Upload
seagul1183822
View
223
Download
0
Embed Size (px)
Citation preview
8/3/2019 spt,cross,forward
1/38
Welcome to the Sessionon
Foreign Exchange Market
Operations: Spot, Cross and ForwardTransactions
8/3/2019 spt,cross,forward
2/38
Foreign Exchange Market
Foreign exchange is the trading of currencies.
The foreign exchange market is not a single placelike the NY Stock Exchange (NYSE). It is a widelydecentralized 24-hour-a-day market, made up of
banks and traders communicating electronically.
The retail market is between individuals,nonfinancial companies, nonbank financialinstitutions, and other customers of banks.
The wholesale or interbank market is the tradingbetween banks. This accounts for 60% or more ofthe total trading.
8/3/2019 spt,cross,forward
3/38
Scope of the Market
About half the daily foreign exchange
trading is done between banks in London
and New York.
Most of the trading involves U.S. currency.
Sometimes the intent is to trade one foreign
currency for another, and the U.S. currency
is only involved as an intermediate step.When this is done, the dollar is called a
vehicle currency.
8/3/2019 spt,cross,forward
4/38
Size of the Market
A. Largest in the world
2004: US$1.9 trillion daily
or
US$475 trillion a year
8/3/2019 spt,cross,forward
5/38
Size of the Market
Market Centers (2004):
#1: London = $753 billion daily
#2: New York= $461 billion daily
#3: Tokyo = $199 billion daily
8/3/2019 spt,cross,forward
6/38
Exchange Rate : Some Basics
The exchange rateis the price of one countrys money interms of another countrys money.
The spot exchange rate is the price for immediateexchange. (Immediate usually means within two workingdays.) This amounts to about 33% of all trading.
The forward exchange rate is the price for exchange totake place at some specific time in the future, often 30, 90,180 days. This amounts to about 11% of all trading.
A swap is a package trade that includes both a spot
exchange of two currencies and a contract to the reverseforward exchange a short time later. This is useful when theparties to the swap have only a short-term need for thecurrency. This amounts to about 56% of all trading.
8/3/2019 spt,cross,forward
7/38
Examples of Currencies
Country Currency Symbol ISO Code
US Dollar $ USD
UK Pound GBP
Canada Dollar C$ CAD
Mexico Peso Ps MXP
Japan Yen JPY
EU Euro EUR
8/3/2019 spt,cross,forward
8/38
Exchange Rate : Some Basics
The exchange rate can be given as the price
of the foreign currency in terms of the
domestic currencythis is the usual way,
and the way well use in this session. Or as the price of the domestic currency in
terms of the foreign currency.
8/3/2019 spt,cross,forward
9/38
Exchange Rate Quotation
Quoted Currency means the currency that
is variable in an exchange rate quotation.
Base Currency means the currency that is
fixed.
Thus if1 = Tk.130.00, sterling is the base
currency and the BDT is the quoted
currency.
8/3/2019 spt,cross,forward
10/38
Exchange Rate Quotation
In Direct Quotation Base Currency is the
Foreign Currency and the Quoted Currency is
the Domestic Currency.($1= Tk.69.50)
In Indirect Quotation Base Currency is the
Domestic Currency and the Quoted Currency
is the Foreign Currency. (Tk.1= $0.0144)
8/3/2019 spt,cross,forward
11/38
Exchange Rate Quotation
In American Terms Base Currency is any
Currency other than USD and the Quoted
Currency is USD (Tk.1= $0.0144).
In European Terms Base Currency is the USD
and the Quoted Currency is any Currency
other than USD ($1= Tk.69.50).
8/3/2019 spt,cross,forward
12/38
Reciprocal Quotations
Currencies can be quoted in terms of the
number of units of A per unit of B or,
alternatively, the number of units of B per
unit of A. The two rates represent equal valueand are reciprocals of each other. To convert
from one method to the other, one simply
divides the number 1 by the rate.
8/3/2019 spt,cross,forward
13/38
Reciprocal Quotations
USD 1/Tk.69.50 =
= 0.0143 BDT/USD
1
69.50BDT/USD
8/3/2019 spt,cross,forward
14/38
Example: Spot Market Transaction
1. Bangladeshi firm buys a U.S. product from a U.S.firm, which requires payment in U.S. dollars ($).
2. The Bangladeshi firm contacts its bank, gets aquote on the dollar-taka exchange rate, and
approves it.
3. The Bangladeshi firm instructs its bank to take takafrom its checking account, convert these to dollars,and transfer the amount to the U.S. producer.
4. The Bangladeshi bank instructs its correspondentbank in New York to take U.S. dollars from itsaccount and pay the U.S. producer by transferringthem to the producers bank.
8/3/2019 spt,cross,forward
15/38
Spot Market Transaction
USD $ 1= Tk.69.10/15
In the above quotation, market maker iswilling to buy 1 U.S. dollar at Tk. 69.10and sell U.S. dollar at Tk. 69.15.
8/3/2019 spt,cross,forward
16/38
Spot Market Transaction
Transactions Costs
1. Bid-Ask Spreadused to calculate the fee
charged by the bank
Bid = the price at which the bank is willing tobuy
Ask = the price it will sell the currency
8/3/2019 spt,cross,forward
17/38
Percent Spread Formula (PS):
100xAsk
BidAskPS
8/3/2019 spt,cross,forward
18/38
Quoting Spot Rate to Customers
The basic principle1. Ascertain the going exchange rate in the
wholesale market (inter-bank market)
2. Load a margin and make a customer quoteExample
Market Rate: USD1= Tk. 69.50/60
Required margin: 0.10 Tk.So, the rate will be USD1= Tk.69.40/69.70
8/3/2019 spt,cross,forward
19/38
Cross Rates
A cross-rate may be defined as an
exchange rate that is calculated from
two other rates.
In practice, cross-rate is the exchange
rate between 2 non - US$ currencies.
8/3/2019 spt,cross,forward
20/38
Calculating Cross Rates
If both currencies involved in the cross
transaction are quoted in the same
form(American or European) divide the
spot rate of one currency by the the spot
rate of the other currency.
8/3/2019 spt,cross,forward
21/38
Calculating Cross Rate: Example
$/Tk. : 69.35
$/ : 0.7828
Then,
/Tk. : 69.35/.7828= Tk.88.5922
$
$$$
TkTk
Tk
Or /Tk.
8/3/2019 spt,cross,forward
22/38
Calculating Cross Rates
If one currency is quoted in one form
and the other currency is quoted in
another form, multiply the spot rate.
8/3/2019 spt,cross,forward
23/38
Calculating Cross Rate: Example
$/Tk. : 69.35
/ $ : 1.2774
Then,
/Tk. : 69.35
1.2774= Tk.88.5876
$
$
Tk
Tk
8/3/2019 spt,cross,forward
24/38
Calculating Cross Rates: Both European
USD/EUR 0.7828 - 0.7848
Divide by
USD/GBP 0.5246 - 0.5266
GBP/ EUR = 1.4865-1.4959
8/3/2019 spt,cross,forward
25/38
Calculating Cross Rates: Both American
EUR/USD 1.2742 1.2774
Divide by
GBP/USD 1.9042 1.9062
EUR/ GBP = 0.6684-0.6708
8/3/2019 spt,cross,forward
26/38
Calculating Cross Rates: One American-One European
EUR/USD 1.2742 1.2774
Multiply by
USD/ GBP 0.5246 0.5251
EUR/ GBP = 0.6684-0.6708
8/3/2019 spt,cross,forward
27/38
Forward Rates
It is an ER for the transaction to be happened
at some future date , but agreement for the
transaction is to be done today. Forward rateis quoted either at premium(+) or at discount
rate(-) over spot rate. In case of direct
quotation, premium will be added to and
discount will be subtracted from spot rate. The
reverse is for indirect quotation.
8/3/2019 spt,cross,forward
28/38
Quotation of Forward Rates
Forward at Premium (pm)
Forward at Discount (dis)
Forward at par meaning the Forward
Rate at a Parity with the Spot Rate.
8/3/2019 spt,cross,forward
29/38
Premium and Discount
The quoted currency is said to stand at a
premium in the forward market if it is more
expensive in the future than it is now in termsof the base currency. Conversely, the base
currency may be said to stand at a discount
relative to the quoted currency.
8/3/2019 spt,cross,forward
30/38
Forward/SWAP Points
SWAP Points (Low - High)
USD/EUR 1 Month SWAP 30/40
SWAP Points (High -Low)
USD/EUR 1 Month SWAP 40/30
8/3/2019 spt,cross,forward
31/38
Forward/SWAP Points
SWAP Points (Low - High)
Forward Rate at Premium for the base
currency
SWAP Points (High -Low)
Forward Rate at Discount for the base
currency
8/3/2019 spt,cross,forward
32/38
Treatment of Forward Margin
High/Low = Subtract
Low/High = Add
Low High = Add
High Low = Subtract
8/3/2019 spt,cross,forward
33/38
Basis for Forward Rate
Forward Points Represent the interest Rate
Differential between the Two Currencies
involved in the TransactionMethod
Spot RateInterest Rate Differential Period Annualized
=360100
..
TimeinDaysDiffINtSpot
8/3/2019 spt,cross,forward
34/38
Calculating Forward Rate
Spot Rate: GBP/USD = 1.90
Interest Rate in USA : 8%
Interest Rate in UK: 16%
8/3/2019 spt,cross,forward
35/38
Calculating Forward Rate
Forward Points =
= 0.032
So, 90 days forward rate will beGBP/USD= 1.868
360100
90890.1
8/3/2019 spt,cross,forward
36/38
Calculating Forward Rate
The currency with relatively higher
interest rate will be cheaper in the forward
market and the currency with relatively
lower interest rate will be expensive in the
forward market.
8/3/2019 spt,cross,forward
37/38
Calculating Interest RateDifferential from Forward Points
Interest Diff.=
FP- Forward Points
RB-Rate Basis
SR-Spot Rate
TermSR
RBFP
100
8/3/2019 spt,cross,forward
38/38
Calculating Forward Rate
CALCULATING THE FORWARD PREMIUMOR DISCOUNT
= F-S x 12 x 100S n
where F = the forward rate of exchange
S = the spot rate of exchangen = the number of months in the
forward contract