FX Market Flashcards
Man functions
favour exchange of funds among diff. countries hedging foreign exchange risk in/outflows (globalisation) finance international trade fix foreign exchange currency price
Players
Ex/importers
firms acting globally have
a) pay salary in local currency
b) payments of clients in foreign
Players
Investors
- foreign direct investments
firms own facilities, holds property or buy firms in oterh countries - internat. PF investment - enter foreign exchange Market to obtain foreign currency to make purchase, convert earnings of f. investment
Speculators
buy/sell solely to profit from anticipated changes in exchange rate (without engaging in no sorts of business)
biggest S = leading banks or inv. banks (proprietary trading using own money), HFT
Governments
national treasuries & central banks may trade for purpose of affecting exchange rates
gov. have created “state-owned inv. funds” (sovereign wealth funds) to invest in foreign currency received
Spot Market
immediate delivery
most transaction arranged electronically
online trading has lowered trading costs (more active)
FX Spot
agreement to directly exchange two currencies
buy one sell other at agreed price called FX SPOT RATE
settlement on spot date (T+2)
EUR/USD
EUR = base currency
USD = quote currency
how much you will receive/pay selling/buying the base C.
value of 1 unit base into quaote
1.22 = EUR/USD
you can buy/sell 1 EUR for 1.22 USD
FX Forwards/
FX Outrights
agreement (2) to exchange an amount on 1 currency in another in FUTURE DATE (above Spot date)
exchange rate is agreed by both for future date
billateral contract - obligation
FWD rate = spot rate+/- swap points
futures
forwards
Obligation to purchase or sell specific currency at maturity
no exchange of money until future date (maturity) reached
lock exchange rate at certain future dates by purchasing/selling future contract
a) future - standardised (CME)
b) fwd - billateral agreement
Export Outright
produce - outsource
receive in foreign currency
(contract to sell F and receive D)
Import Outright
payment need to made in Foreign
contract to receive F and pay D
Non-Delivery Forwards
outright transaction without physical delivery at maturity
cash-settled FX Forward contract
agree - notional, rate, spot level at future day
mostly used for currency which can´t be delivered off-shore
FX Swaps
two deals: spot & outright
exchange currencies for period of time (SPOT) agreeing to reverse transaction in future (outright)
only principal exchange
useful tool to manage currency balances
FX Currency Swaps
a) exchange principal at start & end of contract
b) pay & receive interest on loans between specific interval
FX Options
small portion - most of them OTC
a) buyer has right (not obligation) to buy/sell currency or future contract at agreed FX rate on spec. date
b) seller has obligation to sell/buy currency related to contract details
ALWAYS - call option in one currency and put in the other
gives you the right to buy/sell money instead of other assets
FX Futures
contract currency exchange
where future date & price is negotiated in organised markets
most contracts is physical delivery
however inv. normally closed out their position before the delivery date (many spec.)
daily market to market
CME - US - regulated FX market
Eurex - Futures & options FX
FX portion
48 % - swaps 36 % - spots 8% - FX forwards & NDFs 6% - options/other products 2 % - currency swaps
World FX Reserves of $
Central Banks
- China
- Japan
- Saudi Arabia/Switzerland
World FX Reserves
currency distribution
- USD - 60%
- EUR - 24%
- JPY - 5%
- GBP - 5%
