【正文】 notforprofit cooperative. A bank in New York can send messages to a bank in London via SWIFT’s regional processing centers. The connections are through datatransmission lines. The many different types of participants in the foreign exchange market include the following: （ 1） Importers who convert their domestic currency to foreign currency to pay for goods from foreign countries. （ 2） Exporters who receive foreign currency and may want to convert to the domestic currency. （ 3） Portfolio managers who buy and sell foreign stocks and bonds. （ 4） Foreign exchange brokers who match buy and sell orders. （ 5） Traders who make the market in foreign exchange. Exchange Rates An exchange rate is the price of one country’s currency for another’s. In practice, almost all trading of currencies takes place in terms of the . dollar. For example, both the German deutschemark and the British pound will be traded with their price quoted in . dollars. If the quoted price is the price in dollars of a unit of foreign exchange, the quotation is said to be in direct (or American) terms. For example, $= 163。1 and $ DM1 are in direct terms. The financial press frequently quotes the foreign currency price of a . dollar. If the quoted price is the foreign currency price of a . dollar, the quotation is indirect (or European). For example, 163。 = $1 and =$1. There are two reasons for quoting all foreign currencies in terms of the . dollar. First, it reduces the number of possible crosscurrency quotes. For example, with five major currencies, there would potentially be 10 exchange rates. Second, it makes triangular arbitrage more difficult. If all currencies were traded against each other, it would make inconsistencies more likely. That is, the exchange rate of the French franc against the deutschemark would be pared to the exchange rate between the . dollar and the deutschemark. This implies a particular rate between the French franc and the . dollar to prevent triangular arbitrage. Types of Transactions Three types of trades take place in the foreign exchange market: spot, forward, and trades involve an agreement on the exchange rate today for settlement in two rate is called the spotexchange rate. Forward trades involve an agreement on exchange rates today for settlement in the future. The rate is called the forwardexchange rate. The maturities for forward trades are usually 1 to 52 weeks. A swap is the sale (purchase) of a foreign currency with a simultaneous agreement to repurchase (resell) it sometime in the future. The difference between the sale price and the repurchase price is called the swap rate. EXAMPLE： On October 11, bank A pays dollars to bank B’s account at a New York bank and A receives pounds sterling in its account at a bank in London. On November 11,as agreed to on October 11, the transaction is reversed. A pays the sterling back to B, while B pays back the dollars to A. This is a swap. In effect, A has borrowed pounds sterling while giving up the use of dollars to B. 3 The Law Of One Price And Purchasingpower Parity What determines the level of the spotexchange rate? One answer is the law of one price(LOP). The law of one price says that a modity will cost the same regardless of the country in which it is purchased. More formally, let S163。(t) be the spotexchange rate, that is,the number of dollars needed to purchase a British pound at ti me PUS(t) and PUK(t)be the current . and British prices of a particular modity, say, apples. The law of one price says that PUS(t)=S163。(t) PUK(t).for apples. The rationale behind LOP is similar to that of triangular arbitrage. If LOP did not hold, arbitrage would be possible by moving apples from one country to another. For example,suppose that apples in New York are selling for $4 per bushel, while in London the price is 163。 per bushel. Then the law of one price implies that $4 =S163。(t) 163。 and S163。(t) =$163。 .That is, the LOP implied spotexchange rate is $ per is, the LOP implied spotexchange rate is $ per pound. Suppose instead that the actual exchange rate is $ per pound. Starting with $4, a trader could buy a bushel of apples in New York, ship it to London, and sell it there for163。. The pounds sterling could then be converted into dollars at the exchange rate, $2/163。 yielding a total of $5 for $1 ($5 $4) gain. The rationale of the LOP is that if the exchange rate is not $163。 but is instead, say $2/163。, then forces would be set in motion to change the rate and/or the price of apples. In our example, there would be a whole lot of apples flying from New York to London. Thus, demand for apples in New York would raise the dollar price for apples there, and the supply in London would lower the poundsterling price. The apple traders converting pounds sterling into dollars, that is, supplying pounds sterling and demanding dollars, would also put pressure on the excha nge rate to fall from $2/163。. As you can see, for the LOP to be strictly true, three assumptions are needed: （ 1） The transactions cost of trading apples—shipping, insurance, wastage, and so on—must be zero. （ 2） No barriers to trading apples, such as tariffs or taxes, can exist. （ 3） Finally, an apple in New York must be identical to an apple in London. It won’t do for you to send red apples to London if the English eat only green apples. Given the fact that the transaction costs are not zero and that the other conditions are rarely exactly met, the LOP is really applicable only to traded goods, and then only to very uniform ones. The LOP does not imply that a Mercedes costs the same as a Ford or that a nuclear power plant in France costs the same as one in New York. In the case of the cars,they are not identical. In the case of the power plants, even if they were identical, they are expensive and very d