【正文】 exchange, a means for the settlements of international indebtednesses, credits and international flows of money. In this sense, foreign exchange is the equivalent to international settlement. A Narrow Definition Foreign Exchange is the assets denominated in foreign currency that can be used to settle a country’s imbalances of balance of payments. ?Foreign Exchange Market 3 ?Free convertibility ?General acceptability ?Payable Functions ?Value measurement ?A means for international settlement ?Store of value ?A means for intervention ?Foreign Exchange Market 4 II. Foreign Exchange Market Foreign Exchange Market refers to the market(s) in which international currencies trades take place (Table 211, Table 212 and Table 213 for a survey of global foreign exchange market). Actors ?Commercial banks (CBs) ?Corporations ?Nonbank financial institutions, and ?Central banks ?Foreign Exchange Market 5 Table 211 Global Foreign Exchange Market Turnover Source: BIS. In billions of US dollars. 1992 1995 1998 2020 2020* 2020 S p o t t r a n s a c t i o n s 394 494 568 387 631 1005 O u t r i g h t f o r w a r d s 58 97 128 131 209 362 U p t o 7 d a y s … 50 65 51 92 154 O v e r 7 d a y s … 46 62 80 1 1 6 208 F o r e i g n e x c h a n g e s w a p s 324 546 734 656 954 1714 U p t o 7 d a y s … 382 528 45 1 700 1329 O v e r 7 d a y s … 162 202 204 252 382 T o t a l “ t r a d i t i o n a l” t u r n o v e r 820 1 1 9 0 1490 1200 1900 3210 Note: Daily averages in April. Adjusted for local and crossborder doublecounting. *Data for 2020 have been revised. 6 Table 212 Geographical Distribution of Exchange Market Turnover Source: BIS. In billions of US dollars and per cent. 1998 2020 2020* 2020 A m ou nt S ha r e A m ou nt S ha r e A m ou nt S ha r e A m ou nt S ha r e U ni t e d K i ng do m 637 32 . 5 504 31 . 5 753 31 . 0 1359 34 . 1 U ni t e d S t a t e s 351 17 . 9 354 15 . 7 461 19 . 2 664 16 . 6 J a pa n 136 6. 9 147 9. 1 199 8. 2 238 6. 0 S i ng a po r e 139 7. 1 101 6. 2 125 5. 2 23 1 5. 8 H on g K on g 79 4. 0 67 4. 1 102 4. 2 175 4. 4 S w i t z e r l a nd 82 4. 2 71 4. 4 79 3. 3 242 6. 1 G e r m a ny 94 4. 8 88 5. 5 1 18 4. 8 99 2. 5 F r a nc e 72 3. 7 48 3. 0 64 2. 6 120 3. 0 T ot a l 1969 100 1616 100 2429 100 3988 100 Note: Daily averages in April. Adjusted for local and crossborder doublecounting. *Data for 2020 have been revised. 7 Table 213 Foreign Exchange Market Turnover by Currency Pair Source: BIS. In billions of US dollars and per cent. 2020 2020* 2020 A m oun t S ha r e A m oun t S ha r e A m oun t S ha r e U S dol l a r / e ur o 354 30 506 28 840 27 U S dol l a r / ye n 231 20 298 17 397 13 U S dol l a r / s t e r l i ng 125 11 248 14 361 12 U S dol l a r / A us t r a l i a n dol l a r 47 4 98 5 175 6 U S dol l a r / S w i s s f r a nc 87 5 78 4 143 5 U S dol l a r / C a na di a n dol l a r 50 4 71 4 1 15 4 U S dol l a r / S w e di s h K r ona … … … … 56 2 U S dol l a r / ot he r 195 17 295 16 572 19 E ur o/ ye n 30 3 51 3 70 2 E ur o/ s t e r l i ng 24 2 43 2 64 2 E ur o/ S w i s s f r a nc 12 1 26 1 54 2 E ur o/ ot he r 21 2 39 2 1 12 4 O t he r c ur r e nc y pa i r s 26 2 42 2 122 4 A l l c ur r e nc y pa i r s 1 173 100 1794 100 3081 100 8 Market Microstructure Bank 1 Bank n Interbank Market Customer 1 Customer n Customer 1 Customer n Retail Market ?Foreign Exchange Market 9 ?The Exchange Rate I. What Is the Exchange Rate? Exchange Rate is the price of one currency in terms of another currency (Krugman and Obstfeld, 2020, 。 Pilbeam, 2020, ) . What is Money? ?A myth never solved ?A medium of exchange ?Unit of account ?Store of value 10 Some Fundamental Concepts ?Quotation Direct Quotation, also labeled as Price Quotation. The price of a unit of foreign currency in terms of home currency. . US$1= Indirect Quotation, or Quantity Quotation. The price of a unit of home currency in terms of the foreign currency. . RMB1=US$ For a more real example, see Table 214. ?The Exchange Rate 11 Table 214 RMB Exchange Rate Source: PBC. U S $ EU € JP 165。 International Statistical Yearbook (2020) Note: Price index (2020=100). Actually, wholesale price index is a more appropriate index for the estimation. Using the method in the above Table, we calculate China’s real exchange rate since 1965. See Figure 211 on the next page. N o m i n a l R a t e U S Pr i c e C h i n a ’ s Pr i c e R e a l R a t e 2020 8 . 2 7 8 4 100 100 8 . 2 7 8 4 2020 8 . 2 7 7 0 103 101 8 . 4 4 0 9 2020 8 . 2 7 7 0 105 99 8 . 7 7 8 6 2020 8 . 2 7 7 0 107 101 8 . 7 6 8 7 2020 8 . 2 7 6 8 1 1 0 104 8 . 7 5 4 3 14 Figure 211 RMB Real Exchange Rate Source: Author’s Estimation. 024681012141 96 5 1 97 0 1 97 5 1 98 0 1 98 5 1 99 0 1 99 5 2 00 0 2 00 5N O M I N A L R E A L15 ?Efficient exchange rate Efficient Exchange Rate is a weight average of a money basket made up of a country’s main trading partners’ currencies. The weight can be measured by the ratio of each trading partner’s export volumes plus import volumes to the total volumes of the country in question. 1,11?? ????niiniii wSwN E E R?The Exchange Rate 16 If we use bilateral real exchange rates to substitute the nominal ones in the equation, then we obtain Real Efficient Excha