Foreign Exchange

Trade Cycle

Table of Content
1. Fx Trade cycle
1.1. Front office
1.2. Middle office
1.3. Back office
1.4. Major applications involved in Trading
1.4.1. Wallstreet 5.0
1.4.2. Murex
1.4.3. Baracudda
1.4.4. Broadway
1.4.5. Bloomberg
1.4.6. Roaters
1.4.7. Calypso
1.5. Risk Management
2. General Ledger
3. Recon Process
4. Opening and closing balances
5. Different Fx Assets
5.1. FxSPOT
5.2. FxFWD
5.3. FxOPT
 Fx Trade Cycle

What is Fx/Forex Trading?

Forex, or foreign exchange, can be explained as a network of buyers and sellers,
who transfer currency between each other at an agreed price. It is the means by which
individuals, companies and central banks convert one currency into another – if you have
ever travelled abroad, and then it is likely you have made a forex transaction.

While a lot of foreign exchange is done for practical purposes, the vast majority of
currency conversion is undertaken with the aim of earning a profit. The amount of currency
converted every day can make price movements of some currencies extremely volatile. It is
this volatility that can make forex so attractive to traders: bringing about a greater chance of
high profits, while also increasing the risk.

How do currency markets work?

The forex market is run by a global network of banks, spread across four major forex
trading centres in different time zones: London, New York, Sydney and Tokyo. Because
there is no central location, you can trade forex 24 hours a day.

There are three different types of forex market:

 Spot forex market: The physical exchange of a currency pair, which takes place at the
exact point the trade is settled – ie ‘on the spot’ – or within a short period of time

 Forward forex market: a contract is agreed to buy or sell a set amount of a currency
at a specified price, to be settled at a set date in the future or within a range of future dates

 Future forex market: a contract is agreed to buy or sell a set amount of a given
currency at a set price and date in the future. Unlike forwards, a futures contract is legally
binding.
What is a base and quote currency?
A base currency is the first currency listed in a forex pair, while the second currency is called
the quote currency. Forex trading always involves selling one currency in order to buy
another, which is why it is quoted in pairs – the price of a forex pair is how much one unit of
the base currency is worth in the quote currency.

Each currency in the pair is listed as a three-letter code, which tends to be formed of two
letters that stand for the region, and one standing for the currency itself. For
example, GBP/USD is a currency pair that involves buying the Great British pound and
selling the US dollar.

So in the example below, GBP is the base currency and USD is the quote currency. If
GBP/USD is trading at 1.35361, then one pound is worth 1.35361 dollars.

To keep things ordered, most providers split pairs into the following categories:

Major pairs. Seven currencies that make up 80% of global forex trading. Includes
EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD and AUD/USD

Minor pairs. Less frequently traded, these often feature major currencies against each other
instead of the US dollar. Includes: EUR/GBP, EUR/CHF, GBP/JPY

Exotics. A major currency against one from a small or emerging economy. Includes:
USD/PLN (US dollar vs Polish zloty) , GBP/MXN (Sterling vs Mexican peso), EUR/CZK

Regional pairs. Pairs classified by region – such as Scandinavia or Australasia. Includes:

EUR/NOK (Euro vs Norwegian krona), AUD/NZD (Australian dollar vs New Zealand dollar),
AUD/SGD
What moves the forex market?
The forex market is made up of currencies from all over the world, which can make
exchange rate predictions difficult as there are many factors that could contribute to price
movements. However, like most financial markets, forex is primarily driven by the forces of
supply and demand, and it is important to gain an understanding of the influences that drives
price fluctuations here.

Central banks
Supply is controlled by central banks, who can announce measures that will have a
significant effect on their currency’s price. Quantitative easing, for instance, involves injecting
more money into an economy, and can cause its currency’s price to drop.

News reports
Commercial banks and other investors tend to want to put their capital into economies that
have a strong outlook. So, if a positive piece of news hits the markets about a certain region,
it will encourage investment and increase demand for that region’s currency.

Market sentiment
Market sentiment, which is often in reaction to the news, can also play a major role in driving
currency prices. If traders believe that a currency is headed in a certain direction, they will
trade accordingly and may convince others to follow suit, increasing or decreasing demand.

Economic data
Economic data is integral to the price movements of currencies for two reasons – it gives an
indication of how an economy is performing, and it offers insight into what its central bank
might do next.

Credit ratings
Investors will try to maximise the return they can get from a market, while minimising their
risk. So alongside interest rates and economic data, they might also look at credit ratings
when deciding where to invest. A country’s credit rating is an independent assessment of its
likelihood of repaying its debts. A country with a high credit rating is seen as a safer area for
investment than one with a low credit rating.
Some Forex Trading Terminologies

What is the spread in forex trading?

The spread is the difference between the buy and sell prices quoted for a forex pair. Like
many financial markets, when you open a forex position you’ll be presented with two prices.
If you want to open a long position, you trade at the buy price, which is slightly above the
market price. If you want to open a short position, you trade at the sell price – slightly below
the market price.

What is a lot in forex?

Currencies are traded in lots – batches of currency used to standardise forex trades. As
forex tends to move in small amounts, lots tend to be very large: a standard lot is 100,000
units of the base currency. So, because individual traders won’t necessarily have 100,000
pounds (or whichever currency they’re trading) to place on every trade, almost all forex
trading is leveraged.

What is leverage in forex?

Leverage is the means of gaining exposure to large amounts of currency without having to
pay the full value of your trade upfront. Instead, you put down a small deposit, known
as margin. When you close a leveraged position, your profit or loss is based on the full size
of the trade.

What is margin in forex?

Margin is a key part of leveraged trading. It is the term used to describe the initial deposit
you put up to open and maintain a leveraged position. When you are trading forex with
margin, remember that your margin requirement will change depending on your broker, and
how large your trade size is.

What is a pip in forex?

Pips are the units used to measure movement in a forex pair. A forex pip is usually
equivalent to a one-digit movement in the fourth decimal place of a currency pair. So, if
GBP/USD moves from $1.35361 to $1.35371, then it has moved a single pip. The decimal
places shown after the pip are called fractional pips, or sometimes pipettes.
Front Office

The front office represents the customer-facing function of a firm, for example, customer
service, sales, and industry experts who provide advisory services. The functions of the front
office generate most of the revenue for the firm. Many firms are can be divided into three
parts, the front office performing sales and client service functions, the middle office that
manages risk and corporate strategy, and the back office, which provides analysis, technical,
and administrative support services.

 The front office is typically composed of customer-facing employees such

as sales and service staff.
 Because the front office has the most direct contact with clients, it is
responsible for generating the bulk of revenues.
 The front office relies on the back office for support in the form of
Human Resources, Internet Technology, and accounting and secretarial
functions.

Some Front Office Platforms

 Middle Office

In investment banking, the middle office usually consists of risk management, research and
compliance departments, as well as some elements of technology.

Risk analysts and managers work closely with front office teams to feed them their results
relating to various asset classes and financial markets. This information helps the decision
makers to mitigate investment risks as much as possible. They also manage risk in terms of
compliance, ensuring the bank’s practice is on the right side of legislation and industry
standards. A legal team will also feature here.

 Huge responsibility! These guys are responsible for making sure the bank doesn’t
breach regulations and put its financial position and reputation at stake.
 Challenging negotiations. Middle office needs to convince front office not to get
carried away with risky investment, whilst giving them the room to make the most
lucrative moves they can.

Some Middle Office Platforms

FlexFX OMS
 Back Office

The back office is namely referred to as ‘operations’. This includes all of the services and
duties that must be carried out when trades are made by the front office: clearing and
settlement. These are many administrative roles, which play a vital part in the overall
functioning of the bank – and the world of trading overall, for that matter! There are also
opportunities to work on projects, creating new processes and refining or automating older
ones. They offer a chance to work with various different asset classes, and a global dynamic
to work – global investment banks will coordinate their operations teams worldwide.

 More standard office hours compared to the front office.

 An international dynamic. Multinational investment banks often unite their
operations teams across the globe to get tasks done and problems solved as
quickly as possible.
 There are still essential deadlines to meet, though the heat of the working
environment may not be as intense as in the front office.

Back Office Responsibilities.

 Clearing
 Settlements
 Accounting and Finance
 Cash & Stock Reconciliation
 Major applications involved in Trading

1 Wallstreet 5.0
Wall Street Systems (Wallstreet) is a premier global provider of treasury; trading and settlement
solutions and services that help improve workflow, control and overall productivity for corporate
treasury, bank treasury, central banking, and
FX trading and global back office operations.

With Wallstreet Suite, banks and corporate

treasuries can automate, audit, consolidate
and account for all cash management, trading,
funding and investment activities —
instantaneously and globally. Users can
choose to price and value transactions using
either internal libraries or Numerix libraries,
including models, methods and calibration.
These calculations feed into key accounting,
risk management and other reporting
functions.

Wallstreet FX
This integrated high-volume, trade-processing
platform helps banks be competitive in the
foreign exchange market by reducing
transaction costs and providing transparency
to clients. Wallstreet FX integrates Numerix
analytics to support pricing, valuation and risk
management, with mark-to-market values
feeding accounting and other reporting
functions. Sample transaction types include
FX options such as accumulators, faders and
digital KIKOs.
2 Murex
Murex is a capital markets position keeping tool capable of managing straight through
processing front-middle-back office. It covers a huge variety of asset classes with exotic
characteristics. It has limits control, historical VaR, parametric var, reporting, simulations,
accounting, documents generation, workflows, payments generation, it can measure risk, it
has collateral management, benchmarking, asset management modules.

It is market leader in this sector, and makes big investments in being up to date with the
needs of the industry.