Foreign exchange 1

Foreign exchange - FX Spot

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FOREIGN EXCHANGE

ƒ Market characteristics
ƒ Main players
ƒ FX Spot

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 Foreign exchange 1

FX MARKET - MARKET CHARACTERISTICS

ƒ Global
ƒ 24 hours
ƒ Low margin
ƒ High volume
ƒ > $5 trillion per day
ƒ OTC
ƒ Increasingly electronic platform based

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FX MARKET - MAIN PLAYERS

ƒ Investment / commercial banks

ƒ Corporate clients
ƒ Buy-side investor clients
ƒ Sovereign clients
ƒ Proprietary
ƒ Central banks
ƒ Retail banks

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 Foreign exchange 1

KEY INVESTMENT BANK CLIENT FX NEEDS

ƒ Corporate
ƒ Pay suppliers
ƒ Convert foreign revenues
ƒ Acquire foreign assets
ƒ Buy-side investors
ƒ Funding foreign assets
ƒ Hedge returns on foreign assets
ƒ Speculation

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FX SPOT

ƒ Spot FX is an agreement today (T) to exchange an agreed amount

of one currency, for an agreed amount of another currency, settling
2 business days later (T+2)
ƒ How does a client ask for a price and decide to trade?

ƒ Client - “EUR / USD Spot in 5 mm please”

ƒ Bank - “22 23” (we know trader means 1.3522 bid 1.3523 offer)
ƒ Client - “I sell you 5mm EUR / USD at 22”
ƒ At T+2 Client delivers €5mm
ƒ At T+2 Client receives 5mm * 1.3522 = $6.761mm

ƒ How do we know the direction? Does the client buy or sell EUR?

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 Foreign exchange 1

FX MARKET - QUOTING CONVENTION

ƒ Every pair of currencies has a market standard order

when quoted
ƒ In the market you should never see USD / EUR - it
should be quoted EUR / USD
ƒ What is the relevance of the order?
ƒ The price quoted always refers to the price of one
unit of the first currency (base currency) priced in
the second currency (quote currency)

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FX MARKET - QUOTING CONVENTION

ƒ EUR / USD quotes always refer to price of €1 in $

ƒ How many dollars is 1 euro worth?

ƒ USD / JPY quotes always refer to price of $1 in ¥

ƒ How many yen is 1 dollar worth?

ƒ EUR / CHF quotes always refer to price of €1 in CHF

ƒ How many Swiss francs is 1 euro worth?

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 Foreign exchange 1

FX MARKET - QUOTING CONVENTION

ƒ We know that the bid-offer will be the price of one unit

of the base, or first currency, in terms of the quote, or
second currency
ƒ How do we know which currency comes first?
ƒ You must learn hierarchy
ƒ EUR, GBP
ƒ AUD, NZD
ƒ USD, CAD
ƒ CHF

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FX MARKET - QUOTING CONVENTION

Examples:
ƒ EUR / USD - ‘Euro Dollar’
ƒ GBP / USD - ‘Cable’
ƒ USD / JPY - ‘Dollar Yen’
ƒ USD / CAD - ‘Dollar Cad’
ƒ AUD / USD - ‘Aussie Dollar’
ƒ NZD / USD - ‘Kiwi Dollar’
ƒ NOK / SEK - ‘Nocky Stocky’

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 Foreign exchange 1

FX MARKET - QUOTING CONVENTION

ƒ When someone ‘buys’ EUR / USD, they are buying

EUR
ƒ When someone ‘sells’ EUR / USD, they are selling
EUR
ƒ Both the buy / sell, and the FX rate, always refer to
the first, or ‘base’ currency
ƒ To ‘sell 10mm USD / JPY at 99’ means to sell USD
10mm , at a price of JPY 99 each

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