Foreign Exchange Markets Masterclass

Wednesday, May 13th

09.00 - 09.10 Welcome and Introduction

09.10 - 12.30 FX Market Overview and Products

  • Spot FX - the market for immediate delivery
    • How big is the Spot FX market? Who are the participants? What are their motivations?
    • What moves the price?
      • How important are trade flows and speculative flows?
      • The role of interest rate differentials and interest rate parity
      • Purchasing power parity and current account balances
      • Currencies that are linked to commodity prices
      • How and why do central banks intervene in the FX market?
    • How to execute Spot FX trades
      • Understanding the bid-offer spread
      • Execution for the retail trader - Spot FX brokers, CFDs
      • Execution for the bank trader - electronic trading systems, interbank voice broking
      • Execution for the investor/corporate treasurer - market makers, e-commerce platforms
  • Forward FX - the market for future delivery
    • What is the rationale behind the Forward FX market?
    • How are Forward FX prices quoted?
    • Analysis of the pricing of Forward FX
      • 'Cash and carry' forward pricing
      • Is the Forward FX price a prediction of the future or merely a mathematical result?
      • Pricing long-dated Forward FX
    • Executing Forward FX trades
      • Understanding the 'forward points' quoting system
      • Fixing the spot reference for outright forward dealing
    • Adding a Spot FX and Forward FX trade together - the 'FX Swap'
      • Applications of FX swaps

12.30 - 13.30 Lunch

13.30 - 17.00 FX Market Overview and Products (cont.)

  • The FX options market
    • Understanding how options work
    • The 'right but not the obligation' - how do we choose whether to exercise our right?
    • Analysis of payoff profiles and option combinations. What is put-call parity and why is it important?
    • Using FX options to express a view on the market or hedge a risk exposure
    • Intuitive understanding of option pricing
      • From binomial pricing to the Black-Scholes formula
    • Executing FX option trades
      • How is the price quoted? Who makes the market?
  • Understanding FX volatility
    • What is volatility? How do we measure it?
    • What is meant by 'volatility smile and skew'
    • How to calculate historical volatility
  • Introduction to exotic options
    • Barrier options and digitals
    • How do we use and execute exotic FX options?

Thursday, May 14th

09.00 - 12.30 FX Trading and Investing

  • FX trading within banks - the market maker
    • How do market makers make prices?
    • How do market makers manage their portfolios?
    • What determines the width of the bid/offer spread?
    • Discussion of market making in liquid and illiquid markets
  • FX markets for investors
    • What do investors look for from the FX market?
      • What are the differences from other asset classes?
    • Developing a view on a currency pair
      • Different views - up, down, neutral, range-bound, break-outs, trends
      • Designing a strategy to fit the view - choosing the right product
      • Carry trade analysis
      • Does your view benefit from high or low volatility?
    • Executing your view
      • Dealing with market makers
      • Trade size and the bid/offer spread
      • Order types in the FX market
      • Using take-profit and stop-loss limits to manage risk
    • Investing using options
      • What do options offer the FX investor?
      • How to tailor option combinations to benefit a more specific view
      • Using relative value opportunities in volatility to enhance investment outcomes
  • Trading FX options
    • Executing FX option trades on a 'vol price'
    • Introduction to option risk management
    • Using and understanding the volatility smile
    • Why does volatility change with expiry date?
  • Using exotic FX products
    • Using exotic options to express an investment view
    • Pros and cons of using exotics for investors
    • Using barrier and digital options to take a more specific view
    • Investing with more complex exotics - Autocallables, TARFs
    • How does the trading of exotics affect underlying FX markets?

12.30 - 13.30 Lunch

12.30 - 17.00 FX Risk Management in Banks and Corporate Treasuries

  • How does FX risk arise with a company?
    • Transaction risk
    • Translation risk
    • Understanding the implicit risk position of the company
  • The hedging decision
    • Why hedge?
    • How much to hedge?
    • Specific cash flow hedges versus rolling hedges
    • How does the typical company make the hedging decision?
    • Comparing to peers, does it matter what they do?
  • Hedging contingent exposures
    • What are contingent exposures
    • How can we hedge a risk that is not market-related?
    • What products do banks provide to help companies with contingent hedging?
    • How does the bank manage the contingent risk?

Friday, May 15th

09.00 - 12.30 FX Risk Management in Banks and Corporate Treasuries (cont.)

  • Product choice
    • Hedging with spot and forward FX
      • One-off or repeated trades
      • 'Flat' forward rate contracts for repeated trades - how do they work?
      • Cross-currency swaps - how do they work? How do they differ from FX Forwards?
    • Hedging with vanilla FX options
      • Buy options as insurance
      • Using collars and participating forwards
      • Selling 'covered' options
    • Using more complex structures
      • Quanto products - changing the payment/reference currency
      • Extendible forwards, Forward Plus, Knock-out Forwards, Accrual Forwards
      • Target Redemption Forwards (TARFs)
    • When is it a hedge and when is it not?
  • Other hedging issues
    • Appropriateness and suitability rules
    • Hedging accounting under IFRS9 - why does it matter?

12.30 - 13.30 Lunch

13.30 - 17.00 Applications

  • Case study - expressing an investment view
    • Specifying the view
    • Analysing the available products
    • Calculation of investment amounts
    • Calculation of investment returns in different scenarios
  • Case study - hedging contingent risks
    • Defining the risk
    • Analysis of hedging with normal market products - spot, forward, options
    • Hedging using a 'Contingent Forward' trade
    • Pricing the Contingent Forward
    • What are the pros/cons of all hedging approaches?
  • Case study - hedging investment FX risk
    • Analyse an investment in a foreign currency
    • Use an FX swap to create a synthetic asset in home currency
    • Analyse results - do they make sense?
  • Case study - hedging corporate FX
    • Dealing with banks - what do banks get out of dealing with corporate clients?
    • What happens to the risk once the company has hedged?
    • Understanding how banks profitably seek and manage risk on derivative contracts
    • Analyse real-life company reports
    • What is the magnitude of their FX risk?
    • How do they currently hedge their transaction and translation risk?
    • What is driving their hedging decision making process?
    • How is it represented in the accounts?
    • Would you do it differently? If yes, why?
  • Hedge the option portfolio
    • Analyse the risk profile of an option portfolio
    • Use other market options to hedge the position
    • What residual risk is left?
    • Perform scenario analysis of the 'hedged' position. Does the hedge work?
    • Analyse the risk of a digital option
    • Is it possible to hedge a digital with vanillas?
    • Perform a scenario analysis on your hedged digital position. Does the hedge work? What risk are you left with?
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