Chapter 6 FX - Foreign Exchange Flashcards
Charachteristics of an FX Spot
- Exchange of 2 amounts of different currencies
2. T+2
Pips (points)
The last 2 digits of an exchange rate
Big figure
Number before the pips/points
Conventions quotation
- EURO
- British pound, AUD, NZD
- USD
Indirect quotation
Reverse quotation for customer
Long position
Buying an amount and not immediatly selling (=overbought)
Short position
Sold an amount and not immediatly buying (=oversold)
Charachteristics of an FX forward
- Exchange of principals in 2 different currencies on a future date
- Rate is set at the moment of concluding deal
- Rate can be calculated and is not determined by market expectations
If the base rate is lower than the countercurrency rate (=premium)
FX forward rate is higher than the spot date
If the base rate is higher than the countercurrency rate (=discount)
FX forward rate is lower than the spot date
Charachteristics of an FX swap
- 2 amounts of currencies are exchanged under the agreement that exchange will later be reversed at a pre-agreed exchange rate
- Pure liquidity instrument
- Reduces credit risk
- Can be regarded as 2 opposite deposits
- 2 different MT 3XX messages (one for each leg)
- <1 year
- Difference between bid-ask is determined by liquidity of the market
Price of an FX swap
Delta between the rates in 2 legs (=swap points)
o/n
Overnight transactions: first leg on current day, second leg on t+1
t/n
Tom/next: first leg on t+1, second leg on T+2
Charachteristics of an Non-deliverable forward
- Contracts for difference product
- Virtual FX forward
- FX forward with cash settlement
- Used when supervisors impose administrative requirements for FX forwards
If the rate on the fixing date is lower
The bank has to pay
If the rate on the fixing date is higher
The bank receives
Value dates in case of holiday
Value dates will not be split. In case of a public holiday in one of 2 currencies, it will be settled on the following business day
