mastering foreign exchange & currency options a practical guide to the new marketplace

by Taylor, Francesca

• ISBN13: 9780273662952
• ISBN10: 0273662953
• Edition: 2nd
• Format: Paperback
• Copyright: 2004-08-17
• Publisher: Ft Pr

Summary

mastering foreign exchange & currency options a practical guide to the new marketplace The last ten years have seen a revolution inthe global foreign exchange markets. It is no longer enough for banks and their corporate customers to arrange their currency hedging and trading on an active and commercial basis. It is now vital to understand how new technology has impacted the market. The AUTHOR fully examines key initiatives such as e-forex, TWIST and CLS and the new option to trade FX outside the banking markets, making this book an essentiual tool for all who need to keep up with this fast changing market. Eleven of the twenty-one chapters are written by guest practitioners who provide a unique insight into the forex market. This important new EDITION of Mastering Foreign Exchange & Currency Options will enable you to get your currency dealing right. It is the essential handbook for any player in the forex market. It is written for new entrants seeking to master the fast developing world of forex trading and seasoned professionals needing to keep informed of the latest developments in this sector. With the introduction of new technology this is often seen as a daunting topic to get to grips with. Both hedgers seeking to remoce or manage their currency risk and speculators seeking to take currency risk in the hope of making profit will benefit from this book. The advent of more sophisticated currency derivatives has also raised the stakes. This book contains practical guidance on: bull; bull;Currency Classifications bull;History and economics of forex bull;Technology and the markets bull;Mechanics of spot forex and forward forex bull;Emerging market foreign exchange bull;Forex trading for the individual investor bull;Currency risk management bull;Background, development and mechanics of currency options bull;Exotic options and transparency bull;Innovations in e-foreign exchange bull;Multi-bank electronic trading bull;Electronic procurement of fx: the corporate perspectives bull;TWIST bull;Technical Analysis bull;Continuous linked settlement (CLS) Visit our website at www.financialminds.com

Author Biography

Francesca Taylor is the principal of Taylor Associates, one of the City's leading financial training companies, specializing in derivatives, capital markets, risk and treasury training.

Table of Contents

The author	p. xii
The contributors	p. xiii
Acknowledgements	p. xvi
Preface	p. xvii
The historical perspective	p. 1
Introduction	p. 3
1880-1914: The two gold standards	p. 3
1918-1939: Between the war years	p. 4
1944-1970: The gold exchange standard	p. 4
1971-1973: The collapse of Bretton Woods	p. 5
The period from 1973 to 1999	p. 6
European Monetary Union, 1999 onwards	p. 7
Continuous Linked Settlement (CLS) (2002)	p. 8
Background and development of the foreign exchange market	p. 9
Introduction	p. 11
Market participants	p. 13
Some basic definitions and questions	p. 17
How foreign exchange affects the economy	p. 18
The role of the central banks	p. 19
Currency classifications	p. 25
Introduction	p. 27
Broad classification of currencies	p. 27
Indications of currency classifications	p. 27
Major currencies	p. 28
Minor currencies	p. 28
Emerging market currencies	p. 28
Cross currencies	p. 28
The economics of foreign exchange	p. 31
Introduction	p. 33
Why buy and sell currencies?	p. 34
In the beginning was purchasing power parity ...	p. 34
... And then there were deposits	p. 36
FX rates with a full range of assets	p. 38
Are forward rates forecasts?	p. 38
Relative interest rates	p. 40
A few words on technical analysis	p. 42
What moves exchange rates--economic news and statistics?	p. 42
What moves exchange rates--politics?	p. 45
What moves exchange rates--intervention?	p. 46
What moves exchange rates--sentiment and rumours?	p. 48
Why do exchange rates matter?	p. 49
The last ten years: developments in the foreign exchange market--a broker's perspective	p. 51
Introduction	p. 53
What is foreign exchange?	p. 53
Forwards, options, FRAs and STIRs	p. 55
OTC versus exchanges	p. 58
Market participants and what they look for	p. 59
The FX market--'ere and now	p. 61
Central banks	p. 67
Trading portals	p. 70
The future	p. 72
Technology and the markets	p. 75
The need for information	p. 77
Embracing technology	p. 77
The need for competition	p. 78
Use of data	p. 81
The value of data	p. 83
The future	p. 85
The mechanics of spot foreign exchange	p. 89
Introduction	p. 91
Timing	p. 91
Continuous Linked Settlement (CLS)	p. 92
Quotations	p. 93
Foreign exchange market information	p. 94
Procedures and practices--banks	p. 97
Procedures and practices--clients	p. 100
Calculating cross currency rates	p. 102
Conclusion	p. 104
The mechanics of forward foreign exchange	p. 105
Introduction	p. 107
Background	p. 107
Premiums and discounts	p. 109
Calculating differentials	p. 110
Procedures and practices	p. 114
Calculating outright forwards	p. 114
Calculating 'straight date' forwards (against sterling)	p. 117
Calculating 'broken date' forwards (against sterling)	p. 118
Calculating 'straight date' forwards (against the US dollar)	p. 119
Calculating 'broken date' forwards (against the US dollar)	p. 120
Problems with interpolation	p. 121
Short date forwards	p. 121
Cross rate forward outrights	p. 124
Cross rate forward swaps	p. 126
Option dated forwards	p. 127
Conclusion	p. 128
Emerging market foreign exchange	p. 131
Introduction	p. 133
Non-deliverable forwards and non-deliverable options	p. 133
Third party payments	p. 135
Regional and country descriptions	p. 135
Emerging markets and e-commerce	p. 135
Foreign exchange trading for the individual investor	p. 159
'Traditional' margin FX	p. 161
FX spread betting	p. 164
FX as a Contract for Difference (CFD)	p. 165
Currency risk management	p. 169
Introduction	p. 171
Example of currency risk	p. 171
Company attitudes to risk	p. 172
Hedging guidelines	p. 173
Compare and contrast traditional FX forwards and OTC options	p. 176
Decision rules	p. 178
Trading risk	p. 179
Conclusion	p. 181
Background and development of the currency option market	p. 183
Introduction	p. 185
Basic derivative market background	p. 185
Growth of the currency option market	p. 188
What is a currency option?	p. 190
Terminology	p. 192
Key features of currency options	p. 195
Premium determinants	p. 196
The importance of volatility	p. 199
Comparisons between OTC currency options and forward foreign exchange	p. 203
Using a currency option to hedge a currency receivable	p. 204
Using currency options to speculate	p. 207
Basic workings of currency options	p. 208
The mechanics of currency options	p. 209
Introduction	p. 211
The Black and Scholes option pricing model	p. 211
Expiry or profit and loss profiles	p. 212
Put-call parity	p. 215
Option Greeks	p. 218
Combining options to create more complex strategies	p. 223
Availability	p. 225
Exotic options: the way to transparency	p. 227
Introduction	p. 229
Black-Scholes and its limitations	p. 229
New products, greater margins; more mature products, slimmer margins but greater volume	p. 232
Towards transparency	p. 233
Options with barriers	p. 234
Conclusion	p. 247
e-Foreign exchange	p. 249
Introduction	p. 251
Background	p. 251
Foundation	p. 252
Straight-through processing	p. 253
Single bank platforms	p. 253
Multiple bank platforms	p. 254
Where next?	p. 255
Multi-bank electronic trading: a brief history and current use	p. 257
Introduction	p. 259
Evolution of customer demand for multi-bank eFX	p. 260
Currenex brings together the buy-side and their banks	p. 261
Customers measure up multi-bank eFX	p. 267
Conclusion	p. 268
Innovations in e-fx	p. 271
E-commerce today	p. 273
White labelling	p. 273
Value-added services	p. 274
Transactional innovation	p. 275
Confirmation, settlement and STP	p. 277
Control	p. 278
The future	p. 278
Electronic procurement of foreign exchange: the corporate perspective	p. 279
Introduction	p. 281
Barings Scenarios--the continuing risk	p. 281
Moving out of the dark ages	p. 283
Corporative imperative for a single window to the financial markets	p. 283
Pricing engine--a corporate hidden benefit	p. 285
Future impact on cash management	p. 286
The downsides	p. 286
Conclusion	p. 286
Improving the business process	p. 289
Buy-side: foreign exchange as an instrument for liquidity management	p. 291
The importance of centralized liquidity management for corporates	p. 292
Sell-side (banks): foreign exchange as a service for clients and as a trading instrument	p. 294
Price formation of foreign exchange transactions	p. 296
The case for automation in foreign exchange processing	p. 298
Effective straight-through processing	p. 299
Bottlenecks in the development of operational benefits	p. 301
Technological advancement in corporates and banks	p. 302
The role of electronic trading platforms	p. 303
Standardization within and across organizations	p. 306
TWIST standards for integration	p. 307
Technical analysis	p. 311
Introduction	p. 313
The three rules	p. 313
Technical versus fundamental analysis	p. 314
Different types of chart	p. 314
Trend	p. 318
Japanese candlestick techniques	p. 321
Moving averages	p. 324
Oscillators--RSI, MACD, stochastics, momentum	p. 326
Fibonacci numbers	p. 330
Elliott wave theory	p. 331
Conclusion	p. 333
Continuous linked settlement: changing the way the world works	p. 337
Introduction	p. 339
Who's involved	p. 339
Benefits of CLS	p. 341
Challenges	p. 343
Appendices
Central Bank contributors to the Bank for International Settlements 2001 Triennial Central Bank Survey	p. 349
The Black-Scholes Option Pricing Formula	p. 351
London Code of Conduct for non-investment products, 2002	p. 358
Index	p. 397
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