Professional Documents
Culture Documents
FX Workshop
Tarique Islam Khan
Head of Global Markets Nov 2009
Contents
Agenda
2
The FX Market and Spot
A SPOT FX Transaction is
• an agreement between two
parties
• to exchange a specified amount
of one currency
• for a specified amount of
another currency
• on the second business day (CAD
is the exception)
FX rate is the second currency
exchanged per unit of the first
currency
If the FX transaction is to be
settled beyond SPOT date then it
is a FWD FX transaction
European Terms
A few examples:
• $1 = CHF1.1655/60
• $1 = JPY98.30/35
• $1 = SGD1.5145/55
• $1 = BDT69.00/05
• $1 = AED3.6700/50
A few examples:
• GBP1 = USD1.4590/95
• EUR1 = USD1.3445/50
• AUD1 = USD0.7010/15
• NZD1 = USD0.6555/65
A few examples:
• GBP1 = JPY136.90/95
• EUR1 = GBP0.8845/48
• AUD1 = BDT48.37/44
• GBP1 = BDT100.67/78
Big Figure: Shows the approximate amount of the pricing currency required to
purchase one UNIT of the Base currency. In the above example, it is 1.59
Small figure or PIPS: The smaller numbers that contain the spread
(difference between the bid and the offer). In the above e.g., the small figure is
60-65, which is 100th of one US cent. Dealers generally multiply this small
figure with 10 thousand and call that PIPs and quote in pips.
Different currencies use different number for pips (a.k.a. points), such as in
Bangladesh we use the number just after the decimal and call that pips. For
e.g. if USD/BDT is quoted 69.00-69.05, then we call the 69 taka as the BIG
Figure and the 0.00-0.05 the SMALL figure and 00-05 becomes the pips.
Quoting/Dealing conventions
69.00 69.05
-0.52 +0.43
68.48 69.48
Customer calls
Dealer asks for quotes The best quote dealer gets is
dealer and wishes
from several banks and 69.00-69.05 from ABC bank to
to buy $1m
takes the best quote cover this $1 mln
We quote 1.3270*69.35 =
92.03
Market Average USDBDT Chart [6 months]
6 9 .7 0 0 0
6 9 .2 0 0 0
6 8 .7 0 0 0
6 8 .2 0 0 0
Mar-09
Mar-09
Nov-08
Nov-08
Oct-08
Oct-08
Jan-09
Jan-09
Feb-09
Feb-09
Sep-08
Sep-08
Sep-08
Dec-08
Dec-08
B u yin g R a te S e llin g R a te
Outright Forward
A contract where :
Main Advantages are:
two parties agree to buy/sell a •Hedge Exchange risk exposure and reduce
exchange losses.
currency against another at an •Advance knowledge of transaction price
agreed exchange rate at an agreed helps in forecasting balance sheet.
future date.
date Forwards are generally Main Disadvantages are:
•Contract must be closed out at or before
used by both Exporters and maturity date.
•Market rate may be against forward rate
Importers to hedge against future
at maturity of the forward.
exchange rate volatility.
Example
01Sep09 30Sep09
Deal Date
Month One Month Two Month Three Month Four Month Five
25Mar09 USD 100,000
Pricing a Forward
Using the previous example of 6-mnth $/BDT outright FWD
SWAP points
Minor
SWAP Points Negative Positive decreases
change
marginally
Interest Rate Swap (IRS)
Contract between two parties to exchange interest flows in order to
hedge against interest rate movements
Generally, a fixed interest rate is exchanged for a floating rate based
on market benchmark such as LIBOR
E.g. Client borrows USD10m from ADB at LIBOR6m+2.50% for 7yrs
Libor changes every six months, so does client’s int payments
US interest is low & bottoming out; exposure to rising Libor rates in future
Client willing to pay a bit more than current Libor throughout the loan tenor
Libor+2.5%
Client ADB
Libor 5.85%
The client and the bank
only swaps interest
Bank amounts on the NPA
($10m)
Interest Rate Swaps (IRS)
Libor 6m 5.85%
Libor 6m
USDBDT 69.05
EURUSD 1.4000
EURBDT=?
Calculate the Cross-rate
USDBDT 69.05
USDJPY 98.50
JPYBDT=?
USDBDT FWD for Importer is
At Discount or Premium ?
USDBDT forward for exporter is
At Discount or Premium ?
THANK YOU !