004_inter_finan.qmd

---
title: "International financial markets"
author: Luis Francisco Gomez Lopez
date: 2023-07-11
format:
  beamer:
    colortheme: dolphin
    fonttheme: structurebold
    theme: AnnArbor
    link-citations: true
    linkcolor: blue
    include-in-header:
      - text: |
          \usepackage{booktabs}
          \usepackage{longtable}
          \usepackage{array}
          \usepackage{multirow}
          \usepackage{wrapfig}
          \usepackage{float}
          \usepackage{colortbl}
          \usepackage{pdflscape}
          \usepackage{tabu}
          \usepackage{threeparttable}
          \usepackage{threeparttablex}
          \usepackage[normalem]{ulem}
          \usepackage{makecell}
          \usepackage{xcolor}
bibliography: econ_glob_faedis.bib
---

```{r setup, include = FALSE}
knitr::opts_chunk$set(echo      = FALSE, 
                      warning   = FALSE, 
                      message   = FALSE,
                      fig.align = "center")
```

```{r libraries}

library(tidyverse)
library(knitr)
library(kableExtra)
library(tidyquant)
library(readxl)
```

# Contents

- Please Read Me
- Purpose
- Exchange regime in Colombia
- Exchange rates
- Foreign exchange hedges
- Acknowledgments
- References

# Please Read Me

- Check the message __Welcome greeting__ published in the News Bulletin Board.

- Dear student please edit your profile uploading a photo where your face is clearly visible.

- The purpose of the virtual meetings is to answer questions and not to make a summary of the study material.

- This presentation is based on [@wild_international_2020, Chapter 9]

# Purpose

Explain and describe the importance of the international capital market and its main components

# Exchange regime in Colombia

- The __exchange regime__ is the set of rules that regulate aspects of the foreign exchange market [@dian_preguntas_2020]

- In the exchange regime in Colombia there are 2 markets:

    + Free market ("Mercado libre" in spanish)
    
    + Regulated or exchange market ("Mercado regulado o cambiario" in spanish)
    
        + The regulated or exchange market is made up of all the currencies that must be __channeled__ through the __Exchange Market Intermediaries (EMI)__ (__Intermediarios del Mercado Cambiario (IMC)__ in spanish) authorized for that purpose or through the compensation mechanisms (clearing accounts) [@dian_preguntas_2020]
        
        + __Channeled__ means sell, buy or transfer currencies through the __EMI__
        
# Exchange regime in Colombia

- The operations that must be channeled through the regulated market or exchange market are [@dian_preguntas_2020]:

    + __Import and export of goods__
    + __Securities and guarantees in foreign currency__
    + __Derivatives operations__
    + External debt operations carried out by residents of the country, as well as the financial costs inherent to them.
    + Foreign capital investments in the country, as well as the returns associated with them
    + Colombian capital investments abroad, as well as the returns associated with them
    + Financial investments in securities issued and in assets located abroad, as well as the returns associated with them
    
# Exchange regime in Colombia

- __EMI__ (__(IMC)__ in spanish) in Colombia [@banrep_banco_2021]

```{r}

# Sistema Estadistico Cambiario SEC
## https://quimbaya.banrep.gov.co/secinternet/ > 
## Endeudamiento externo y avales >
## Otros servicios >
## Consultar lista de intermediarios del mercado cambiario

# read_csv("004_intermediarios_mercado_cambiario.csv") %>%
read_excel(path = "004_intermediarios_mercado_cambiario.xlsx", sheet = 1) %>% 
  select(2,3) %>% 
  set_names(nm = c("NIT", "Name")) %>% 
  slice(1:22) %>% 
  kable(format = "latex", booktabs = TRUE) %>% 
  kable_styling(font_size = 4, latex_options = "striped") %>%
  row_spec(row = 0, bold = TRUE) %>% 
  footnote(number = c("Source: Sistema Estadístico Cambiario - SEC",
                      # You need to update this manually
                      "Lat update: 2023-07-11"))
```

# Exchange regime in Colombia

- __EMI__ (__(IMC)__ in spanish) in Colombia [@banrep_banco_2021]

```{r}

# read_csv("004_intermediarios_mercado_cambiario.csv") %>%
read_excel(path = "004_intermediarios_mercado_cambiario.xlsx", sheet = 1) %>% 
  select(2,3) %>% 
  set_names(nm = c("NIT", "Name")) %>% 
  slice(23:45) %>% 
  kable(format = "latex", booktabs = TRUE) %>% 
  kable_styling(font_size = 4, latex_options = "striped") %>%
  row_spec(row = 0, bold = TRUE) %>% 
  footnote(number = c("Source: Sistema Estadístico Cambiario - SEC",
                      # You need to update this manually
                      "Last update: 2023-07-11"))
```

# Exchange rates

- ISO 4217 Currency Codes: standard that establishes internationally recognized codes for the representation of currencies that enable clarity and reduce errors

    + Some examples:

        + __COP__: Colombian peso
        + __USD__: United States dollar
        + __EUR__: Euro
        + __GBP__: Pound sterling
        
    + Some examples of exchange rates using __COP__ as a quoted currency and __USD__, __EUR__ and __GBP__ as base currencies:
    
        + __COP/USD__
        + __COP/EUR__
        + __COP/GBP__
        
# Exchange rates

```{r, out.width="90%"}

cop_usd <- tq_get(x = "COP=X") %>%
    select(symbol, date, high) %>%
    arrange(desc(date))

cop_usd %>%
    select(symbol, date, high) %>%
    ggplot(aes(x = date, y = high)) +
    geom_line(color = palette_light()[[1]]) +
    labs(x        = "",
         y        = "COP/USD",
         title    = "Daily exchange rate: COP/USD",
         subtitle = str_glue("Variable code Yahoo Finance: {unique(cop_usd$symbol)}
                             Highest price of each day used to make the plot: {names(cop_usd)[[3]]} column in Yahoo Finance"),
                             
         caption  = str_glue("Source: Yahoo Finance
                             Last update date: 2023-07-11")) + # You need to update this manually
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          legend.background = element_rect(fill = "#f3fcfc"),
          plot.title        = element_text(face = "bold"),
          axis.title        = element_text(face = "bold"),
          legend.title      = element_text(face = "bold"),
          axis.text         = element_text(face = "bold"))
```

# Exchange rates

```{r, out.width="90%"}

cop_eur <- tq_get(x = "EURCOP=X") %>%
    select(symbol, date, high) %>%
    arrange(desc(date))

cop_eur %>%
    select(symbol, date, high) %>%
    ggplot(aes(x = date, y = high)) +
    geom_line(color = palette_light()[[1]]) +
    labs(x        = "",
         y        = "COP/EUR",
         title    = "Daily exchange rate: COP/EUR",
         subtitle = str_glue("Variable code Yahoo Finance: {unique(cop_eur$symbol)}
                             Highest prices of each day used to make the plot: {names(cop_usd)[[3]]} column in Yahoo Finance"),
         caption  = str_glue("Source: Yahoo Finance
                             Last update date: 2023-07-11")) + # You need to update this manually
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          legend.background = element_rect(fill = "#f3fcfc"),
          plot.title        = element_text(face = "bold"),
          axis.title        = element_text(face = "bold"),
          legend.title      = element_text(face = "bold"),
          axis.text         = element_text(face = "bold"))
```

# Exchange rates

```{r, out.width="90%"}

cop_gbp <- tq_get(x = "GBPCOP=X") %>%
    select(symbol, date, high) %>%
    arrange(desc(date))

cop_gbp %>%
    select(symbol, date, high) %>%
    ggplot(aes(x = date, y = high)) +
    geom_line(color = palette_light()[[1]]) +
    labs(x        = "",
         y        = "COP/GBP",
         title    = "Daily exchange rate: COP/GBP",
         subtitle = str_glue("Variable code Yahoo Finance: {unique(cop_gbp$symbol)}
                             Highest prices of each day used to make the plot: {names(cop_usd)[[3]]} column in Yahoo Finance"),
         caption  = str_glue("Source: Yahoo Finance
                             Last update date: 2023-07-11")) + # You need to update this manually
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          legend.background = element_rect(fill = "#f3fcfc"),
          plot.title        = element_text(face = "bold"),
          axis.title        = element_text(face = "bold"),
          legend.title      = element_text(face = "bold"),
          axis.text         = element_text(face = "bold"))
```

# Exchange rates

- __Spot rates__

    + Exchange rates that require delivery of the traded currency within 2 business days
    
- __Forward rates__

    + A exchange rate at which 2 parties agree to exchange currencies on a specifies future date
    
# Foreign exchange hedges

- A foreign exchange hedge ("Cobertura cambiaria" in spanish) is a financial instrument used to eliminate the risk resulting from transactions in foreign currencies by transferring this risk to another agent which is usually a financial institution

- Foreign exchange hedges most used in Colombia [@bancoldex_coberturas_2014]:

    + Forward exchange rate
    
        + Delivery
        
    + Foreign exchange option
    
        + Put
        + Call
    
# Foreign exchange hedges

- Foreign exchange risk [@bancoldex_coberturas_2014, p 8-9]

```{r, fig.height=2.5, fig.width=4.5}

tibble(cop_usd    = c(round(pull(cop_usd[1,3])) - 100, 
                      round(pull(cop_usd[1,3])),
                      round(pull(cop_usd[1,3])) + 100),
       y          = rep(x = 0, times = 3)) %>%
    mutate(label_text = str_glue("{as.character(cop_usd)}
                                 COP/USD"))  %>% 
    ggplot() +
    geom_point(aes(x = cop_usd, y = y, fill = label_text),
               shape = 21,
               size  = 4,
               color = "black") +
    geom_label(aes(x = cop_usd, y = y, label = label_text, fill = label_text),
               vjust = -1,
               color = "white") + 
    geom_vline(xintercept = round(pull(cop_usd[1,3])),
               linetype = "dotted") + 
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 100,
                               y    = 0,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = 0),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend)) +
    # Revaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) - 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Devaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) + 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Revaluation annotation
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) - 100))/2,
             y     = -0.5,
             label = "Revaluation") +
    # Devaluation annotation
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) + 100))/2,
             y     = -0.5,
             label = "Devaluation") +
    scale_fill_tq() +
    xlim(c(round(pull(cop_usd[1,3])) - 120, round(pull(cop_usd[1,3])) + 120)) + 
    ylim(c(-1, 1)) +
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          panel.grid        = element_blank(),
          legend.background = element_rect(fill = "#f3fcfc"),
          legend.position   = "none", 
          axis.title        = element_blank(),
          axis.text         = element_blank(),
          axis.ticks        = element_blank())
```

# Foreign exchange hedges

- Foreign exchange risk [@bancoldex_coberturas_2014, p 8-9]

    + A __importer__ is not in the business of currency speculation
    
```{r, fig.height=2, fig.width=4.5}

tibble(cop_usd    = c(round(pull(cop_usd[1,3])) - 100, 
                      round(pull(cop_usd[1,3])),
                      round(pull(cop_usd[1,3])) + 100),
       y          = rep(x = 0, times = 3)) %>%
    mutate(label_text = str_glue("{as.character(cop_usd)}
                                 COP/USD"))  %>% 
    ggplot() +
    geom_point(aes(x = cop_usd, y = y, fill = label_text),
               shape = 21,
               size  = 4,
               color = "black") +
    geom_label(aes(x = cop_usd, y = y, label = label_text, fill = label_text),
               vjust = -1,
               color = "white") + 
    geom_vline(xintercept = round(pull(cop_usd[1,3])),
               linetype = "dotted") + 
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 100,
                               y    = 0,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = 0),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend)) +
    # Revaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) - 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Devaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) + 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Revaluation annotation: potential gain
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) - 100))/2,
             y     = -0.5,
             label = str_glue("Revaluation
                               Potential gain")) +
    # Devaluation annotation: potential loss
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) + 100))/2,
             y     = -0.5,
             label = str_glue("Devaluation
                              Potential loss"),
             fill = palette_light()[[4]]) +
    scale_fill_tq() +
    xlim(c(round(pull(cop_usd[1,3])) - 120, round(pull(cop_usd[1,3])) + 120)) + 
    ylim(c(-1, 1)) +
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          panel.grid        = element_blank(),
          legend.background = element_rect(fill = "#f3fcfc"),
          legend.position   = "none", 
          axis.title        = element_blank(),
          axis.text         = element_blank(),
          axis.ticks        = element_blank())
```
    
# Foreign exchange hedges

- Foreign exchange risk [@bancoldex_coberturas_2014, p 8-9]

    + A __exporter__ is not in the business of currency speculation
    
```{r, fig.height=2, fig.width=4.5}

tibble(cop_usd    = c(round(pull(cop_usd[1,3])) - 100, 
                      round(pull(cop_usd[1,3])),
                      round(pull(cop_usd[1,3])) + 100),
       y          = rep(x = 0, times = 3)) %>%
    mutate(label_text = str_glue("{as.character(cop_usd)}
                                 COP/USD"))  %>% 
    ggplot() +
    geom_point(aes(x = cop_usd, y = y, fill = label_text),
               shape = 21,
               size  = 4,
               color = "black") +
    geom_label(aes(x = cop_usd, y = y, label = label_text, fill = label_text),
               vjust = -1,
               color = "white") + 
    geom_vline(xintercept = round(pull(cop_usd[1,3])),
               linetype = "dotted") + 
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 100,
                               y    = 0,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = 0),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend)) +
    # Revaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) - 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Devaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) + 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Revaluation annotation: potential loss
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) - 100))/2,
             y     = -0.5,
             label = str_glue("Revaluation
                               Potential loss"),
             fill = palette_light()[[4]]) +
    # Devaluation annotation: potential gain
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) + 100))/2,
             y     = -0.5,
             label = str_glue("Devaluation
                              Potential gain")) +
    scale_fill_tq() +
    xlim(c(round(pull(cop_usd[1,3])) - 120, round(pull(cop_usd[1,3])) + 120)) + 
    ylim(c(-1, 1)) +
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          panel.grid        = element_blank(),
          legend.background = element_rect(fill = "#f3fcfc"),
          legend.position   = "none", 
          axis.title        = element_blank(),
          axis.text         = element_blank(),
          axis.ticks        = element_blank())
```

# Foreign exchange hedges

- __Forward exchange rate (Delivery)__: Upon expiration of the contract there is a transfer of the currency amount negotiated between the parties at an exchange rate agreed previously

    + __Parties__:
    
        + Importer or exporter
        + Financial institution

    + __Due date ("Fecha de vencimiento/plazo" in spanish)__
    
    + __Amount ("Monto" in spanish)__: amount of currency that the financial institution agrees to buy or sell to the importer or exporter
    
    + __Forward rate__: rate agreed previously at which currencies will be bought or sold on the due date which is equal to __Spot price__ +  __Implicit devaluation__ [^1]
    
        + __Spot price__: currency price at the time of negotiating this type of forward
        
[^1]: In [@wild_international_2020, Chapter 10] we will examine a way to calculate it

# Foreign exchange hedges

- __Forward exchange rate (Delivery)__: example with a positive implicit devaluation of 10, a spot price of `r round(pull(cop_usd[1,3]))` and a forward rate of `r round(pull(cop_usd[1,3])) + 10`  

```{r, fig.height=2, fig.width=4.5}

tibble(cop_usd    = c(round(pull(cop_usd[1,3])) - 100, 
                      round(pull(cop_usd[1,3])) + 10,
                      round(pull(cop_usd[1,3])) + 100),
       y          = rep(x = 0, times = 3)) %>%
    mutate(label_text = str_glue("{as.character(cop_usd)}
                                 COP/USD"))  %>% 
    ggplot() +
    geom_point(aes(x = cop_usd, y = y, fill = label_text),
               shape = 21,
               size  = 4,
               color = "black") +
    geom_label(aes(x = cop_usd, y = y, label = label_text, fill = label_text),
               vjust = -1,
               color = "white") + 
    geom_vline(xintercept = round(pull(cop_usd[1,3])),
               linetype = "dotted") + 
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 100,
                               y    = 0,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = 0),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend)) +
    # Revaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) - 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Devaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) + 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Revaluation annotation: potential loss
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) - 100))/2,
             y     = -0.5,
             label = str_glue("Revaluation
                              No potential 
                              loss/gain")) +
    # Devaluation annotation: potential gain
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) + 100))/2,
             y     = -0.5,
             label = str_glue("Devaluation
                              No potential 
                              loss/gain")) +
    scale_fill_tq() +
    xlim(c(round(pull(cop_usd[1,3])) - 120, round(pull(cop_usd[1,3])) + 120)) + 
    ylim(c(-1, 1)) +
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          panel.grid        = element_blank(),
          legend.background = element_rect(fill = "#f3fcfc"),
          legend.position   = "none", 
          axis.title        = element_blank(),
          axis.text         = element_blank(),
          axis.ticks        = element_blank())
```

# Foreign exchange hedges

- __Put option (Exporter)__: The exporter acquires the right to sell foreign currency at a price established on a certain future date, but is not obliged to carry out the operation if it does not favor him

    + __Parties__:
    
        + Exporter
        + Financial institution

    + __Due date ("Fecha de vencimiento/plazo" in spanish)__
    
    + __Amount ("Monto" in spanish)__: amount of currency that the financial institution agrees to buy or sell to the importer or exporter
    
    + __Forward rate__: rate agreed previously at which currencies will be bought or sold on the due date where it is equal to __Spot price__ +  __Implicit devaluation__
    
        + __Spot price__: currency price at the time of negotiating this type of forward
        
    + __Premium value__ ("valor de la prima" in spanish)
        
# Foreign exchange hedges

- __Put option (Exporter)__: an example where the potential loss materializes, the implicit devaluation is 10, the spot price is `r round(pull(cop_usd[1,3]))`, the forward rate is `r round(pull(cop_usd[1,3])) + 10` and the exporter pays a premium value of 5 __COP__ per __USD__

    + In this case the exporter __opts__ for the option

```{r, fig.height=2, fig.width=4.5}

tibble(cop_usd    = c(round(pull(cop_usd[1,3])) - 100, 
                      round(pull(cop_usd[1,3])) + 10,
                      round(pull(cop_usd[1,3])) + 100),
       y          = rep(x = 0, times = 3)) %>%
    mutate(label_text = str_glue("{as.character(cop_usd)}
                                 COP/USD"))  %>% 
    ggplot() +
    geom_point(aes(x = cop_usd, y = y, fill = label_text),
               shape = 21,
               size  = 4,
               color = "black") +
    geom_label(aes(x = cop_usd, y = y, label = label_text, fill = label_text),
               vjust = -1,
               color = "white") + 
    geom_vline(xintercept = round(pull(cop_usd[1,3])),
               linetype = "dotted") + 
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 100,
                               y    = 0,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = 0),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend)) +
    # Revaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) - 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Revaluation annotation: potential loss materializes
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) - 100))/2,
             y     = -0.5,
             label = str_glue("Potential loss
                              materializes"),
             fill = palette_light()[[4]]) +
    scale_fill_tq() +
    xlim(c(round(pull(cop_usd[1,3])) - 120, round(pull(cop_usd[1,3])) + 120)) + 
    ylim(c(-1, 1)) +
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          panel.grid        = element_blank(),
          legend.background = element_rect(fill = "#f3fcfc"),
          legend.position   = "none", 
          axis.title        = element_blank(),
          axis.text         = element_blank(),
          axis.ticks        = element_blank())
```

# Foreign exchange hedges

- __Put option (Exporter)__: an example where the potential gain materializes, the implicit devaluation is 10, the spot price is `r round(pull(cop_usd[1,3]))`, the forward rate is `r round(pull(cop_usd[1,3])) + 10` and the exporter pays a premium value of 5 __COP__ per __USD__

    + In this case the exporter __doesn't opt__ for the option
    
```{r, fig.height=2, fig.width=4.5}

tibble(cop_usd    = c(round(pull(cop_usd[1,3])) - 100, 
                      round(pull(cop_usd[1,3])) + 10,
                      round(pull(cop_usd[1,3])) + 100),
       y          = rep(x = 0, times = 3)) %>%
    mutate(label_text = str_glue("{as.character(cop_usd)}
                                 COP/USD"))  %>% 
    ggplot() +
    geom_point(aes(x = cop_usd, y = y, fill = label_text),
               shape = 21,
               size  = 4,
               color = "black") +
    geom_label(aes(x = cop_usd, y = y, label = label_text, fill = label_text),
               vjust = -1,
               color = "white") + 
    geom_vline(xintercept = round(pull(cop_usd[1,3])),
               linetype = "dotted") + 
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 100,
                               y    = 0,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = 0),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend)) +
    # Devaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) + 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Devaluation annotation: potential gain materializes 
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) + 100))/2,
             y     = -0.5,
             label = str_glue("Potential gain
                              materializes")) +
    scale_fill_tq() +
    xlim(c(round(pull(cop_usd[1,3])) - 120, round(pull(cop_usd[1,3])) + 120)) + 
    ylim(c(-1, 1)) +
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          panel.grid        = element_blank(),
          legend.background = element_rect(fill = "#f3fcfc"),
          legend.position   = "none", 
          axis.title        = element_blank(),
          axis.text         = element_blank(),
          axis.ticks        = element_blank())
```

# Foreign exchange hedges

- __Call option (Importer)__: The importer acquires the right to buy foreign currency at a price established on a certain future date, but is not obliged to carry out the operation if it does not favor him

    + __Parties__:
    
        + Importer
        + Financial institution

    + __Due date ("Fecha de vencimiento/plazo" in spanish)__
    
    + __Amount ("Monto" in spanish)__: amount of currency that the financial institution agrees to buy or sell to the importer or exporter
    
    + __Forward rate__: rate agreed previously at which currencies will be bought or sold on the due date where it is equal to __Spot price__ +  __Implicit devaluation__
    
        + __Spot price__: currency price at the time of negotiating this type of forward
        
    + __Premium value__ ("valor de la prima" in spanish)
    
# Foreign exchange hedges

- __Call option (Importer)__: an example where the potential loss materializes, the implicit devaluation is 10, the spot price is `r round(pull(cop_usd[1,3]))`, the forward rate is `r round(pull(cop_usd[1,3])) + 10` and the importer pays a premium value of 5 __COP__ per __USD__

    + In this case the importer __opts__ for the option
    
```{r, fig.height=2, fig.width=4.5}

tibble(cop_usd    = c(round(pull(cop_usd[1,3])) - 100, 
                      round(pull(cop_usd[1,3])) + 10,
                      round(pull(cop_usd[1,3])) + 100),
       y          = rep(x = 0, times = 3)) %>%
    mutate(label_text = str_glue("{as.character(cop_usd)}
                                 COP/USD"))  %>% 
    ggplot() +
    geom_point(aes(x = cop_usd, y = y, fill = label_text),
               shape = 21,
               size  = 4,
               color = "black") +
    geom_label(aes(x = cop_usd, y = y, label = label_text, fill = label_text),
               vjust = -1,
               color = "white") + 
    geom_vline(xintercept = round(pull(cop_usd[1,3])),
               linetype = "dotted") + 
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 100,
                               y    = 0,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = 0),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend)) +
    # Devaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) + 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Devaluation annotation: potential loss materializes
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) + 100))/2,
             y     = -0.5,
             label = str_glue("Potential loss
                              materializes"),
             fill = palette_light()[[4]]) +
    scale_fill_tq() +
    xlim(c(round(pull(cop_usd[1,3])) - 120, round(pull(cop_usd[1,3])) + 120)) + 
    ylim(c(-1, 1)) +
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          panel.grid        = element_blank(),
          legend.background = element_rect(fill = "#f3fcfc"),
          legend.position   = "none", 
          axis.title        = element_blank(),
          axis.text         = element_blank(),
          axis.ticks        = element_blank())
```

# Foreign exchange hedges

- __Call option (Importer)__: an example where the potential gain materializes, the implicit devaluation is 10, the spot price is `r round(pull(cop_usd[1,3]))`, the forward rate is `r round(pull(cop_usd[1,3])) + 10` and the importer pays a premium value of 5 __COP__ per __USD__

    + In this case the importer __doesn't opt__ for the option

```{r, fig.height=2, fig.width=4.5}

tibble(cop_usd    = c(round(pull(cop_usd[1,3])) - 100, 
                      round(pull(cop_usd[1,3])) + 10,
                      round(pull(cop_usd[1,3])) + 100),
       y          = rep(x = 0, times = 3)) %>%
    mutate(label_text = str_glue("{as.character(cop_usd)}
                                 COP/USD"))  %>% 
    ggplot() +
    geom_point(aes(x = cop_usd, y = y, fill = label_text),
               shape = 21,
               size  = 4,
               color = "black") +
    geom_label(aes(x = cop_usd, y = y, label = label_text, fill = label_text),
               vjust = -1,
               color = "white") + 
    geom_vline(xintercept = round(pull(cop_usd[1,3])),
               linetype = "dotted") + 
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 100,
                               y    = 0,
                               xend = round(pull(cop_usd[1,3])) + 100,
                               yend = 0),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend)) +
    # Revaluation
    geom_segment(data = tibble(x    = round(pull(cop_usd[1,3])) - 10,
                               y    = -0.5,
                               xend = round(pull(cop_usd[1,3])) - 100,
                               yend = -0.5),
                 aes(x    = x, 
                     y    = y,
                     xend = xend,
                     yend = yend),
                 arrow = arrow(ends = "last")) +
    # Revaluation annotation: potential gain materializes
    annotate("label",
             x     = (round(pull(cop_usd[1,3])) + (round(pull(cop_usd[1,3])) - 100))/2,
             y     = -0.5,
             label = str_glue("Potential gain
                              materializes")) +
    scale_fill_tq() +
    xlim(c(round(pull(cop_usd[1,3])) - 120, round(pull(cop_usd[1,3])) + 120)) + 
    ylim(c(-1, 1)) +
    theme(panel.border      = element_rect(fill = NA, color = "black"),
          plot.background   = element_rect(fill = "#f3fcfc"),
          panel.background  = element_rect(fill = "#f3f7fc"),
          panel.grid        = element_blank(),
          legend.background = element_rect(fill = "#f3fcfc"),
          legend.position   = "none", 
          axis.title        = element_blank(),
          axis.text         = element_blank(),
          axis.ticks        = element_blank())
```

# Acknowledgments

- To my family that supports me

- To the taxpayers of Colombia and the __[UMNG students](https://www.umng.edu.co/estudiante)__ who pay my salary

- To the __[Business Science](https://www.business-science.io/)__ and __[R4DS Online Learning](https://www.rfordatasci.com/)__ communities where I learn __[R](https://www.r-project.org/about.html)__ 

- To the __[R Core Team](https://www.r-project.org/contributors.html)__, the creators of __[RStudio IDE](https://rstudio.com/products/rstudio/)__ and the authors and maintainers of the packages __[tidyverse](https://CRAN.R-project.org/package=tidyverse)__, __[knitr](https://CRAN.R-project.org/package=knitr)__, __[tidyquant](https://CRAN.R-project.org/package=tidyquant)__, __[kableExtra](https://CRAN.R-project.org/package=kableExtra)__ and __[tinytex](https://CRAN.R-project.org/package=tinytex)__ for allowing me to access these tools without paying for a license

- To the __[Linux kernel community](https://www.kernel.org/category/about.html)__ for allowing me the possibility to use some __[Linux distributions](https://static.lwn.net/Distributions/)__ as my main __[OS](https://en.wikipedia.org/wiki/Operating_system)__ without paying for a license

# References