Global Financial Markets eLearning
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For more info pls mail info@financialtraininghub.com visit: www.financialtraininghub.com This eLearning offers you an in depth explanation about money market products, interest rate conventions and pricing. The training can also be used to prepare these topics for ACI operations or dealing certificate exams. The eLearning contains 5 sessions: 1) Basic Interest rate calculations 2) Money markets 3) Currency markets 4) Fixed income securities and interest rate swaps (IRS) 5) Options Content: presentations, short video's and quizes
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Global Financial Markets eLearning
- 1. WHAT CAN YOU EXPECT? EXAMPLES OF SLIDES AND ELABORATIONS 1 Michiel van den Broek www.financialtraininghub.com / info@financialtraininghub.com +31(0)61381 8662
- 2. Money Markets Michiel van den Broek www.financialtraininghub.com / info@financialtraininghub.com +31(0)61381 8662
- 3. Money Market Introduction Main activity: short term cash management using traditional instruments − Deposits / loans − Money market paper − Repo’s Professional and non-professional (retail) parties − Care of duty − Maximum amount www.financialtraininghub.com 3
- 4. Money Market Introduction Domestic money market and Euro money market − Eurodollar means USD traded outside US − Euroyen means JPY traded outside Japan Money market interest rate: Central bank monetary policy Money market derivatives − Exchange traded futures − OTC traded FRA’s and OIS’s www.financialtraininghub.com 4
- 5. Money Market Basic Interest Rate Calculations Michiel van den Broek www.financialtraininghub.com / info@financialtraininghub.com +31(0)61381 8662
- 6. Calculation of Coupon Amounts CPN = NOM x D / B x Y% Calculate the coupon amount if: Investment EUR 20 mio Start date 4 April, Maturity date 23 May Interest rate 3.20% Question: Calculate the coupon amount www.financialtraininghub.com 6
- 7. Day count Conventions Money Market CPN = NOM x D/B x Y% D = Days period; B = Days in Year − Include week-ends and bank holidays Day count fraction = D/B Conventions per currency for D/B: − Actual/360: EUR, USD, CHF, JPY − Actual/365: GBP, NZD, AUD, SGD, CAD, HKD www.financialtraininghub.com 7
- 8. Currency Markets Michiel van den Broek www.financialtraininghub.com / info@financialtraininghub.com +31(0)61381 8662
- 9. Introduction FX Payments and Receipts from: 1. International: − Investing − Borrowing & Lending 2. Import / Export of Goods & Services www.financialtraininghub.com 9
- 10. Outright FX spot transaction Standard delivery date: today + 2 business days (t+2) Exchange rate: FX spot rate − Unique ISO-code for each currency − EUR/USD = Base / Quoted currency − Euro 1 = Us-dollars ….. Quote to buy & sell euro’s for US dollars: EUR/USD = 1.1640 – 45 − Points (pips) and big figure − Common practice traders: points − Spread: difference between buy and sell price www.financialtraininghub.com 10
- 11. Fixed Income Securities and Interest Rate Swaps Michiel van den Broek www.financialtraininghub.com / info@financialtraininghub.com +31(0)61381 8662
- 12. Definitions Fixed Income Securities Private Loan: not tradeable Tradeable Fixed income securities − Exchange listed • Prospectus • High costs − Registered securities: OTC trading • Loan program (DIP / NIF) • Bank intermediation www.financialtraininghub.com 12
- 13. Bonds Issue location and currency − Domestic bonds − Eurobonds − Foreign bonds (e.g. Yankee and Bulldog) Government Bonds − Issue by auctions / tender − By separate government organization (Treasury / Debt Management Organization - DMO) www.financialtraininghub.com 13
- 14. Options Michiel van den Broek www.financialtraininghub.com / info@financialtraininghub.com +31(0)61381 8662
- 15. Options The right to 1. purchase or sell goods or financial instruments in the future at a fixed price which is agreed upon on the contract date OR 2. to settle the difference between the fixed price set at the contract date and the actual market rate on the expiry date Hedge application: − Protect against adverse price movement − Profit from favourable price movements www.financialtraininghub.com 15
- 16. Options: Rights and Obligations www.financialtraininghub.com 16 Pay Premium Right to buy Buy Rec premium Obligation Write Call Pay Premium Right to sell Buy Rec premium Obligation Write Put Options
Editor's Notes
- Each currency has its own money market in which short term transactions are concluded in the local currency, the local money markets. The main function of the money market is cash management, where counterparties with temporary liquidity surpluses close short-term loans with parties that are short of money. The traditional financial instruments on the money market are deposits, money market paper and repurchase agreements. Money market instruments are mainly traded concluded over-the-counter (OTC). In most countries, the regulatory supervisors distinct professional and non-professional parties. If non-professionals close transactions they are protected by a duty of care of professional counterparties. For example, retail clients deposits in Europe are protected for deposits with a principal below EUR 100.000.
- If a British company issues commercial paper in USD in the United States, then this is a local commercial CP since it is issued in the US. And if, for instance, a US citizen invests in a EUR denominated deposit in Frankfurt, then this is a domestic deposit. If, on the other hand, a party performs a transaction in a currency outside the country where the currency is the local currency, then the word ‘euro’ is added to this transaction. If for example an UK company issues a CP denominated in US dollars in the UK, then this is a eurodollar CP. And if a US company invests in a USD deposit with a Singapore bank, this is referred to as a eurodollar deposit. This USD deposit is legally not subject to the cash reserve requirements of the Fed, but to the cash reserve requirement of the central bank of Singapore. The level of the money market interest is determined by monetary policy of the central bank. Money market derivatives to manage short term interest rate risk are exchange traded short term interest rate futures (STIR’s) and OTC-traded forward rate agreements (FRA’s) or overnight index swaps (OIS). The maximum maturity of money market instruments is two years, but most transactions are executed for much shorter terms.
- CPN = coupon amount / return NOM = nominal amount D = day count = number of days in the coupon period B = year basis Y% = coupon percentage (cash rate) Answer to exercise 1 In order to calculate the interest amount, the number of interest days must first be determined. In April, 30 - 3 = 27 days are included (the first three days of April do not count, April 4th does). In May 22 days are included (May 23rd does not count). The total number of interest days, therefore, is 27 + 22 = 49 days. The interest amount for this deposit is: EUR 20,000,000 x 3.2% x 49/360 = EUR 87,111.11
- Interest rates (or yields) are always stated on an annual basis. If you invest 100 million for 1 year at 4% the coupon is 4 million. But if you invest 100 million for 6 months at 3,5% the coupon is 3,5% x 6/12 months x 100 million, so 1,75 million. To calculate the interest amount for an investment for an interest rate (yield) the day count fraction is applied, or D/B. In above example the day count fraction was 1 and in the second example the day count fraction was 0.5. There are two different day count fractions In the money market, or day count conventions: actual/360 and actual 365. The actual number of days is counted form the start date to the maturity date and includes week-ends and bank holidays. The start day is included, the maturity date not. The difference between the conventions is the number of days in a year, the year basis. So B can be 360 days or 365 days. In practice the day count fractions vary for different currencies.
- The buying and selling of Forex is done on the Foreign Exchange market. Transactions on the forex market can be done for international borrowing & lending. Suppose that the US government needs to borrow money to cover a budget deficit. A potential investor can be an European Pension Fund. The Pension Fund first has to buy US dollars to be able to lend the dollars to the US Government. International trade, imports and exports of goods & services is another reason to buy or sell forex. For example if a Dutch cheese producer sell products to an American client. To buy / sell foreign currencies market participants use outright FX spot transactions.
- Outright transactions are direct purchases or sales of foreign currency. An outright transaction may be a spot or a forward deal, depending on the value date. Outright FX spot transactions are settled on a standard delivery date, usually two business days after the trade day. For some currency pairs, such as US and Canadian dollar, the settlement is one business day. FX quotations express the exchange rate of two currencies using their unique ISO-codes (ISO = International Standardization Organization). The ISO-codes for euros is EUR, and USD for US dollars. The first two figures indicate the country, the last figure indicates the name of the currency. A spot quotation for euro – US dollar FX quotation is expressed as EUR/USD. The first mentioned currency is the base currency that is being traded (1 unit of) and the second currency the counter or quoted currency, the currency that expresses the price of the base currency. An example of a price quote for EUR/USD is 1.1640 – 45: the trader (market maker) is willing to buy 1 euro for 1.1640 US dollars and to sell 1 euro for 1.1645 US dollars. Although it is recommended to quote the whole price, it is common practice for traders to only mention the last two digits, the points or pips of an exchange rate. The big figure’ is not mentioned. If for example the price for a USD/CHF FX spot rate of 1.2389 - 1.2391, 1.23 (really only the ‘3’) is the big figure and there are 89 pips for the bid rate and 91 pips for the ask rate. A market maker would then only quote: 89-91. The two-way quote for USD/CHF 1.2398 - 1.2400 will be 98-00, or 98 ‘to the figure’. The big figure for a USD/JPY spot rate of 82.45 is 82 and the number of pips is 45.
- A private loan is a bilateral loan agreement between a borrower and one or more lenders, often institutional investors. These loans are not tradeable. Fixed income (FI) securities offer investors defined cash flows and a specific time line for return of the principal amount invested. When fixed-income securities are issued, this is referred to as the primary market. After issue, the FI securities are traded on the secondary market. FI securities can be exchange listed, such as bonds. One of the requirements to list a FI security is a prospectus specifying the business activities and economic data of the issuing organization, also referred to as a bond indenture. Investors use this information to assess the credit risk. Once the bond is issued, major changes in a prospectus can only be made with the consent of the investors. Registered FI securities are not listed on an exchange. Because listing on a public market is expensive, to reduce costs FI securities are often issued over-the-counter (OTC) by concluding the contract directly between borrower and lender, normally with a bank acting as intermediate. Many OTC issued fixed income securities are part of a loan program, meaning that the borrower can recur issuing fixed-income securities up to a specific maximum amount, a debt issuance program (DIP) or note issuance facility (NIF).
- Bond are tradeable fixed income securities that have a term longer than one year with issued. In regard to the currency and the location where bonds are issued, there are three types of bonds: domestic bonds, foreign bonds and Eurobonds. Domestic bonds are issued by residents in the domestic markets in the local currency. Eurobonds are issued in a currency which is different from the local currency in the country of issue, for example a GPB denominated bond issued in the US by a US company. Most Eurobonds are listed and usually have standardized terms in accordance with ICMA - the international capital markets association. Foreign bonds are issued by non-residents in the domestic market in the local currency. For instance a USD denominated bond issued in the US by a Japanese company (a Yankee) or a GBP denominated bond issued in the UK by a German company (a Bulldog). Government bonds are usually issued by auction, also referred to as tender. In each country, there is a separate government organization that issues Government bonds and organizes the auctions, the treasury or Debt Management Organization (DMO): in the US, for instance, this is the US Treasury.
- Options are financial instruments that give one party a unilateral right to enter into a transaction or to receive a payment if certain conditions are met at a future date. The other party has the unilateral obligation to perform this transaction or to transfer the agreed payment. The right under an option contract can be used as a hedge against adverse price movements without losing the opportunity to profit from favorable price movements. The right can also be used to speculate on favorable price movements without being exposed to possible adverse price movements. An FX option gives the holder the right to conclude an FX forward transaction at a pre-agreed price. The underlying value of an FX forward is therefore the FX forward rate. Since FX forwards are over the counter traded instruments, most FX options are also traded OTC.
- The option buyer obtains the right, the option seller provides the right. To sell an option is also named to write an option. The buyer of a call option has the right to buy the underlying, a put option holder has the right to sell. The call option seller has the obligation to sell if the buyer exercises. The put option writer has the obligation to buy if the holder exercises. The option buyer must make an payment to the seller, the option premium.