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![Autocorrelaon
of
Change
Rates
24
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0.9
0.8
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0.4
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Independence
is
oren
checked
by
non-‐auto-‐
correlaon
of
rates
and
variance
of
rates.
Autocorrelaon
of
simple
rates
of
return
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36
Autocorrelation
Lag
[Days]](https://image.slidesharecdn.com/fxrisk-140825212746-phpapp01/85/Fx-risk-24-320.jpg)
![Autocorrelaon
of
Change
Rate
Variance
25
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Autocorrelaon
of
de-‐trended
squared
rates
of
return
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Autocorrelation
Lag
[Days]](https://image.slidesharecdn.com/fxrisk-140825212746-phpapp01/85/Fx-risk-25-320.jpg)
More Related Content
Fx risk
- 1.
- 2. Geneva: 6 May 2010 2 Buy Sell 1.06993 1.14009 Is AMEX buying and selling Swiss francs or dollars at these rates? When you arrive you sell $1 for 1.07 SFr When you depart you buy $1 for 1.14SFr AMEX is buying and selling USD in terms of CHF USD / CHF Bid 1.06993 Ask 1.14009 Buy 1 USD for 1.14009 CHF Sell 1 USD for 1.06993 CHF Buy 1 CHF for 0.93464 USD Sell 1 CHF for 0.87712 USD
- 3. Geneva: 20 May 2011 3 Buy Sell .85305 0.90899 When you arrive you sell $1 for .85 SFr When you depart you buy $1 for .91 SFr Or equivalently When you arrive you buy 1 SFr for $1.17 When you depart you sell 1 SFr for $1.10 USD / CHF Bid 0.85305 Ask 0.90899 Buy 1 USD for 0.90899 CHF Sell 1 USD for 0.85305 CHF Buy 1 CHF for 1.17226 USD Sell 1 CHF for 1.10012 USD
- 4. CHF / USD Three Year Chart 4 May 2010 0.897666 August 2011 May 2011 1.133196 Did I have exchange rate (FX) risk between 1.374079 the me I booked the trip and the me I arrived and incurred expenses in francs? How about U.S. businesses that buy or sell products in Switzerland?
- 5. FX Notaon EUR / USD 1.4021 Terms or quote currency 1 EUR = = Buy the commodity currency using (selling) the terms currency (1 Bbl) WTI Crude Oil / USD 82 (1 oz) Gold / USD 1700 5 Commodity or base currency 1.4021 1 USD 1 EUR 1.4021 USD Live Quotes
- 6. USD / CHF Three Year Chart 6
- 7. How many CHF for 1 USD ? 7
- 8. FX Bid and Offer (Ask) ¨ EUR / USD 1.4480 -‐ 1.4485 ¨ or without the ‘big numbers’ or ‘handle’ in the offer rate EUR/USD 1.4480 – 85 ¨ Smallest increment is .0001 = 1 pip ¤ One ck in rate in terms currency in least significant figure ¨ Example ¤ If €125,000 is being bought and sold in matched trades, the dealer makes a profit of 5 pips at $12.50 per pip or $62.5 ¤ The AMEX dealer at the Geneva airport made 575 pips on a matched trade 8 Bid Offer (Ask) Live Bid – Offer Rates
- 9. FX Bid and Offer (Ask) 9 Interbank rates Bid / Ask (Offer) You Sell / You Buy Dealer buys / Dealer Sells You get the worse of the two rates ISO Currency Codes
- 10. Reciprocal FX Rates EUR/USD SB – SO EUR/USD 1.3447 – 1.3464 1 USD/EUR 0.7427 -‐ 0.7437 10 Spot Spot Bid Ask (Offer) O B S S USD/EUR 1 − EUR / USD Bid 1.3447 Ask 1.3464 Buy 1 EUR for 1.3464 USD Sell 1 EUR for 1.3447 USD Buy 1 USD for 0.7437 EUR Sell 1 USD for 0.7427 EUR USD / EUR Bid 0.7427 Ask 0.7437 Buy 1 USD for 0.7437 EUR Sell 1 USD for 0.7427 EUR Buy 1 EUR for 1.3464 USD Sell 1 EUR for 1.3447 USD
- 11. Buy and Sell Round Trip At A FX Kiosk 11 $ 100.00 Sell USD Fr. 85.31 Receive Fr. 5.00 Selling commission Fr. 80.31 Actual Receipt Fr. 5.00 Buying commission Fr. 75.31 Actual sale $ 82.84 Receipt USD / CHF Bid 0.8531 Ask 0.9090 Buy 1 USD for 0.9090 CHF Sell 1 USD for 0.8531 CHF Buy 1 CHF for 1.1723 USD Sell 1 CHF for 1.1001 USD 559 pips and a 6.349% spread The interbank rate is 5 pips
- 12. Long Term FX Rate: USD/ CHF 12
- 13. Japanese Yen ¥ USD / JPY 13 Yen News
- 14. Long Term FX Rate: USD/ JPY 14 JPY / USD Bid 0.007660 Ask 0.007665 Buy 1 JPY for 0.007665 USD Sell 1 JPY for 0.007660 USD Buy 1 USD for 130.5483 JPY Sell 1 USD for 130.4631 JPY
- 15. Euro € EUR / USD 15
- 16. Hong Kong Dollar HK$ USD / HKD 16
- 17. Chinese Yuan ¥ USD / CNY 17
- 18. Zimbabwe Dollar $ USD / ZWD 18
- 19. Personal FX Tips ¨ Foreign Travel ¤ FX kiosks at airports n Banks n Travel agents n Amex Travel , Thomas Cook, Travelex ¤ ATM ¤ Credit cards ¤ Traveler’s Checks 19 Foreign Exchange Markets or Securies • OTC currency contracts • Spot, forwards • FX Futures and opons • CME • ETF • Wisdomtree • CurrencyShares • Mutual Funds • MERK Funds • Hedge Funds
- 20. US Dollar Index DXY 20 Currency Weight Euro 57.7% Japanese Yen 13.7% British Pound 12.0% Canadian Dollar 9.2% Swedish Krona 4.3% Swiss Franc 3.7%
- 21. Singapore Dollar USD / SGD 21
- 22. 400 350 300 250 200 150 100 50 0 r f f − − i i 1 i f -‐4.0%-‐3.5%-‐3.0%-‐2.5%-‐2.0%-‐1.5%-‐1.0%-‐0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Frequency Daily Rate of Change Stascal Analysis 22 3,823 daily rates, ri, of change from 1996 to 2011 USD / SGD Mean: -‐.007 Standard deviaon: 0.376% (remove the bad cks) i − 1 =
- 23. Stascal Analysis -‐4.0%-‐3.5% -‐3.0% -‐2.5% -‐2.0% -‐1.5% -‐1.0% -‐0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Daily Rate of Change 23 The daily change rates are not normal, but are uni-‐modal and leptokurc. Qualitavely un-‐ skewed with exponenally decreasing tails. Very important in stascs is whether a random variable is independent, idencally distributed and has finite variance.
- 24. Autocorrelaon of Change Rates 24 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 -‐0.1 -‐0.2 -‐0.3 Independence is oren checked by non-‐auto-‐ correlaon of rates and variance of rates. Autocorrelaon of simple rates of return 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 Autocorrelation Lag [Days]
- 25. Autocorrelaon of Change Rate Variance 25 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Autocorrelaon of de-‐trended squared rates of return 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Autocorrelation Lag [Days]
- 26. Correlaon Visualizaon 26 Developed by Erich Neuwirth ρ = -‐.2 ρ = .3
- 27. Financial Risk -‐ Frank Knight’s Insight ¨ University of Chicago , 1921 ¨ Disnguished between risk and uncertainty ¨ Risk – future financial outcomes can be quanfied and managed via probabilies due to sufficient frequency of relevant historical events ¤ Risk is quanfied and managed via mathemacal models ¨ Uncertainty – future financial outcomes cannot be quanfied and managed with probabilies due to infrequency of relevant historical events ¤ Uncertainty is managed via n risk reducing contracts n global operaons
- 28. Money 28 Federal Reserve Balance Sheet Assets Gold US Treasuries US Agencies MBS Bear Stearns assets Etc Liabiles Bank deposits Currency Etc Capital The main funcons of money are: a medium of exchange; a unit of account; a store of value;
- 29.
- 30.
- 31. China Trade and Currency Flows 31 USD CNY Bank of China Balance Sheet Assets Liabilies UST Yuan currency and deposits US consumers businesses Chinese Company Products US Treas UST USD Bank of China $ US Fed UST US Fed Primary Dealers Bond Market UST $
- 32. Purchasing Power Parity 32 An economic theory that estimates the adjustment needed in the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power. investopedia
- 33.
- 34. Essenal Concepts ¨FX rate notaon ¤ Direct and reciprocal ¨ Exchanged traded and pegged currencies ¨ Bid and offer spreads on FX and securies ¨ Time series analysis ¤ FX trend and volality ¤ Independence and auto-‐correlaon ¨ Risk and uncertainty ¨ Money ¨ Foreign Trade 34
- 35. Discussion Links ¨New Fee to Bank Cash ¨ Swissy Plummets On Rumor Swiss Banks To Charge For CHF Deposits ¨ Live Interbank Rates ¨ Financial Repression ¨ CME FX ¤ Note CHF futures contract at CME is reciprocal of that at the Geneva kiosk ¨ Franc, Yen, Dollar Tumble as Stock Rally Curbs Haven Demand; Rand Climbs 35
- 36. FX Risk Management ¨ Manage uncertainty ¤ Unknown future FX rate ¤ Long term contracts ¤ Lock in future rates ¤ Next chapter n Full hedge with forwards ¨ Manage risk ¤ Stascal models of FX rate of change ¤ Fluctuaons or volality n Standard deviaon of rate of change 36