currency. We test out this rule on 10 currencies and find the empirical evidence consistent with the proposed anchor‐based heuristic.     

不对称国际经济体系下的人民币汇率问题--一个劳动力平价视角

本文试从经济和金融全球化的视角,以劳动力平价为分析基础,分析在不对称国际经济体系中的人民币汇率水平问题。通过对中美劳动力平价以及中国与印度尼西亚、马来西亚和韩国三国的劳动力平价的比较研究,发现对美元而言,人民币1998年之前存在着较严重低估,1998年之后低估程度缩小;对印度尼西亚、马来西亚和韩国三国而言,10年来一直处于竞争性均衡中,在劳动力平价上不存在比较优势。因而,只有在人民币汇率形成机制中考虑东南亚国家货币的影响,才能保证我国商品的国际竞争力。     

Exports and hedging exchange rate risks: the multi‐country case

This article examines the optimal production, export allocation, and hedging decisions of a risk‐averse international firm that exports to several foreign markets with different currencies. The firm faces multiple exchange rate risks. Optimal decisions are analyzed under two scenarios. In the first, there is a forward market for one currency only. Then, the export allocation to different markets is separable from the firm's preferences and the joint distribution of the exchange rates. In contrast, total production is not separable except for a special case. In the second scenario, there is a forward market for each currency. Then, both production and export allocation are separable. Hedging with forward contracts depends on risk premia and on the joint distribution of the exchange rates. If tradable exchange rate risk is a linear function of untradable exchange rate risk plus noise, there is a conflict between cross hedging and taking a basis risk. If, alternatively, the untradable exchange rate risk is a linear function of the tradable exchange rate risk and noise, there is no such conflict. A speculative position in a biased forward market for one currency can be cross hedged using an unbiased forward market for another currency. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:843–864, 2000.     

PERIODIC SEQUENCES OF ARBITRAGE: A TALE OF FOUR CURRENCIES

This paper investigates arbitrage chains involving four currencies and four foreign exchange trader‐arbitrageurs. In contrast with the three‐currency case, we find that arbitrage operations when four currencies are present may appear periodic in nature, and not involve smooth convergence to a ‘balanced’ ensemble of exchange rates in which the law of one price holds. The goal of this article is to understand some interesting features of sequences of arbitrage operations, features which might well be relevant in other contexts in finance and economics.     

Why is China so Competitive? Measuring and Explaining China's Competitiveness

This paper evaluates factors responsible for the competitiveness of China in the world economy and relative to its East Asian rivals. China has been highly successful in capturing world export markets. Chinese competitiveness is not just a matter of an undervalued exchange rate and extremely low labour costs. It reflects the coincidence of favourable cost conditions with improvements in China's ability to produce products that meet world market specififications. These improvements are closely related to foreign participation in China's economy through foreign direct investment and joint venture enterprises.     

Currency distribution and forward cover in foreign trade: Sweden revisited, 1973

New data on currency distribution in Sweden's foreign trade payments for 1973 are presented and compared with data from an earlier survey for 1968. The basic pattern remains unchanged, invoicing being predominantly made in local currencies. The limited use of U.S. dollars, and other third-country currencies, has remained approximately the same over the five-year period, though with a marked shift from pounds to dollars and D-marks. Both the 1968 year of fixed parities and the 1973 year of floating exchange rates display a symmetric payments system, without any particular currency playing the role of ‘international money’ in private transactions. Data are also supplied for the total volume of forward transactions in Sweden from 1966–1974. As anticipated in foreign exchange theory, forward covering of trade payments has increased sharply since the floating of exchange rates in 1973.     

Testing the Martingale Difference Hypothesis (MDH) with Structural Breaks: Evidence from Foreign Exchanges of Nigeria and South Africa

ABSTRACT

This study tests for MDH in two prominent foreign exchange (FX) markets in Africa, Nigeria and South Africa using three benchmark currencies (euro, dollar and pound sterling). Data utilized cover time series closing rate data set of five-day weekly frequency spanning December 14, 2001 to September 26, 2014. The study considers both the linear and nonlinear measures for MDH with better size and power properties. We also capture structural break endogenously from the data stream using Perron (2006) unit root test with structural break. Three striking findings are discernible from our analyses. First, on average, the South African FX market appears to be more efficient than the Nigerian FX market. Thus, the latter may be more susceptible to speculations than the former. Second, ignoring significant structural breaks may render statistical inferences invalid. Third, the choice of methodology does matter when testing for MDH of foreign exchanges in Africa.     

Predicting exchange rate returns

We test whether forward premiums predict spot exchange rate returns for 16 currencies. We apply a recently developed time series predictability test that allows us to model data features including heteroskedasticity in forward premium. We discover return predictability for 75% (12/16) of currencies in our sample. Trading strategies show that investors can make more profits from our proposed forward premium model compared to a random walk model and foreign exchange carry trade model.     

Export dynamics and sales at home

How do firms' sales interact across markets? Are foreign and domestic sales complements or substitutes? Using a French firm-level database combining balance-sheet and product-destination-specific export information over the period 1995–2001, we study how demand conditions in foreign markets affect domestic sales through variations in exports. We identify a number of exogenous shocks affecting the firms' demand on foreign markets, including product-destination specific imports or tariff changes, and large foreign shocks such as financial crises or civil wars. Our results show that exogenous variations in firm-level exports positively impact domestic sales, even after controlling for domestic demand conditions. A 10% exogenous increase in foreign sales generates a 1 to 3% increase in domestic sales in the short-run. This result is robust to various estimation techniques, instruments, controls, and sub-samples. It is also supported by the natural experiment of the Asian crisis in the late 1990's.     

Exchange market pressure,commodity prices,and contagion in Latin America

Over the past two decades, Latin American currencies have faced not only pressure to devalue but also periods of uncomfortable appreciation. Domestic macroeconomic factors, as well as global events and contagion, might bear part of the responsibility. This study constructs a monthly index of exchange market pressure (EMP) for four Latin American countries before using vector autoregressive methods to test the influence of commodity prices, macroeconomic variables, and external factors on each country's index. While inflation is an important determinant of EMP, we conclude that Chile and Peru are more likely than Mexico and Brazil to face pressure when commodity prices fall. This supports the idea that these two countries have “commodity currencies” and that their exchange markets are most vulnerable to international contagion.     

Currency trading and international financial instability

During the past year, global capital markets have experienced an unprecedented series of financial turmoils. Asian contagion, Russia's default and the collapse of the US hedge fund Long Term Capital Management (LTCM) are the low points of this development. As recent events in Latin America and elsewhere indicate, there is no prospect that markets worldwide will lastingly calm down soon. There is an abundance of proposals and suggestions on how the system should be stabilised. The most popular among them include the control of capital flows and hedge-fund activities. The following article draws attention to another element of financial instability which at times triggers, at times fuels, a crisis: expectation-driven foreign exchange transactions.