1.–2. Foreign Exchange Markets
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Transcript of 1.–2. Foreign Exchange Markets
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1.–2. Foreign Exchange Markets
International Financial Services
Karel Bruna
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Main Business Problems
• the role of bank/company in foreign exchange market
• main sources of risk to which bank/company face up
• main trends in foreign exchange markets
• effective ways how to manage foreign exchange transactions
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Main Features of the Foreign Exchange Market
• place of trade concentration (geographical extent)
• trading channels
• participants (institutions)
• type of transaction
• motivation for transaction
• conventions in exchange rate quotation
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Foreign Exchange Markets Geography
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Reported foreign exchange market turnover structure by geographical distribution(Triennial Central Bank Survey, Foreign exchange and derivatives market activity in 2010, September 2010, BIS)
United Kingdom37%
United States18%
Others12%
Canada1%
Germany2%
Denmark2%
France3%
Australia4%
Honk Kong5%
Switzerland5%
Singapore5%
Japan6%
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Reported foreign exchange market turnover structure by currency pair(Triennial Central Bank Survey, Foreign exchange and derivatives market activity in 2010, September 2010, BIS)
EUR/USD28%
USD/JPY14%
USD/GBP9%
Other26%
USD/AUD6%
EUR/CHF2%
EUR/JPY3%
USD/CHF4%
USD/CAD5%
EUR/GBP3%
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USD in Foreign Reserves
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The Circadian Rhythms of the FX Markets
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Main Trading Channels in FX Market
Interbank Market Client Market
direct trading single-bank systemsReuters Dealing 3000 Direct Chief Dealer (Citibank)EBS Trader NatWest Global Banking & Markets
electronic brokers multi-bank systemsReuters Dealing 3000 Spot Fxall, Currenex, eSpeed,EBS Spot 360 Treasury System, Lava FX
FX Connect
e-exchange e-exchange FX MarketSpace HotSpotFX
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Example of Dealer’s Conversation
From “CODE” “FULL NAME HERE” *0728GMT 030801 */7576Our Terminal: “CODE” Our Users: “FULL NAME HERE”EUR 10# 25.27
BA> I BUY# TO CONFIRM AT 1,0227 I SELL 10 MIO USD# VAL 5AUG01# MY EUR TO “FULL NAME HERE”# THANKS AND BYE
TO CONFIRM AT 1,0227 I BUY 10 MIO USDVAL 5AUG01MY USD TO “FULL NAME HERE”THANKS FOR DEAL FRDS. CHEERS
##END REMOTE#
##END#
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EBS Spot Electronic Broker
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HotSpot FX
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Volume of Transactions Traded Online(Gtnews Online Trading Survey, 2004)
1-20%15%
21-40%9%
41-60%13%
61-80%40%
81-100%23%
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Primary Benefits of E-Trading in FX Market(State Street Global Market Survey, 2005)
0
10
20
30
40
50
60
70
Fasterexecution
Convenience,efficiency,
productivity
Tight spreads Straight-through-
processing
Reduction intrade errors
Increasedliquidity
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Reported foreign exchange market turnover by counterparty(Triennial Central Bank Survey, Foreign exchange and derivatives market activity in 2010, September 2010, BIS)
with reporting dealers39%
with other financial institutions
48%
with non-financial customers13%
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% Share and dynamics in main segments of dealer-to-client market(2005, ClientKnowledge, 2006)
Leverage/higly active
investors38%
Client bank s37%
Corporations18%
Real money investors
7%
-80
-60
-40
-20
0
20
40
60
80
Corporations Real moneyinvestors
Leverage/higlyactive investors
Client banks
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Reported global foreign exchange market turnover by transaction type(Triennial Central Bank Survey, Foreign exchange and derivatives market activity in 2010, September 2010, BIS)
Spot transactions36%
Outright forwards11%
FX swaps43%
Exchange traded futuresand options
2%Currency options5%
Currency swaps1%
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Motivation for Transaction in Foreign Exchange Market
• change of purchasing power
• speculation
• hedging
• arbitrage
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Exchange Rate QuotationEuropean quotation
outright quotation small figure
base currency
24,264 CZK/EUR
European quotationquoted currency
big figure
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Exchange Rate QuotationAmerican quotation
outright quotation small figure
base currency
0,04122 EUR/CZK
American quotation quoted currency
big figure
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Exchange Rate QuotationEuropean vs. American quotation
1European quotation BID = --------------------------------
American quotation ASK
1
European quotation ASK = --------------------------------
American quotation BID
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Exchange Rate QuotationDirect quotation
base currency = foreign currency
18,534 CZK/USD
quoted currency = home
currency
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Exchange Rate QuotationIndirect quotation
base currency = home currency
0,0540 USD/CZK
quoted currency = foreign currency
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Exchange Rate Quotation
26,5346 26,5353 CZK/USD
26,5346/53 CZK/USD
46-53 CZK/USD
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Main business problems(cross rates)
• definition of the strategy of cross rates predictions
• cross trades as the source of volatility of company’s future cash flow
• company’s management of FX risk in case of cross trades
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Cross rateEuropean quotation
USD/CHFcross rate rule GBP/CHF = --------------------
USD/GBP
USD/CHFBID
GBP/CHFBID = -------------------- USD/GBPASK
USD/CHFASK
GBP/CHFASK = -------------------- USD/GBPBID
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Cross rateAmerican quotation
GBP/USDcross rate rule GBP/CHF = --------------------
CHF/USD
GBP/USDBID
GBP/CHFBID = -------------------- CHF/USDASK
GBP/USDASK
GBP/CHFASK = -------------------- CHF/USDBID
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Cross rateEuropean vs. American quotation
cross rate rule GBP/CHF = GBP/USD . USD/CHF
GBP/CHFBID = GBP/USDBID.USD/CHFBID
GBP/CHFASK = GBP/USDASK.USD/CHFASK
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Cross rate(majors vs. cross rate majors market share in 2007)
majors cross rate majors
EUR/USD 27% EUR/JPY 2 %
USD/JPY 13 % EUR/GBP 2 %
GBP/USD 12 % EUR/CHF 2 %
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