Gilles HUART FX Marketing - Paris 33-1 01.42.98.02.82 [email_address] MASTERE  MANAGEMENT INDUSTRIEL INTERNATIONAL GESTION...
SUMMARY <ul><li>Introduction .........................................................p. 2 </li></ul><ul><li>C ontents ......
INTRODUCTION <ul><li>This is the largest market in the world with an estimated  usd 1.9 Trio average daily turnover </li><...
INTRODUCTION The FX market is evolving <ul><li>Dealing between  B anks   and  o ther  F inancial  I nstitutions has risen ...
INTRODUCTION Source: Bank for International Settlements 2004
INTRODUCTION <ul><li>Average daily turnover (ADV) in FX markets rose from USD 1.2 trillion in April 2001 to USD 1.9 trilli...
<ul><ul><li>Market participants </li></ul></ul><ul><ul><li>Market liquidity </li></ul></ul><ul><ul><li>Around-the-clock ma...
Contents -  MARKET PARTICIPANTS <ul><li>Governments </li></ul><ul><li>Central banks </li></ul><ul><li>Corporate </li></ul>...
MARKET PARTICIPANTS - Governments <ul><li>Governments  have requirements for foreign currencies   </li></ul><ul><ul><li>Go...
MARKET PARTICIPANTS   -  Central banks <ul><li>CENTRAL BANKS ARE ACTIVE MAINLY FOR THE FOLLOWING </li></ul><ul><li>REASONS...
MARKET PARTICIPANTS   -  Central banks CENTRAL BANK INTERVENTION : JAPAN EXAMPLE
MARKET PARTICIPANTS   -  Central banks CENTRAL BANK of CHINA
MARKET PARTICIPANTS   -  Corporate <ul><li>Commercial requirements  </li></ul><ul><ul><li>Importers   oil (buying USD) </...
MARKET PARTICIPANTS  -  Financial institutions   <ul><li>Real Money managers / Pension funds - long term view </li></ul><u...
MARKET PARTICIPANTS  -  Financial institutions   FINANCIAL INSTITUTIONS :  Japanese investors flows into USD
MARKET PARTICIPANTS  -  Market makers <ul><li>LIQUIDITY PROVIDER </li></ul><ul><ul><li>MM have the obligation to quote2-wa...
MARKET PARTICIPANTS  -  Market makers <ul><li>BROKER HOUSES </li></ul><ul><ul><li>Bring buyer and seller together at a mut...
Contents -  MARKET LIQUIDITY <ul><li>Most traded currencies  </li></ul><ul><ul><li>G7 currencies </li></ul></ul><ul><ul><l...
Contents -  MARKET LIQUIDITY ZAR / JPY chart
Contents -  MARKET LIQUIDITY
Contents -  AROUND-THE-CLOCK MARKET <ul><li>Main financial centers, 24 hours per day </li></ul><ul><li>Europe & Middle Eas...
FOREIGN EXCHANGE EXPOSURE <ul><ul><li>Volatility </li></ul></ul><ul><ul><li>Foreign exchange risk </li></ul></ul><ul><ul><...
Foreign Exchange Exposure  -  VOLATILITY <ul><li>Volatility </li></ul><ul><ul><li>The volatility is the amplitude of curre...
<ul><li>Foreign exchange exposure is the risk of financial impact due to changes in foreign exchange rates </li></ul><ul><...
<ul><li>Transaction Exposure </li></ul><ul><ul><li>Transaction exposure mainly impacts a company’s profit and loss and cas...
Foreign Exchange Exposure  -  RISK SOURCES <ul><li>Financial transactions </li></ul><ul><ul><li>Funding </li></ul></ul><ul...
FOREIGN EXCHANGE PRODUCTS <ul><ul><li>Spot market </li></ul></ul><ul><ul><li>Forward market </li></ul></ul><ul><ul><li>Non...
<ul><li>Bid / Offer spread  </li></ul><ul><ul><li>Prices are given as spread </li></ul></ul><ul><ul><li>1.1724/1.1728 </li...
Foreign Exchange Products -  SPOT   Reuters page: Spot prices
Foreign Exchange Products -  SPOT <ul><li>PRICE DETERMINANTS </li></ul><ul><ul><li>supply and demand exchange rates in for...
<ul><li>CONVENTION  </li></ul><ul><li>Delivery D+2 </li></ul><ul><ul><li>2 business days are required to enable the trade ...
<ul><li>Orders </li></ul><ul><ul><li>Take profit </li></ul></ul><ul><ul><li>Stop loss </li></ul></ul><ul><ul><li>At best <...
<ul><li>“ My word is my bound” </li></ul><ul><li>Quick pricing </li></ul><ul><li>Trading Positions </li></ul><ul><ul><li>L...
<ul><li>Monitoring a position </li></ul>Foreign Exchange Products -  SPOT   <ul><li>Positive PL    Sell 27 mio Eur above ...
<ul><li>Principle </li></ul><ul><li>A forward contract is a transaction excecuted today in which one currency is bought or...
Foreign Exchange Products -  FORWARD
Foreign Exchange Products -  FORWARD <ul><li>Bids and offers </li></ul><ul><ul><li>Just as there is bid and offer in the s...
Foreign Exchange Products -  FORWARD <ul><li>Quotation OUTRIGHT  FORWARD </li></ul><ul><ul><li>The spread is given in swap...
Foreign Exchange Products -  FORWARD <ul><li>Quotation FOREX SWAP  </li></ul><ul><ul><li>Simultaneously 1 spot transaction...
Foreign Exchange Products -  FORWARD Mechanics of Forex Swaps
<ul><li>Convertibility and Transferability </li></ul><ul><li>Currencies like ARS / BRL / CNY/ TWD/KRW </li></ul><ul><li>Us...
<ul><li>NDFs are generally short term instruments, using the same standard foreign exchange as forward market convention <...
<ul><li>Hedging Currency risk with NDF </li></ul><ul><ul><li>A multinational corporation generates 30% of its revenues in ...
<ul><li>Definition and terminology </li></ul><ul><li>A forex option give the right to the order to buy or sell specific am...
<ul><li>Premium of the option= price of the option paid at spot value </li></ul><ul><li>Exercise  is the process by which ...
Foreign Exchange Products -  OPTIONS <ul><li>An investor wants to hedge against a possible strengthening of the EUR. </li>...
<ul><li>Common Option Strategies </li></ul>A straddle  is a combination of a call and a put on the same underlying asset w...
A strangle  is a combination of a call and a put on the same underlying asset, with the same the put). A long strangle is ...
A risk reversal  portfolio is obtained either by buying a call and selling a put or selling a call and buying a put. It ca...
A bullish vertical spread  is created by buying a call option and selling a further out of the money call with same expiry...
A knock-in  is a European option that becomes alive (is “knocked-in”) if the underlying spot reaches a predetermined barri...
A knock-out  is a European option that ceases to exist (is “knocked-out”) if the underlying spot reaches a predetermined b...
Reuters page: Volatility prices Foreign Exchange Products -  Options
Foreign Exchange Products -  OPTIONS
DISCLAIMER
Upcoming SlideShare
Loading in …5
×

Tunisia

813
-1

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
813
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
15
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • 1 THANK YOU FOR HAVING INVITED ME IN THIS MARVELOUS PLACE IN OPIO I LL BE VERY QUICK BECAUSE ACTUALLY I AM VERY EAGER TO GO RAFTING I HAVE 10 MINUTES TO CONVINCE YOU THAT FOREIGN EXCHANGE MUST BE ON THE TOP OF YOUR PRIORITY LIST AS A PRODUCT FOR 3 REASONS 1/ FX BOOSTS BNP PARIBAS RETURN ON EQUITY 2/ FX ENHANCES CLIENT RELATIONSHIP 3/ BNP PARIBAS IS VERY GOOD IN FX BUSINESS
  • Foreign exchange rate are of particular concern to governments because change in foreign exchange rate affect the value of products and financial intsruments Exchange rate changes also impact a nation international investment flow as well as export and import prices These factors in turn can influenece inflation and economic growth For exemple suppose the price of Eur 1.35 to 1.17 American exports to Europe will become more expensive The higher European import prices might be an inflationary influence in Europe European exports to Us will become less expensive which might lead to an increase in European exports and a boost to Euoep employment
  • Covering the contributions the receive Ie United nations Exposure linked to development programs Buying currencies to finance local aid They are dealing with 100 currencies
  • Provide liquidity in the market Who The stregngh of investment and merchnt banks lies in their corporate finance and capital markets activities the multi currency sophistication of the capital markets and the wide international spread of corporations required banks to conduct Foreign exchange business , they deal direct or through broker Financial transactions Funding Portfolio investment
  • However the use of live brokers has decreased in recent years due mosly to the irse of the various interbank electronic brokerage systems
  • OUTRITE FORWARD BNP sells 3 months EUR BNP will deliver EUR in 3 months BNP buys today the Eur to be delivered in 3 M BNP needs to borrow Usd during 3 m period BNP will lend the Eur during 3 months that will be used at maturity for the delivery ACB will deliver Usd in 3 months
  • A growing number of investors have been attracted to the high yields available in the developing word but find access can be limited due to currency restrictions NDFs provide the means to invest in these economies without being locked into non-convertible currency
  • Tunisia

    1. 1. Gilles HUART FX Marketing - Paris 33-1 01.42.98.02.82 [email_address] MASTERE MANAGEMENT INDUSTRIEL INTERNATIONAL GESTION DES OPERATIONS INTERNATIONALES LE RISQUE DE CHANGE 6 Mars 2002 Corporate Banking and Investment Corporate Banking and Investment Foreign Exchange Markets TUNIS, 13 th December 2005 Nadia Dagnas / Andreas Hesse FX Sales - CEEMEA Region
    2. 2. SUMMARY <ul><li>Introduction .........................................................p. 2 </li></ul><ul><li>C ontents .................................................................p. 6 </li></ul><ul><ul><li>Market participants ............................................................... p. 07 </li></ul></ul><ul><ul><li>Market liquidity ......................................................................... p. 17 </li></ul></ul><ul><ul><li>Around-the-clock market .................................................. p. 19 </li></ul></ul><ul><li>F oreign E xchange E xposure................................p. 20 </li></ul><ul><ul><li>Volatility ........................................................................................ p. 21 </li></ul></ul><ul><ul><li>Foreign exchange risk ....................................................... p. 22 </li></ul></ul><ul><ul><li>Sources of risk ........................................................................ p. 23 </li></ul></ul><ul><li>F oreign E xchange P roducts.................................p. 25 </li></ul><ul><ul><li>Spot market .............................................................................. p. 26 </li></ul></ul><ul><ul><li>Forward market ..................................................................... p. 34 </li></ul></ul><ul><ul><li>Non deliverable forward .................................................. p. 39 </li></ul></ul><ul><ul><li>Forex options .......................................................................... p. 42 </li></ul></ul>
    3. 3. INTRODUCTION <ul><li>This is the largest market in the world with an estimated usd 1.9 Trio average daily turnover </li></ul><ul><li>Unlike Commodities and Equities markets, the Forex market is not located in a specific place nor limited by trading hours </li></ul><ul><li>It is a truly 24 hours global system trading example BNPP add geo Map </li></ul><ul><li>It knows no barrier and Forex is over-the-counter market where buyer and sellers conduct business </li></ul><ul><li>A foreign exchange transaction is a contract to exchange one currency for another at an agreed rate on an agreed date </li></ul>
    4. 4. INTRODUCTION The FX market is evolving <ul><li>Dealing between B anks and o ther F inancial I nstitutions has risen while i nterbank dealing has declined as a proportion of the overall market </li></ul>NBFIs including Hedge Funds, Fund Managers and CTAs Source: Bank for International Settlements 2004
    5. 5. INTRODUCTION Source: Bank for International Settlements 2004
    6. 6. INTRODUCTION <ul><li>Average daily turnover (ADV) in FX markets rose from USD 1.2 trillion in April 2001 to USD 1.9 trillion in April 2004, a 57% increase at current exchange rates and 36% increase at constant exchange rates </li></ul><ul><li>Spot FX posted the largest gains going from ADV of USD 387 billion in April 2001 to USD 621 billion in April 2004 – 60.5% growth at current exchange rates </li></ul>Source: Bank for International Settlements 2004 USD 944 billion USD 621 billion USD 208 billion
    7. 7. <ul><ul><li>Market participants </li></ul></ul><ul><ul><li>Market liquidity </li></ul></ul><ul><ul><li>Around-the-clock market </li></ul></ul>CONTENTS
    8. 8. Contents - MARKET PARTICIPANTS <ul><li>Governments </li></ul><ul><li>Central banks </li></ul><ul><li>Corporate </li></ul><ul><li>Financial Institutions </li></ul><ul><li>Market Makers </li></ul>
    9. 9. MARKET PARTICIPANTS - Governments <ul><li>Governments have requirements for foreign currencies </li></ul><ul><ul><li>Government expenses </li></ul></ul><ul><ul><ul><li>ie to pay staff salaries and local bills of embassy abroad </li></ul></ul></ul><ul><ul><li>Activities linked to the management of non domestic debts </li></ul></ul><ul><ul><ul><li>To pay back foreign loan with the capital sum eventually having to be repaid ( Paris club ) </li></ul></ul></ul><ul><ul><ul><li>Foreign Bonds redemption </li></ul></ul></ul><ul><li>Who is managing the risk ? </li></ul><ul><ul><li>In some countries there are Debt agencies Sweden Belgium </li></ul></ul><ul><ul><li>In other countries MOF will act through central banks ie Greece </li></ul></ul><ul><li>Products tools </li></ul><ul><ul><li>Fx spot </li></ul></ul><ul><ul><li>Fx forward </li></ul></ul><ul><ul><li>Fx options </li></ul></ul>
    10. 10. MARKET PARTICIPANTS - Central banks <ul><li>CENTRAL BANKS ARE ACTIVE MAINLY FOR THE FOLLOWING </li></ul><ul><li>REASONS </li></ul><ul><li>The central banks are stabilising their own currency </li></ul><ul><ul><li>They will enter the market to correct what are felt to be unnecessarily large movements often in conjunction with one another </li></ul></ul><ul><ul><li>By their actions however they can sometimes create the excess they are specifically trying to prevent </li></ul></ul><ul><ul><ul><li>Example of G7 interventions charts </li></ul></ul></ul><ul><li>The second group of active central banks can be described as aggressive managers of their reserves </li></ul><ul><ul><li>Some of the middle east and Far Eastern central banks fall into this category </li></ul></ul><ul><ul><li>They are major speculative risk takers to enhance local flows </li></ul></ul><ul><ul><li>Managing bonds portfolio and money market deposits </li></ul></ul><ul><li>Existence of a currencies basket will conduct their Forex activities with curencies adjustments </li></ul><ul><ul><li>According evolution of the basket percentage reserves have to replicate weight </li></ul></ul><ul><ul><li>of currencies in the basket </li></ul></ul><ul><ul><ul><li>Example: Russia </li></ul></ul></ul>
    11. 11. MARKET PARTICIPANTS - Central banks CENTRAL BANK INTERVENTION : JAPAN EXAMPLE
    12. 12. MARKET PARTICIPANTS - Central banks CENTRAL BANK of CHINA
    13. 13. MARKET PARTICIPANTS - Corporate <ul><li>Commercial requirements </li></ul><ul><ul><li>Importers  oil (buying USD) </li></ul></ul><ul><ul><li>Exporters  utilities, manufacturing goods </li></ul></ul><ul><li>M&A Business (MERGER AND ACQUISITION) </li></ul><ul><ul><li>Cross border activities </li></ul></ul><ul><ul><li>Exemples of recent M&A involving Forex transactions </li></ul></ul><ul><li>Financial Business </li></ul><ul><ul><li>Balance sheet consolidation </li></ul></ul><ul><ul><li>case of HIA </li></ul></ul>
    14. 14. MARKET PARTICIPANTS - Financial institutions <ul><li>Real Money managers / Pension funds - long term view </li></ul><ul><ul><li>Forex activity as investment in foreign bonds or equities </li></ul></ul><ul><ul><ul><li>Chart: Japanese investors flows into Usd </li></ul></ul></ul><ul><li>Hedge funds - medium term view </li></ul><ul><ul><li>They have no underlying exposure to hedge rather they attempt to fulfill the adage buy low sell high by trading for profit as a reward of their activities </li></ul></ul><ul><ul><li>Foreign exchange is an ideal speculative tool offering volatility liquidity and leverage </li></ul></ul><ul><li>Commercial banks- short term view </li></ul><ul><ul><li>Trading activities on Fx spot </li></ul></ul><ul><ul><li>Estimated up to 90 % of the daily trading activity, as a speculator community </li></ul></ul><ul><li>Development Banks and Public organisations </li></ul><ul><ul><li>Loans </li></ul></ul><ul><ul><li>Payables and receivables </li></ul></ul>
    15. 15. MARKET PARTICIPANTS - Financial institutions FINANCIAL INSTITUTIONS : Japanese investors flows into USD
    16. 16. MARKET PARTICIPANTS - Market makers <ul><li>LIQUIDITY PROVIDER </li></ul><ul><ul><li>MM have the obligation to quote2-way prices, hence showing bid/offer spread </li></ul></ul><ul><ul><li>MM are ready to buy and sell currencies </li></ul></ul><ul><ul><li>Reciprocity is standard practice </li></ul></ul><ul><ul><li>This category is the largest and includes international commercial and investment banks </li></ul></ul><ul><li>PRICES FACTORY </li></ul><ul><ul><li>It requires a global organisation </li></ul></ul><ul><ul><li>Expertise and knowledge to deal with particular requirements </li></ul></ul><ul><ul><ul><li>very important flows, high number of transactions </li></ul></ul></ul><ul><li>MAKE PROFIT </li></ul><ul><ul><li>Maximising the turn-over </li></ul></ul><ul><ul><li>Set Bid / Offer spread </li></ul></ul><ul><ul><li> The bulk of today trading activity is concentrated between 150 banks </li></ul></ul>
    17. 17. MARKET PARTICIPANTS - Market makers <ul><li>BROKER HOUSES </li></ul><ul><ul><li>Bring buyer and seller together at a mutually agreed price </li></ul></ul><ul><ul><li>Liquidity provider, both buyer and seller should pay a transaction commission which will vary according to currency handled, the amount and from center to center </li></ul></ul><ul><ul><li>Major Broker </li></ul></ul><ul><li>ELECTRONIC BROKERING SYSTEM </li></ul><ul><ul><li>EBS </li></ul></ul><ul><ul><li>Reuters 3000 </li></ul></ul>
    18. 18. Contents - MARKET LIQUIDITY <ul><li>Most traded currencies </li></ul><ul><ul><li>G7 currencies </li></ul></ul><ul><ul><li>Pacific currencies </li></ul></ul><ul><li>Converging currencies </li></ul><ul><ul><li>Eastern Europe </li></ul></ul><ul><ul><li>High yield and FDI flows </li></ul></ul><ul><li>Emerging market currencies </li></ul><ul><ul><li>Volatility </li></ul></ul><ul><ul><li>Carry trades </li></ul></ul><ul><ul><ul><li>Ie Turkey and South Africa </li></ul></ul></ul><ul><li>Local currencies </li></ul><ul><ul><li>pricing one side </li></ul></ul>
    19. 19. Contents - MARKET LIQUIDITY ZAR / JPY chart
    20. 20. Contents - MARKET LIQUIDITY
    21. 21. Contents - AROUND-THE-CLOCK MARKET <ul><li>Main financial centers, 24 hours per day </li></ul><ul><li>Europe & Middle East </li></ul><ul><li>Paris </li></ul><ul><li>London </li></ul><ul><li>Amsterdam </li></ul><ul><li>Athens </li></ul><ul><li>Dublin </li></ul><ul><li>Brussels </li></ul><ul><li>Switzerland </li></ul><ul><li>Bahrain </li></ul><ul><li>Oslo </li></ul><ul><li>Milan </li></ul><ul><li>Madrid </li></ul><ul><li>Warsaw </li></ul><ul><li>Budapest </li></ul><ul><li>Sofia </li></ul><ul><li>Japan </li></ul><ul><li>Tokyo </li></ul><ul><li>Asia </li></ul><ul><li>Bangkok </li></ul><ul><li>Hong-Kong </li></ul><ul><li>Singapore </li></ul><ul><li>Seoul </li></ul><ul><li>Taipei </li></ul><ul><li>Sydney </li></ul><ul><li>Americas </li></ul><ul><li>New-York </li></ul><ul><li>San-Francisco </li></ul><ul><li>Montreal </li></ul><ul><li>Brazil </li></ul><ul><li>Argentina </li></ul><ul><li>Singapore </li></ul>Front Office Staff Risk Solution Sales Total Front Office : 284 Americas 51 Japan 12 Asia ex. Japan 75 Europe 150 4 26 21 2 41 32 6 5 10 60 80 Trading 1 5 “Hubs” 23 Local Platforms
    22. 22. FOREIGN EXCHANGE EXPOSURE <ul><ul><li>Volatility </li></ul></ul><ul><ul><li>Foreign exchange risk </li></ul></ul><ul><ul><li>Sources of risk </li></ul></ul>
    23. 23. Foreign Exchange Exposure - VOLATILITY <ul><li>Volatility </li></ul><ul><ul><li>The volatility is the amplitude of currencies variations </li></ul></ul><ul><ul><li>Forex risk exposure is linked to volatility factors </li></ul></ul><ul><li>Reasons of currencies move </li></ul><ul><ul><li>Growth differentials expectations </li></ul></ul><ul><ul><li>Interest rates expectations </li></ul></ul><ul><ul><li>Large market flows </li></ul></ul><ul><ul><li>Market news and Rumour (“ Buy the Rumour, sell the News ”) </li></ul></ul><ul><li>No volatility no Forex risk </li></ul><ul><ul><li>Some emerging currencies are pegged to Usd, any FX risk? </li></ul></ul><ul><ul><li>Risk of deval or reval... </li></ul></ul>
    24. 24. <ul><li>Foreign exchange exposure is the risk of financial impact due to changes in foreign exchange rates </li></ul><ul><li>The participants in the foreign exchange markets effect hedge operations for either financial or commercial transactions </li></ul>Foreign Exchange Exposure - RISK EXPOSURE
    25. 25. <ul><li>Transaction Exposure </li></ul><ul><ul><li>Transaction exposure mainly impacts a company’s profit and loss and cash flow </li></ul></ul><ul><ul><li>It results from transacting business in currencies different from the home-based currency </li></ul></ul><ul><ul><li>This exposure could be hedged through the use of foreign exchange products such as forward contracts </li></ul></ul><ul><li>Commercial transactions and hedging </li></ul><ul><ul><li>Commercial transactions hedging </li></ul></ul><ul><ul><ul><li>Corp. buying raw materials from abroad and exporting final products </li></ul></ul></ul><ul><ul><ul><li>Importers of goods buying foreign currencies </li></ul></ul></ul><ul><ul><li>Economic exposure in case of tender </li></ul></ul>Foreign Exchange Exposure - RISK SOURCES
    26. 26. Foreign Exchange Exposure - RISK SOURCES <ul><li>Financial transactions </li></ul><ul><ul><li>Funding </li></ul></ul><ul><ul><li>Portfolio investment </li></ul></ul><ul><li>Translation exposure </li></ul><ul><ul><li>Translation exposure mainly impacts a company’s balance sheet </li></ul></ul><ul><ul><li>It results from the translation of foreign assets and liabilities into the company‘s home currency for accounting purposes </li></ul></ul>
    27. 27. FOREIGN EXCHANGE PRODUCTS <ul><ul><li>Spot market </li></ul></ul><ul><ul><li>Forward market </li></ul></ul><ul><ul><li>Non deliverable forward </li></ul></ul><ul><ul><li>Forex options </li></ul></ul>
    28. 28. <ul><li>Bid / Offer spread </li></ul><ul><ul><li>Prices are given as spread </li></ul></ul><ul><ul><li>1.1724/1.1728 </li></ul></ul><ul><ul><li>Spread is given in pips </li></ul></ul><ul><ul><li>Amount </li></ul></ul><ul><ul><li>Trader buys at lower price  bid side or left side </li></ul></ul><ul><ul><li>Trader sells at highest price left  Ask side or Right side </li></ul></ul><ul><ul><li>Client buys at highest price / Client sells at lowest price </li></ul></ul>Foreign Exchange Products - SPOT <ul><li>Transaction </li></ul><ul><ul><li>Spot is the price at which one currency can be bought or sold, expressed in terms of the other currency for delivery on spot value date </li></ul></ul>
    29. 29. Foreign Exchange Products - SPOT Reuters page: Spot prices
    30. 30. Foreign Exchange Products - SPOT <ul><li>PRICE DETERMINANTS </li></ul><ul><ul><li>supply and demand exchange rates in foreign exchange are driven by the laws of supply and demand </li></ul></ul><ul><ul><li>The supply and demand for specific currencies change given the amount of trade and investment being done </li></ul></ul><ul><ul><li>If there is a high demand for a currency its value increases </li></ul></ul><ul><ul><li>If there is a low demand then its value decreases </li></ul></ul><ul><ul><li>but also economic political monetary and social factors </li></ul></ul><ul><ul><li>Rumours and anticipations </li></ul></ul>
    31. 31. <ul><li>CONVENTION </li></ul><ul><li>Delivery D+2 </li></ul><ul><ul><li>2 business days are required to enable the trade information between the counterparties involved to be agreed on and to process the funds through the local clearing </li></ul></ul><ul><li>ISO code: GBP, USD,.... </li></ul><ul><ul><li>First 2 letters for the country: G reat B ritain P, 3rd letter for the currency: GB P ound </li></ul></ul><ul><ul><li>Quotation </li></ul></ul><ul><li>Direct domestic currency is quoted versus foreign currency </li></ul><ul><ul><li>Eur/Usd, Gbp/Usd </li></ul></ul><ul><li>Indirect foreign currency is quoted versus domestic currency </li></ul><ul><ul><li>Usd/chf usd/jpy usd/kes </li></ul></ul><ul><li>Market quotation </li></ul><ul><ul><li>prices are given with 4 decimals except the jpy </li></ul></ul><ul><ul><li>the second decimal is called the figure </li></ul></ul><ul><ul><li>the last 2 decimals are pips </li></ul></ul>Foreign Exchange Products - SPOT
    32. 32. <ul><li>Orders </li></ul><ul><ul><li>Take profit </li></ul></ul><ul><ul><li>Stop loss </li></ul></ul><ul><ul><li>At best </li></ul></ul>Foreign Exchange Products - SPOT
    33. 33. <ul><li>“ My word is my bound” </li></ul><ul><li>Quick pricing </li></ul><ul><li>Trading Positions </li></ul><ul><ul><li>Long EURUSD  Risk Downside </li></ul></ul><ul><ul><li>Short EURUSD  Risk Upside </li></ul></ul><ul><ul><li>Square  No risk </li></ul></ul><ul><li>Trading rules </li></ul><ul><ul><li>Neutral will price market price </li></ul></ul><ul><ul><li>Bullish Trader will quote better bid  1.0725/29 </li></ul></ul><ul><ul><li>Bearish Trader will quote better offer  1.0723/27 </li></ul></ul><ul><li>Trading limits </li></ul><ul><ul><li>Open positions limits </li></ul></ul><ul><ul><li>Orders stop loss take profit </li></ul></ul><ul><ul><li>MDDR </li></ul></ul>Foreign Exchange Products - SPOT
    34. 34. <ul><li>Monitoring a position </li></ul>Foreign Exchange Products - SPOT <ul><li>Positive PL  Sell 27 mio Eur above 1.1767 ie 1.1777 </li></ul><ul><ul><li>Profit 27 000 Usd </li></ul></ul><ul><li>Negative PL  Sell 27 mio Eur below 1.1767, ie 1.1757 </li></ul><ul><ul><li>Loss 27 000 Usd </li></ul></ul><ul><li>No PL  Sell 27 mio Eur at 1.1767 </li></ul>
    35. 35. <ul><li>Principle </li></ul><ul><li>A forward contract is a transaction excecuted today in which one currency is bought or sold against another for delivery on a specified date </li></ul><ul><li>Forward points are relative interest rate differentials expressed as units of currency </li></ul><ul><li>Forward contract prices are determined by 2 factors </li></ul><ul><ul><li>the current spot price between the two currencies </li></ul></ul><ul><ul><li>the interest rate prevailing in each of the two currencies </li></ul></ul><ul><li>Premium </li></ul><ul><ul><li>if the interest rates in the variable currency are lower than those of the fixed currency </li></ul></ul><ul><ul><li>The forward points are added to the spot rate to get the forward rate </li></ul></ul><ul><li>Discount </li></ul><ul><ul><li>The interest rates in the variable currency are higher than those of the fixed currency </li></ul></ul><ul><ul><li>The forwards points are deducted from the spot rate </li></ul></ul>Foreign Exchange Products - FORWARD
    36. 36. Foreign Exchange Products - FORWARD
    37. 37. Foreign Exchange Products - FORWARD <ul><li>Bids and offers </li></ul><ul><ul><li>Just as there is bid and offer in the spot market there is also a bid and offer rate in the forward market </li></ul></ul><ul><ul><li>This means that the forward points for both sides of the exchange rates must be quoted </li></ul></ul><ul><li>Outright Forward </li></ul><ul><ul><li>BNP sells 3 months EUR </li></ul></ul><ul><ul><li>BNP will deliver EUR in 3 months </li></ul></ul><ul><ul><li>BNP buys today the Eur to be delivered in 3 M </li></ul></ul><ul><ul><li>BNP needs to borrow Usd during 3 m period </li></ul></ul><ul><ul><li>BNP will lend the Eur during 3 months that will be used at maturity for the delivery </li></ul></ul><ul><ul><li>ACB will deliver Usd in 3 months </li></ul></ul>Reuters page: Forward prices
    38. 38. Foreign Exchange Products - FORWARD <ul><li>Quotation OUTRIGHT FORWARD </li></ul><ul><ul><li>The spread is given in swaps pips </li></ul></ul><ul><ul><li>It is the same as spot with 2 or 4 decimals </li></ul></ul><ul><ul><li>Example </li></ul></ul><ul><ul><ul><li>Spot EURUSD @ 1.1724/1.1728 </li></ul></ul></ul><ul><ul><ul><li>Forward pips @ 4.32/4.37 </li></ul></ul></ul><ul><ul><ul><li>Forward rate 1.172832/1.173237 </li></ul></ul></ul>
    39. 39. Foreign Exchange Products - FORWARD <ul><li>Quotation FOREX SWAP </li></ul><ul><ul><li>Simultaneously 1 spot transaction+ 1 Forward transaction </li></ul></ul><ul><ul><li>but opposite way </li></ul></ul><ul><ul><li>Example </li></ul></ul><ul><ul><ul><li>Spot EURUSD @ 1.1724/1.1728 </li></ul></ul></ul><ul><ul><ul><li>Forward pips @ 4.32/4.37 </li></ul></ul></ul><ul><ul><ul><li>Forward rate 1.172832/1.173237 </li></ul></ul></ul>
    40. 40. Foreign Exchange Products - FORWARD Mechanics of Forex Swaps
    41. 41. <ul><li>Convertibility and Transferability </li></ul><ul><li>Currencies like ARS / BRL / CNY/ TWD/KRW </li></ul><ul><li>Use of NDF </li></ul><ul><ul><li>NDFs allow corporations, banks and other organisation to hedge their currency risk simply and efficiently </li></ul></ul><ul><ul><li>Whether the exposure takes the shape of overseas assets or equity holdings, international subsidiaries or receivables in foreign currencies </li></ul></ul><ul><ul><li>NDF to protect their investment </li></ul></ul><ul><li>Principles </li></ul><ul><ul><li>As with normal forward transaction you either buy or sell the NDF depending on your position to be hedged or your view on the currency or its interest rates </li></ul></ul><ul><ul><li>There is no physical delivery of currency at maturity </li></ul></ul><ul><ul><li>Instead, the difference between the agreed outright price and the prevailing spot rate is multiplied by the notional amount of the contract to return an amount in dollars </li></ul></ul><ul><li>Settlement: Payment of Netting </li></ul>FX Products - NON DELIVERABLE FORWARD
    42. 42. <ul><li>NDFs are generally short term instruments, using the same standard foreign exchange as forward market convention </li></ul><ul><li>Two way prices are quoted two ways bid / offer </li></ul><ul><li>NDFs require a fixing mechanism to establish a spot rate on which to settle these transactions </li></ul><ul><li>The purchaser of the contract pays out the foreign exchange </li></ul><ul><li>differential in dollars </li></ul><ul><li>Advantage of NDFs </li></ul><ul><ul><li>Not subject to local regulations or restrictions </li></ul></ul><ul><ul><li>Principal not subject to settlement risk only profit and loss </li></ul></ul><ul><ul><li>Simple and easy settlement </li></ul></ul><ul><ul><li>Only settlement currency in Usd so no local currency accounts are needed </li></ul></ul><ul><ul><li>Eliminates paying spot bid/ask spreads again at maturity of the contract </li></ul></ul>FX Products - NON DELIVERABLE FORWARD
    43. 43. <ul><li>Hedging Currency risk with NDF </li></ul><ul><ul><li>A multinational corporation generates 30% of its revenues in Korea but reports and dividends are in the EUR </li></ul></ul><ul><ul><li>if the Korean Wong depreciates the value of its earning erodes and the company could miss its earning projection </li></ul></ul><ul><ul><li>The company needs to ensure access to an acceptable exchange rate six months forward </li></ul></ul><ul><ul><li>The company Sells forward using a six months NDF contract </li></ul></ul><ul><li>Example </li></ul><ul><ul><li>EUR/KRW = 1402/1403 </li></ul></ul><ul><ul><li>EUR/KRW @ 6M = 1423/1425 </li></ul></ul><ul><ul><li>Fixing rate 1400 </li></ul></ul><ul><li>Netting calculation </li></ul><ul><ul><li> ( 1400- 1425 * 10 000 000 ) / 1400= 178,571.42 Eur </li></ul></ul>FX Products - NON DELIVERABLE FORWARD
    44. 44. <ul><li>Definition and terminology </li></ul><ul><li>A forex option give the right to the order to buy or sell specific amount at a specific rate at a specific date </li></ul><ul><li>Call & Put option: Calls and puts provide the buyer with an instrument that ensures against adverse exchange rate movements. In return for this protection, the buyer pays a premium for the option. If the option is exercised there is a physical delivery of the underlying stock. </li></ul>Foreign Exchange Products - OPTIONS <ul><li>At expiry, the buyer of the Call has unlimited upside potential if the spot rate is higher than the strike price Call is the right to buy </li></ul><ul><li>. </li></ul><ul><li>At expiry, the holder of the put has unlimited upside potential if the spot rate is lower than the strike price. Put is the right to sell </li></ul>
    45. 45. <ul><li>Premium of the option= price of the option paid at spot value </li></ul><ul><li>Exercise is the process by which the option is converted into a spot transaction </li></ul><ul><li>The strike is the exchange rate at which the option can be exercised </li></ul><ul><li>In the Money, At the Money, Out The Money </li></ul><ul><li>Expiry date is the final date on which the option can be exercised </li></ul><ul><li>European style exercise at maturity </li></ul><ul><li>American style exercise during the life of the option </li></ul><ul><li>PRICE = intrinsic value+time value </li></ul><ul><li>Intrinsic value is the advantage to the holder of the option of the strike rate over the forward outright rite </li></ul><ul><li>Time value is a mathematical function of implied volatility time to maturity interest rates differentials, spot and the strike of the option </li></ul><ul><li>Volatility </li></ul><ul><li>It is a statistical function of the movement of exchange rate it measures the speed of movement within an exchange rate band </li></ul>Foreign Exchange Products - OPTIONS
    46. 46. Foreign Exchange Products - OPTIONS <ul><li>An investor wants to hedge against a possible strengthening of the EUR. </li></ul><ul><li>He buys a EUR Call USD Put with the following details: </li></ul><ul><li>Strike 1.19 </li></ul><ul><li>Spot 1.18 </li></ul><ul><li>Expiry 1 month </li></ul><ul><li>FX Outright 1.1820 </li></ul><ul><li>Volatility @8.5% </li></ul><ul><li>Premium 0.4250% EUR </li></ul><ul><li>If the spot rate exceeds 1.19 at maturity, the customer exercises his call : he can buy the nominal in euros at the strike price. </li></ul><ul><li>If the spot rate ends up below 1.19, his loss is limited to the amount of the premium. </li></ul>
    47. 47. <ul><li>Common Option Strategies </li></ul>A straddle is a combination of a call and a put on the same underlying asset with same strike price and same expiry date. A long straddle is obtained by buying a call and a put while a short straddle is obtained by selling a call and a put. Value The value of a straddle increases with the maturity and the volatility of the underlying asset. Payoff At expiry, the owner of the straddle has unlimited upside potential if the spot rate should move either direction. The writer of the straddle will benefit if the spot price remains very close to the strike. Foreign Exchange Products - OPTIONS
    48. 48. A strangle is a combination of a call and a put on the same underlying asset, with the same the put). A long strangle is created by buying a call and a put, while a short strangle is created by selling a call and a put. Value The value of a strangle increases with the volatility of the underlying asset. Payoff At expiry, the owner of the option has unlimited upside potential if the spot rate should move either direction by a large extent. The writer of the strangle will benefit if the spot price remains between the put strike and the call strike. Foreign Exchange Products - OPTIONS
    49. 49. A risk reversal portfolio is obtained either by buying a call and selling a put or selling a call and buying a put. It can be used as a cheaper hedging strategy compared to a plain European call or put. Premium The net cost of a risk reversal is very low since the sold option covers the cost of the purchased option, sometimes even making it a zero-cost strategy. Payoff The payoff diagrams for a risk reversal are : Foreign Exchange Products - OPTIONS
    50. 50. A bullish vertical spread is created by buying a call option and selling a further out of the money call with same expiry. A bearish vertical spread is created by buying a put and selling a further out-of-the money put with same expiry. Premium Vertical spreads cost less than European options as the cost of the bought option is offset to a certain extent by the premium received for the sold option. Payoff The buyer benefits if the spot rate is between the two strikes at expiry. The payoff diagrams for vertical spreads are : Foreign Exchange Products - OPTIONS
    51. 51. A knock-in is a European option that becomes alive (is “knocked-in”) if the underlying spot reaches a predetermined barrier before maturity. Barrier For a regular knock-in, the barrier is out-of-the-money, i.e. below the strike for a call and above the strike for a put. For a reverse knock-in (or “kick-in”), the barrier is in-the-money, i.e. above the strike for a call and below the strike for a put. Premium The knock-in premium is lower than that of a regular European option. The further the barrier to the spot, the lower the premium, as there is smaller probability that the option will become alive before expiry. It is a cheaper hedge compared to a European option. Payoff If the barrier is knocked-in, then the profile of a knock-in option is the same as with a regular option. If the option is not knocked-in, the customer having a position with underlying currency does not benefit from any exchange cover. Foreign Exchange Products - OPTIONS
    52. 52. A knock-out is a European option that ceases to exist (is “knocked-out”) if the underlying spot reaches a predetermined barrier before maturity. Barrier For a regular knock-out, the barrier is out-of-the-money, i.e. below the strike for a call and above the strike for a put. For a reverse knock-out (or “kick-out”), the barrier is in-the money, i.e. above the strike for a call and below the strike for a put. Premium The knock-out premium is lower than that of a regular European option. The closer the barrier to the spot, the lower the premium, as there is greater probability that the option will extinguish before expiry. It is a cheaper hedge compared to a European option. Payoff If the barrier is not knocked-out, then the profile of a knock-out option is the same as with a regular option. If the option is knocked-out, the customer is no more hedged versus adverse market movements. Foreign Exchange Products - OPTIONS
    53. 53. Reuters page: Volatility prices Foreign Exchange Products - Options
    54. 54. Foreign Exchange Products - OPTIONS
    55. 55. DISCLAIMER
    1. A particular slide catching your eye?

      Clipping is a handy way to collect important slides you want to go back to later.

    ×