Exchange Rate Movements
Do the futures prices exhibit a premium or a discount. How do you interpret this result
with regards to the
expectation of an appreciation or depreciation of the RMB in the future?
Would your Internet business pay a higher or lower rate when converting RMB into
dollars than if you converted
funds at the prevailing spot rate? Is this good or bad news for the Revenue (A/R) your business
will earn from its Chinese
customers over the coming year?
Go to www.bis.org/ (or the foreign Central Bank’s own website) to learn about the Central Bank
of China.
Question 3 – According to this website, is the exchange rate system used by the Central Bank
of China a fixed-rate or
2 Exchange Rate Movements
floating-rate system? Describe the Bank of China ’s role of central bank intervention, that is,
under what circumstances does
it intervene and what is it seeking to accomplish?
Question 4 – Explain how and why this information is/might be important for your business, not
only its management of
currency risk, but also for the stability of your cash flows (A/R and A/P)
RMB Exchange rates to the US dollar.
May-
13
Jun-
13
Jul-13 Aug-
13
Sep-
13
Oct-13 Nov-
13
Dec-
13
Jan-14 Feb-
14
Mar-
14
Apr-14 AVG
6.1315 6.133 6.1289 6.1203 6.1209 6.0946 6.094 6.0543 6.0612 6.1451 6.2171 6.2595 6.1300
3 Exchange Rate Movements
The contract MNH H15=1(10) – USD/OFFSHORE RMB FUTURES (E-MICRO) date
of maturity is 15 March 2015.The Current sport rate is 6.3228 while the current futures price for
the data is 6.2473.(31 May 2014)
- The future price is exhibiting a discount as the current price is 6.2473 and the future price is
6.3228. In case the RMB depreciate n value and reaches 6.5 RMB against the dollar. Then it will
exhibit a premium. In case the RMB appreciates in value and reaches 6.0005 per dollar then it
will slide into more loss or discount. - It will convert at lower rates. These will be good news for the revenue authority as it will be
paying less exchange rates as the dollars rate of exchange is lower. In the coming year if the
exchange rate depreciates to 6.3228 against the dollar then it will result in more RMB than the
previous year. - The floating exchange rate system is used by the Chinese central bank. The Chinese central
bank role is to stabilize the renminbi against the other world currencies. Since the Chinese
exchange rate reforms of 2005, the RMB has appreciated more than 30%. The Chinese central
bank known as the People’s Bank of China (PBC) has moved away from its initial fixed rate
regime that it was using before the global financial crisis of 2007-8 where it used to subsidized
its exchange rates by purchasing bulk US dollars to the current system that includes calculating
the geometric weighted averages of a number of countries bilateral exchange rates. The broad
indices comprise of data from 61 Economies from 1994 while the narrow indices include data
from 27 economies from 1964. These averages are the ones that make the EER (Effective
Exchange rates).
4 Exchange Rate Movements
The intervention of the PBC comes in different ways. For example, if the exchange rate increases
rapidly by 8% then the PBC has to step in. If the RMB appreciates very fast the PRC may face
bankruptcy of its export factories and the rate of unemployment will also rise rapidly. These will
cause economic and also social unrest in the country.
If the exchange rate decreases to by 8% then the PBC will have to act again. The RMB will
automatically be overpriced and the PRC will again seek to peg its currency against the dollar.
These will be a better move than allowing the RMB to plummet and subsequently cause capital
flight and losses to the export market. (Cairns, 2004)
When the RMB appreciates, then the Chinese exports will be affected negatively as they will be
very expensive and unaffordable in some markets. As a result it exports in the global market will
decrease and the unemployment rate will also increase.
- These information is important as most business are affected by the international exchange
rates. Just like in the case above, if the exchange rate appreciate by 8% then incase am an
exporter then my income will drop by 8% as the exports will be 8% more expensive in terms of
the dollars exchange rate. Incase am an importer then the income will increase by the same
margin. If however, the exchange rate drops by 8%, then the exporters will have a field day as
their exports will be less expensive by 8% while the importers will be complaining as their
imports will cost 8% more.
References
Cairns, J. (2004). Interest Rate Models – An Introduction. Princeton. Princeton University Press.
