Chapter 1: Forex market

MsC. Phan Hong Hanh

Course learning outcomes

1. Explain the concepts and transactions in the forex

market

2. Introduce the participants in the forex market

3. Assess the importance of the forex market

4. Introduce the Vietnamese of forex market

Structure
01 Definition and characteristics

02 Participants in the forex market

03 The importance of forex market

04 Vietnamese forex market

 Module 1:
Definition and characteristics
of the forex market
 Module’ learning outcomes

Define the Classify the Compare the

forex market participants in the transactions in the
forex market forex market
 Module 1.1.
Definition of forex and forex market
What is foreign exchange?
 Foreign exchange
According to the Ordinance on Foreign Exchange (28/2005/PL-UBTVQH11),
foreign exchange consists of:

1. Foreign currency
2. Means of payment in foreign currency
3. Valuable papers denominated in foreign currency
4. Gold
5. VND in some specific cases
Vietnam foreign exchange reserve
Unit: Million USD

Source: Bloomberg
What is foreign exchange?
In this course, foreign exchange is
foreign currency
What is foreign exchange?

• Each currency is presented through a three –

letter alphabetic called currency code

• Currency code are unique that denote a

specific currency

• ISO 4217 is the international standard for

currency code
 Some popular currency codes

Country Name of currency Currency code

United State of America US dollar USD
Eurozone Euro EUR
United Kingdom Pound Sterling GBP
Japan Yen JPY
Switzerland Swiss Franc CHF
China Yuan Renminbi CNY
What is forex market?
What is “Thị trường ngoại hối là bất cứ đâu diễn

forex market? ra việc mua, bán các đồng tiền khác

nhau”
Giáo trình Quản trị rủi ro ngoại hối trong kinh doanh quốc tế
– GS. TS. Nguyễn Văn Tiến (2021)
What is The foreign exchange market (forex

forex market? market) is a global decentralized or over

– the – counter (OTC) market for the
trading of currencies
 History of the forex market
The forex market history
• The origin of foreign currency
exchange is from the needs of
international trade activities
• Foreign currency trading facilities
international trade for thousands
of years
The development of forex market
• The forex market has developed rapidly
since the collapse of Bretton Woods
Agreements (1971)
• The development of the Internet and
informational technology makes everyone
participates in the forex market easily
• The forex market also helps participants in
seeking profits and hedging risk from
exchange rate fluctuation
 The foreign exchange market (forex
What is market) where the foreign currencies

forex market? are traded between banks, therefore

it is called as the forex interbank
market
 Module 1.2.
Features of the forex market
 Features of the forex market

01 02
Hour operation Daily trading volume
and liquidity

03 04
Volatility Transparency
 Hour operation

• The forex market is a global decentralized

or over– the – counter (OTC) market
• The forex market operates 24 hours per
day and 5 working days per week
• Customers can trade any time
Daily trading volume
7.5 trillion USD
It is the largest and most liquid financial is daily trading volume
market in the world

Trading speed in
second
The liquidity of the forex market is
unlimited
More than 50
currencies are
The forex transaction can trade frequently
completed quickly and easily
7,508 billion USD
is the average daily trading volume of the forex market

BIS triennial Central bank survey (2022)

 Volatility of the forex market

• The sensitive of the forex market is called the volatility

• The prices in the market are influenced easily by events of
politic, economics, society and even natural disaster
• Changes in any cases of such events can translate into a
significate shift in the forex market
High transparency of the forex market
• Low transaction fee
• High liquidity
• Customers can update and access the related information and
data of the market on a real time basic
• Nobody can control the market
• The forex market has leverage
 Module 1.3.
Transactions in the forex market
 Transactions in the forex market

Forex spot transaction Currencies delivered within 2 working days since trade date

Forex forward transaction Derivatives transaction. Currencies delivered in a specific future day

Swap currencies transaction Derivatives transaction. Swap consists 1 buy and 1 sell transactions

Forex future transaction Derivatives transaction. Future is similar to Forward but operating in the
Exchange

Option currencies transaction Derivatives transaction. Transaction gives the buyer the right (but not
obligation) to buy or sell currency
Transcations in the forex market

SPOT SWAP

FOREX SPOT TRANSACTION

FUTURE OPTION
 Module 2:
Participants and the importance of
the forex market
Module learning outcome

Classify participants in Explain the importance

the forex market of the forex market
 Module 2.1:
Participants in the forex market
 Commercial banks
• The most importance participants in the forex market
• Account for the largest proportion of trading volume in
the forex market
• Commercial banks trade on their own behalf and as
brokers for their clients
• Commercial banks are essential for providing for
liquidity for the market
• Commercial banks are considered as the best –
informed market player
Retail dealers

• Include importers, exporters, individuals traders, other firms

• Their main goals are making profit and hedging foreign exchange rate risk

• They normally access the forex market through brokers

• They access the market through internet and development of information

technology

• Small capital size trader

• Cannot giving shock in the forex market

 Central banks

● Central banks intervene in the forex market

when they want to regulate their exchange
rate regime
● Central banks also intervene in the market
when they want to manage the foreign
currency reserve
● Central banks sell and buy currencies with
banks in the forex market
 Brokers

• Acting as intermediary between retail dealers and

international forex market

• Offering liquidity, leverage and supporting services

to other market participants, especially individual
trader

• Brokers can be commercial banks or non – bank

brokers

• Profit of brokers is spread

 Module 2.2:
The importance of forex market
The importance of
forex market

● International trade
● Financial instrument settlements
● Hedging
● Inflation control
 The importance of forex market
For international trade Hedging risk Investment opportunities

• Facilitating Transactions in the forex Trader can make profit from

international trade market often used to fluctuations in exchange rate
• Where exporters and hedge foreign exchange
importers exchanges rate risk
different currencies
Economics

For central bank Where the foreign

exchange rate is
Central bank intervene
determined
the market to stabilize
their domestic currency
and inflation
 Module 3:
Vietnamese forex market
Development of Vietnamese forex market
1994 - 2015
Promulgate forex
1991 market legislations
Foreign currency
trading central

2016 - now
Regulate the forex market
1994 through central exchange
rate regime and
Interbank foreign exchange rate band
exchange market
 Foreign currency trading central

The purposes of the foreign currency trading central

bank is:
• Measure the suppy and demand of foreign
currencies
• Decide the reasonable exchange rate to manage
the market
• Prepare the initial conditions to build an official
forex market in Vietnam
• Through the foreign currency trading central bank,
the SBV increase the foreign currency reserve
Regulations on Vietnamese forex market

• Ordinance on foreign exchange

• Regulations on operating foreign
exchange activity
• Exchange rate regime
Group discussion:
What is exchange rate
regime in Vietnam?
 Materials

• Tim Weithers, 2006, A practice Guide to the FX markets, NXB John

Wiley and Son
• James Chen, 2009, Essentials of foreign exchange trading, NXB John
Wiley and Son
• BIS Triennial Central Bank Survey 2022
Thanks
CREDITS: This presentation template was created by Slidesgo,
including icons by Flaticon, infographics & images by Freepik
 6/14/24

Chapter 2: Foreign exchange rate

MsC. Phan Hong Hanh

Chapter learning outcomes

Explain What is foreign exchange rate

Identify Base currency and quote currency; direct quotation and

indirect quotation; bid exchange rate and ask exchange
rate

Calculate Cross exchange rate

Explain Factors affecting the exchange rate

1
 6/14/24

Module 1.
What is foreign exchange rate?

Objectives
Define the foreign
Exchange rate quotation
exchange rate

• Foreign exchange rate • Direct and indirect quotation

• Symbols of exchange rate • European and American quotation
• Currencies in exchange rate
• Pip

2
 6/14/24

Module 1.1
Definition of exchange rate

What is exchange rate?

● The rate in which one currency can be
exchanged to another currency
● The price of one currency in relation to another

3
 6/14/24

What is exchange rate?

“Tỷ giá là giá trị của đồng tiền này được
biểu thị thông qua một đồng tiền khác”
Giáo trình quản trị rủi ro trong kinh doanh quốc tế,
GS. TS. Nguyễn Văn Tiến (2021)

Foreign exchange rate

USD/VND: 25,400 1 USD = 25,400 VND

EUR/USD: 1.1011 1 EUR = 1.1011 USD

USD/JPY 134.85 1 USD = 134.85 JPY

GBP/USD 1.2635 1 GBP = 1.2635 USD

4
 6/14/24

Foreign exchange rate

§ Exchange rate is determined by the demand and

supply currencies in the forex market
§ Exchange rate constantly fluctuates
§ Factors affecting exchange rate fluctuation
includes: interest rates, transaction tenor,
changes in political, economic and social events

Exchange rate symbols

E S F
Exchange rate Spot exchange rate Forward exchange rate

• Exchange rate symbol in • Exchange rate is used in • Exchange rate is used in

general spot transaction forward transaction
• E(USD/VND) • To be used to determine • To be determined on
• E(AUD/USD) derivate exchange rates trade date
• S(EUR/USD) • F(EUR/USD)
• S(JPY/VND) • F(JPY/VND)

5
 6/14/24

Pips in forex

● The smallest unit of exchange rate

● Pip stands for point in percentage
● The unit of measurement to express the
change in exchange rate is called as Pip

Pips in forex

EUR/USD = 1. 2 7 8 5
5 pips

80 pips
700 pips
2,000 pips
10,000 pips

6
 6/14/24

• Exchange rate normally quoted with 5 digits --> Pip

is the last decimal place of price quote

Pips in forex • Sometimes exchange rate is quoted with 6 digits

(especially in the interbank forex market) --> Pipette
• Value of pip depends on each exchange rate

Pips in forex
USD/VND 25,435
EUR/USD: 1.0862 EUR/USD: 1.0863
EUR/USD: 1.0862
USD/JPY: 157.23
GBP/USD: 1.2654 If EUR/USD increase .0001 USD --> The
exchange rate of EUR/USD increases 1 (one) pip

7
 6/14/24

Pips in forex

● The bid – ask spread of forex quote is

measured in pips
● Movement of the exchange rate is
measured in pips
● A pipette equals 1/10 of a pip

Module 1.2.
Currencies in an exchange rate

8
 6/14/24

Base currency Quote currency

● The first currency in a currency ● The second currency in a

pairs currency pairs
● Also called as transaction ● Also called as counter/ term
currency/ commodity currency currency

Base currency
USD / VND
1 USD = xxx VND
● The first currency in a currency EUR / USD
pairs
1 EUR = xxx USD
● The value of base currency is
measured by quote currency GBP / CAD
● In currency pairs, the unit of base 1 GBP = xxx CAD
currency is fixed of 1 (one)

9
 6/14/24

Base currency
E(USD/VND) moves from 25,300
to 25,400
● Exchange rate is the price of the --> USD is appreciate to VND
base currency E(GBP/USD) moves from 1.2653
● An increase in exchange rate to 1.2640
means base currency is
--> GBP is depreciate to USD
appreciate to quote currency and
vice verse

Quote currency
USD / VND ● The second currency in a currency
1 USD = xxx VND pairs
● To be used to measure the value
EUR / USD
of the base currency
1 EUR = xxx USD ● The exchange rate presents how
many quote currency exchanges 1
GBP / CAD
(one) base currency
1 GBP = xxx CAD ● The unit of quote currency in
currency pairs changes according
to the exchange rate fluctuation

10
 6/14/24

Module 1.3.
Exchange rate quotation

Exchange rate
quotation
● Exchange rate quotation is the
principle for determining the positions
of 2 currencies in an exchange rate
● Base on a national perspective there
are domestic currency and foreign
currency --> Direct and indirect
quotation

11

Direct and
indirect quotation
Direct quotation
• Foreign currency: Base currency
• Domestic currency: Quota currency
• Domestic currency is used to
measure the value of foreign
currency
• Popular exchange rate quotation
6/14/24
Indirect quotation
• Domestic currency: Base currency
• Foreign currency: Quota currency
• Foreign currency is used to
measure the value of domestic
currency
• Only some countries use this type
of quotation
12
 6/14/24

Direct quotation
Domestic currency is
quote currency
Vietnam uses direct quotation:
• VND is always the quote currency
• VND is the second currency in USD / VND
exchange rate EUR / VND
• Foreign currency is the base currency
and the first currency in exchange rate GBP / VND

Foreign currency is
base currency

Indirect quotation
Domestic currency is
quote currency

Only some countries use this type of

quotation, include: EUR / VND
• Euro zone --> EUR
GBP / USD
• United Kingdom --> GBP
• Australia --> AUD AUD / CAD
• New Zealand --> NZD NZD / USD

Foreign currency is
base currency

13
 6/14/24

European and
American quotation
• USD usually appears in many currency pairs
because it is the most popular traded
currency in the world
• Base on the position of USD in an exchange
rate --> European and American quotation

European quotation American quotation

• USD: Base currency • USD: Quote currency

• USD is always the first currency in • USD is always the second currency
an exchange rate in an exchange rate

14
 6/14/24

Exchange rate quotation

USD can be both the base currency in
one currency pair and the quote
currency in another
AUD / USD
EUR / USD
USD / CAD
USD / CHF

Rule Number 1
● Used if the exchange rate has not USD or
domestic currency

● Not applicable to indirect currency quotation:

EUR, GBP, AUD, NZD

● The currency has greater value is the base

currency

15
 6/14/24

Module 2.
Types of exchange rates

Module’s objectives

Able to Able to Able to

distinguish choose calculate
Types of exchange rate appropriate
such as: bid – ask rate; exchange rate Cross exchange rate
interbank – retail rate

16
 6/14/24

Bid – ask exchange rate

● Bid exchange rate/ Buy exchange rate –
Symbol: Eb
● Ask exchange rate/ Offer exchange rate –
Symbol: Ea

Bid exchange rate

Bid rate Ask rate

• Exchange rate usually quoted in

pairs: Eb – Ea
• The first exchange rate is called Bid USD/VND: 25,300 – 25,400
exchange rate (bid rate) Eb EUR/USD: 1.0960 – 1.0990
• The second exchange rate is called GBP/VND: 29,635 – 29,950
Ask exchange rate (ask rate) Ea
USD/JPY: 134.80 – 136.40

17
 6/14/24

Bid exchange rate

§ The first exchange rate in a currency pair

§ It is the exchange rate that the dealer/ bank
is willing to buy for a base currency
§ The bid exchange rate usually higher than
the ask one

Ask exchange rate

§ The second exchange rate in a currency pair

§ It is the exchange rate that the dealer/ bank is
willing to sell a base currency
§ The ask exchange rate usually lower than the
bid one

18
 6/14/24

Bid – ask spread

● The different between the bid and ask exchange
rate when dealers/ banks trading one base
currency
● Bid – ask spread is measured in Pip
● The spread is the transaction cost
● The higher bid – ask spread, the higher profit of
dealers/ banks

Bid – ask exchange rate

The exchange rate list in bank A is as follow: USD/VND: 25,300 – 25,400

EUR/USD: 1.0960 – 1.0990
What is the exchange rate used when: GBP/VND: 29,635 – 29,950
1. Customer B buys USD from bank A USD/JPY: 134.80 – 136.40

2. Bank A sells AUD to its retail customer

3. Bank A buys EUR from its retail customer
4. Customer C sells JPY to bank A

19
 6/14/24

Bid – ask exchange rate

The exchange rate list in bank A and bank B are as follow:

1. What is bid – ask spread of bank A and Bank A

bank B? USD/VND: 25,250 – 25,350
2. If you want to buy USD, which bank you Bank B
want to trade with? USD/VND: 25,270 – 25,320
3. If you want to sell USD, which bank you
want to trade with?

Wholesale and retail

exchange rate

20
 6/14/24

Wholesale Retail
exchange rate exchange rate

The wholesale exchange rate is The retail exchange rate is the

the exchange rate used for the exchange rate used for the forex
forex transactions in the interbank transactions in the retail forex
forex market market

Wholesale forex market

• Wholesale forex market is called as

interbank forex market
• Where currencies traded between banks
(including commercial banks, central
banks)

21
 6/14/24

Wholesale exchange rate

• Applied in transactions between banks

• Transaction speed in wholesale market is
extremely fast so the wholesale exchange rate
also constantly fluctuates
• Bid – ask spread in the wholesale market is very
small (1 to some pips)
• Transactions in the wholesale market have very
large trading volumes

Retail forex market

• Where the currencies traded between

banks – its customers; individual
investors, firms
• Transactions in the retail market have
small trading volume comparing with
ones in the wholesale market

22
 6/14/24

Retail exchange rate

• Retail exchange rate is determined

based on the wholesale exchange rate
• The retail exchange rate’s fluctuation is
more stable than the wholesale
exchange rate’s
• Bid – ask spread in the retail market is
larger than in the wholesale market

Module 3.
Cross exchange rates

23
 6/14/24

Cross exchange rate

● Definitions of cross exchange rate

● How to determine the cross exchange rate

Cross exchange rate definition

• Cross exchange rate is the exchange rate
that determined through a intermediate
exchange rate or a intermediate currency
(3th currency)
• USD is usually the 3 currency used to
determine cross exchange rate

24
 6/14/24

Cross exchange rate

Simple cross exchange rate Bid – ask cross exchange rate

Only one exchange rate Including bid exchange rate and

ask exchange rate
USD/VND: 23,400
USD/JPY: 134.80 USD/VND: 23,400 – 23,445
USD/JPY: 134.80 – 135.15

E(JPY/VND) =?
Eb(JPY/VND) – Sa(JPY/VND)=?

Simple cross exchange rate

USD/VND: 23,400 !"# ()& ()&

$%&
= $%&
/ !"#
USD/JPY: 134.80

E(JPY/VND) =? E(JPY/VND) = E(USD/VND) / E(USD/JPY)

E(JPY/VND) = 23,400 / 134.80 = 173.59

25
 6/14/24

Bid – ask cross exchange rate

USD/VND: 23,400 – 23,445

What is the exchange used USD/JPY: 134.80 – 135.15
if a customer sell JPY to this
bank for VND?

Eb(JPY/VND) =?

Determine the bid cross exchange rate

Step 1:
The customer uses his JPY
to buy USD from the bank USD/VND: 23,400 – 23,445

What is the applied USD/JPY: 134.80 – 135.15

exchange rate?

Step 2: Step 3:
The customer sells the amount of USD
that he’ve just bought to buy VND JPY USD USD
= ∶
What is the applied exchange rate?
VND VND JPY

26
 6/14/24

Bid – ask cross exchange rate

USD/VND: 23,400 – 23,445

What is the exchange used
USD/JPY: 134.80 – 135.15
if a customer using his VND
to buy JPY from the bank?

Ea(JPY/VND) =?

Determine the ask cross exchange rate

Step 1:
The customer uses his VND
to buy USD from the bank USD/VND: 23,400 – 23,445

What is the applied USD/JPY: 134.80 – 135.15

exchange rate?

Step 2: Step 3:
The customer uses the amount of
USD that he’ve just bought to buy JPY USD USD
JPY = ∶
VND VND JPY
What is the applied exchange rate?

27
 6/14/24

The bid -ask cross exchange rate

Scenario 1: USD is the base currency in both exchange rates

USD/X: a–b ! $%& $%&

= :
" " !
USD/Y: c–d

Sb(X/Y): Sb(USD/Y) : Sa(USD/X) = c : b

Sa(X/Y): Sa(USD/Y) : Sb(USD/X) = d : a

The bid -ask cross exchange rate

Scenario 2: USD is the quote currency in both exchange rates

! ! "
X/USD: a–b
"
= $%&
: $%&
Y/USD: c–d

Sb(X/Y): Sb(X/USD) : Sa(Y/USD) = a : d

Sa(X/Y): Sa(X/USD) : Sb(Y/USD) = b : c

28
 6/14/24

The bid -ask cross exchange rate

The spot exchange rate list of a
commercial bank is as follow: Calculate the following cross
exchange rates?
USD/VND: 23,400 – 23,445
Sb(EUR/VND) – Sa(EUR/VND)
EUR/USD: 1.0960 – 1.0990
Sb(JPY/VND) – Sa(JPY/VND)
GBP/VND: 29,635 – 29,950
Sb(GBP/EUR) – Sa(GBP/EUR)
USD/JPY: 134.80 – 136.40

The bid -ask cross exchange rate

The spot exchange rate list of a Calculate the following cross
exchange rates?
commercial bank is as follow:
Sb(GBP/CHF) –Sa(GBP/CHF)
USD/VND 23,200 / 23,300
GBP/USD 1.2674 / 1.2780 Sb(JPY/VND) – Sa(JPY/VND)
USD/JPY 107.25 / 108.10
Sb(EUR/AUD) – Sa(EUR/AUD)
AUD/USD 0.6765 / 0.6800
EUR/USD 1.1015 / 1.1030 Sb(AUD/VND) – Sa(AUD/VND)
USD/CHF 0.9910 / 0.9940
Sb(CHF/VND) – Sa(CHF/VND)

29
 6/14/24

Module 4.
Exchange rate risks

Module’s objectives

01 Explain the exchange rate risk

Assess the impacts of

02 exchange rate risk

30
 6/14/24

What is Exchange rate risk is unexpected fluctuation

exchange possibility in income of participants when

exchange rates changes

rate risks?

Exchange rate risks

• The exchange rate risk is caused by exchange rate fluctuations

• These risks is not completely avoidable but can be mitigated by using
derivative transactions such as forward, future, options
• It is the major risk for exporters, importers and other participants in
international trade
• There are 3 types of exchange rate risks: transaction risks, economic
risk, and translation risks

31
 6/14/24

Exchange rate risks

• Unpredictable fluctuation in exchange rate

can cause risks to to entities such as
importers, exporters by increasing their cost or
reducing their income
• For speculators and dealers, exchange rate
fluctuation creating opportunity to making
profit but also causes losses when
mispredicting the fluctuation

Exchange rate risk

“Opening forex position is the main cause of exchange rate risk”

32
 6/14/24

Forex position
• Forex position is amount of currency being owned by an entity
(Dealer, individual, commercial bank, etc. ) in the forex market

• Forex position of an entity is the difference between his assets

and liabilities in foreign currency at a given time

• To hedge the exchange rate risk, the forex position should be

squared

Transactions can change the forex position

Increase Decrease
• Buy currency • Sell currency
• Export • Import
• Loan foreign • Borrow foreign
currency currency
• Collect fees in • Payment fees in
foreign currency foreign currency

33
 6/14/24

Transactions can change the forex position

Increase Decrease
• Buy currency • Sell currency
• Export • Import
• Loan foreign • Borrow foreign
currency currency
• Collect fees in • Payment fees in
foreign currency foreign currency

Transactions can change the forex position

These are transactions take place at Bank A on date T:

Forex position Cash flow

Transaction
(USD) USD VND
Buy 10,000 USD @ S(USD/VND): 23,450
Sell 10,000 USD @ F31d(USD/VND): 23,550
Sign an export contract worth 15,000 USD,
payment in next 30 days
Loan 20,000 USD; 90 days at iUSD:
4.5%/year
Net forex position

34
 6/14/24

Transactions can change the forex position

Example: On 29th April 2023, there are some following transactions have taken at bank A. Let’s
record all forex positions and cash flow which created from such transactions.

No. Transaction

1 Buy spot 1,000,000 USD for its customer @ S(USD/VND): 23,500/600

2 Borrow the amount of VND to settle for the transaction (1); tenor: 30
days; iVND: 6.0%/year
3 Deposit the amount of USD receiving from transaction (1); tenor: 30
days; iUSD: 3.0%/year
4 Sell forward 1,000,000 USD for its customer @ F30d(USD/VND):
23,300/340

Transactions can change the forex position

Example: On 29th April 2023, there are some following transactions have taken at company A.
Let’s record all forex positions and cash flow which created from such transactions.

No. Transaction

1 Buy spot 1,000,000 USD for a commercial bank @ S(USD/VND): 23,250/500

2 Borrow the amount of VND to settle for the transaction (1); tenor: 30 days;
iVND: 6.0%/year
3 Deposit the amount of USD receiving from transaction (1); tenor: 30 days;
iUSD: 3.0%/year
4 Sell forward 1,000,000 USD to a commercial bank @ F30d(USD/VND):
23,300/340

35
 6/14/24

Regulations on forex position

● Circular No. 07/2012/TT-NHNN on March 20,

2012 on foreign currency position of credit
institutions and foreign bank branches
● The total positive/ negative foreign currency
position of credit institutions should not
exceed 20% of the own capital of credit
institutions

Exchange rate risk for

entities in the economy

36
 6/14/24

Exchange rate risk

for exporters
● Face to the exchange rate risk when exchange rate
decreases --> Their income is decreased when
exchanging to domestic currency

● Hedging risk by using derivative transactions such

as forward, option, future or swap

Exchange rate risk

for importers
● Face to the exchange rate risk when exchange rate
increases --> Their cost is increased when
exchanging to foreign currency (payment currency)

● Hedging risk by using derivative transactions such

as forward, option, future or swap

37
 6/14/24

Exchange rate risk for

commercial banks
● Commercial banks trade for their own behalf and as
broker for their customers

● Banks are at risk when their prediction about

exchange rate fluctuation incorrect

● Hedging risk by using derivative transactions such

as forward, option, future or swap

Thanks
CREDITS: This presentation template was created by Slidesgo,
including icons by Flaticon, infographics & images by Freepik
Please keep this slide for attribution

38
 2/17/21

FX SPOT TRANSACTION
1

1
 2/17/21

2
 2/17/21

4 1

3 2

3
 2/17/21

10

11

12

4
 2/17/21

13

14

Interbank Interbank Client

Client Bid Rate Ask Rate Ask Rate
Bid Rate

Spread

Spread
15

5
 2/17/21

Interbank Interbank Cash Ask

Cash Bid
Bid Rate Bid Rate Rate
Rate

Client Client
Bid Rate Ask Rate

16

17

Interbank Customer demand

Exchange Rate

Ø USD/VND: 23.230/35 à SELL USD

Ø EUR/USD: 1.1420/45 à BUY USD

Ø USD/JPY: 112.09/20 à SELL JPY

Ø GBP/USD: 1.2880/92 à BUY GBP

Ø GBP/AUD: 1.8211/18 à SELL AUD

18

6
 2/17/21

19

Spot Contract

Swifts/
Commodity
USD Chips

USD

20

The Society for Worldwide Financial Telecommunication

CHIPS Clearing House Interbank Payment System

CITAD
21

7
 2/17/21

22

23

24

8
 2/17/21

25

26

27

9
 2/17/21

28

ARBITRAGE

29

USD/VND 22.600 22.610 USD/VND 22.615 22.630

30

10
 2/17/21

31

32

33

11
 2/17/21

34

35

12
 2/19/21

FX FORWARD TRANSACTION

1
 2/19/21

2
 2/19/21

180
DAYS

90
DAYS
60
DAYS

3
 2/19/21

10

11

12

4
 2/19/21

13

14

15

5
 2/19/21

16

USD/VND Bid rates Ask rates

Spot 23,100 23,200
ON 23,103 23,204
1w 23,115 23,220
1m 23,140 23,260
3m 23,180 23,300
6m 23,200 23,350

17

EUR/USD Bid rates Ask rates

Spot 1.0640 1.0642
ON 1.0641 1.0644
1w 1.0642 1.0645
1m 1.0650 1.0653
3m 1.0683 1.0688
6m 1.0733 1.0738

18

6
 2/19/21

EUR/USD Bid rates Ask rates

Spot 1.0640 1.0642
ON 1 2
1w 2 3
1m 10 11
3m 43 46
6m 93 96

19

USD/VND Bid rates Ask rates

Spot 23,100 23,200
ON 3 4
1w 15 20
1m 40 60
3m 80 100
6m 100 150

20

USD/VND Bid rates Ask rates

Spot 22,700 22,707
ON 2 3
1w 13 17
1m 56 63
3m 189 202
6m 253 276

21

7
 2/19/21

USD/JPY Bid rates Ask rates

Spot 113.62 113.63
ON 8 6
1w 24 23
1m 89 83
3m 426 423
6m 927 915
12m 2,130 2,110

22

23

24

8
 2/19/21

25

26

27

9
 2/19/21

28

Spot rate
Interest
rate

Duration

Forward
Exchange Rate
29

30

10
 2/19/21

31

32

33

11
 2/19/21

34

35

36

12
 2/19/21

37

38

39

13
 2/19/21

40

41

FX Position Cash Flow Position

Transaction (USD) USD VND
1. Sign the forward contract to + 100,000
buy USD

Net Position 0 0 0

42

14
 2/19/21

43

44

FX Position Cash Flow Position

Transaction (USD) USD VND
1. Sign the forward contract
to buy 1 USD. Tenor: 1
year. Forward rate: Fb
2. Sell USD for VND in
Interbank Market @ Sb
3. Borrow USD for 1 year
in Interbank Market.
Interest: ia(USD)
4. Invest VND for 1 year in
Interbank Market. Interest:
ib(VND)
0 0 0 45
Net Position

15
 2/19/21

FX Position Cash Flow Position

Transaction (USD) USD VND
1. Sign forward contract to +1
buy 1 USD. Tenor: 1 year.
Forward rate: Fb
2. Sell USD for VND in " " Sb
− − +
[" + %& USD ] [" + %+ USD ] [" + %+ USD ]
Interbank market @ Sb
3. Borrow USD for 1 year ia(U SD ) 1
− +
[" + %& USD ] [" + %& USD ]
in Interbank market.
Interest: ia(USD)
4. Invest VND for 1 year in +
Sb
[" + %+ USD ]
Interbank market. Interest:
ib(VND)
Net Position 0 0 0 46

FX Cash Flow Position

Transaction Position
USD VND
(USD)

1. Exercise the forward +1 - Fb

contract
2. Pay off principal -1
and interest in USD
Sb[1 + $% VND ]
3.Receive principal [1 + ia USD ]
and interest in VND
Sb[. + /0 123 ]
Net Position 0 0 − 89
[. + /4 563 ]
47

48

16
 2/19/21

49

50

51

17
 2/19/21

FX Position Cash Flow Position

Transaction (USD) USD VND
1. Sign forward contract to
sell USD. Tenor: 1 year.
Forward rate: Fa
2. Buy USD in Interbank
market @ Spot rate: Sa
3. Deposit USD in
Interbank market. Tenor: 1
year. Interest rate: ib(USD)
4. Borrow VND in
Interbank market. Tenor: 1
year. Interest rate: ia(VND)
Net Position 0 0 0
52

FX Position Cash Flow Position

Transaction (USD) USD VND
1. Sign forward contract to -1
sell USD. Tenor: 1 year.
Forward rate: Fa
2. Buy USD in interbank +
1
+
1
−
S+
market @ Spot rate: Sa [1 + ib USD ] [1 + ib USD ] [1 + ib USD ]

3. Deposit USD in +
ib(USD)
−
1

Interbank market. Tenor: 1 [1 + ib USD ] [1 + ib USD ]

year. Interest rate: ib(USD)

4. Vay Borrow VND in +
Sa

Interbank market. Tenor: 1 [1 + ib USD ]

year. Interest: ia(VND)

Net Position 0 0 0 53

FX Cash Flow Position

Position
Transaction USD VND
(USD)

1. Exercise the forward -1 + Fa

contract
2. Receive principal and +1
interest in USD
3. Pay off principal and Sa[1 + &' VND ]
−
interest in VND [1 + i- USD ]

S1[2 + 31 456 ]
Net Position 01 −
0 0 [2 + 37 896 ]
54

18
 2/19/21

55

56

FPb(X/Y) = Sb(ibY − iaX)T FP#(X/Y) = S#(iaY − ibX)T

57

19
 2/19/21

58

59

60

20
 2/19/21

Ø Fixed cost Ø Eliminate profitable

Ø Reduce or eliminate exchange rate movements.
currency risk. Ø Irrevocable contract
Ø Control cash flow
effectively. 61

Ø Elimimate profitable
Ø Fixed income exchange rate movements.
Ø Reduce or eliminate market Ø Irrevocable contract.
risk

Ø Control cash flow effectively

62

63

21
 2/19/21

64

65

66

22
 2/19/21

67

68

• Difficult to find
partner (matching • Large spread
both value date and • Irrevocable contract
amount) • Margin requirement
• Eliminate profitable
exchange rate
movements.

69

23
 7/14/20

FX SWAP
TRANSACTION

1 2

3 4

1
 7/14/20

5 6

7 8

2
 7/14/20

9 10

BUY SELL
FX
POSITION
?
11 12

3
 7/14/20

SWAP

13 14

15 16

4
 7/14/20

17 18

19 20

5
 7/14/20

21 22

23 24

6
 7/14/20

25 26

27 28

7
 7/14/20

FX Cash flow position

Date Transaction Position USD VND
(USD)

16/06

Net position

16/09
Net position

29 30

31 32

8
 7/14/20

FX Cash flow position

DAT
Position
E Transaction USD VND
(USD)

16/06

Net position 16/06

16/09
Net position 16/09

30/09
33 34
Net position 30/09

35 36

9
 7/14/20

37 38

39 40

10
 7/14/20

41
42

43 44

11
 7/14/20

• Irrevocable contract
• Value date is fixed and
can’t changed.
• Eliminate the profitable
exchange rate movement • Spread forward rates
are large

45 46

12
 3/26/21

FUTURES
TRANSACTION
1

1
 3/26/21

2
 3/26/21

3
 3/26/21

CURRENCY CONTRACT SIZE

GBP 62.500
CAD 100.000
JPY 12.500.000
EUR 125.000
AUD 100.000
CHF 125.000

10

11

12

4
 3/26/21

13

14

15

5
 3/26/21

16

17

18

6
 3/26/21

19

20

21

7
 3/26/21

Exchange
Open account Investors
membership

Before trading Investors Exchange

membership

On trade day Investors Exchange

Exchange
membership

At the end of
trade day Clearing
house

T + 1 (day Exchange Clearing

after trade Investors membership house
date) …
Value date 22

Step Details
Step 1 Investor opens an account through exchange market
Step 2 Investor puts an initial margin into the account
Step 3 Exchange membership makes order (Buy/ sell according to
investor’s order)
Step 4 Confirm order
Step 5 Exchange sends results of deal to exchange membership and
Clearing house
Step 6 Exchange membership sends deal result to investor and call
margin. Clearing house executes mark to market
Step 7 Investor puts an Call margin into account
Step 8 Call margin or withdraw margin account balance
Step 9 Clearing house up to date the margin account balance

23

24

8
 3/26/21

25

26

Initial Margin Maintenance

Currency Contract Size
(USD) Margin (USD)
GBP 62.500 1.485 1.100
CAD 100.000 608 450
JPY 12.500.000 4.590 3.400
EUR 125.000 1.755 1.300
AUD 100.000 1.148 850
CHF 125.000 2.565 1.900

27

9
 3/26/21

28
28

29
29

30

10
 3/26/21

Deposit/ Margin
Mark to
Contract Contract withdraw account
Date GBP/USD market
size (GBP) value (USD) margin account balance
(USD)
(USD) (USD)
06/07 1,2960
06/07 1,2982
07/07 1,2963
08/07 1,2928
09/07 1,2943
10/07 1,2975

31

32

33

11
 3/26/21

34

35

36

12
 3/26/21

37

38

39

13
 3/26/21

40

41

42

14
 3/26/21

43

44

45

15
 7/14/20

1 2

3 4

1
 7/14/20

5 6

7 8

2
 7/14/20

9 10

USD/VND:
22.650

USD/VND:
22.800

USD/VND:
22.500
11 12

3
 7/14/20

13 14

15 16

4
 7/14/20

17 18

19 20

5
 7/14/20

21 22

23 24

6
 7/14/20

Get
premium

Get
obligation

25 26

27 28

7
 7/14/20

29 30

Anytime within period

Value date only 31 32

8
 7/14/20

• Expiration
date is the last day
the options
contract is valid. If
an investor chooses
Expiration not to exercise the
Date right, the options
expires and In the money - Call: Strike < Spot
becomes worthless.
(ITM) - Put: Strike > Spot

Underlying
Volume - Call: Strike P > Spot
asset Out of the money
(OTM) - Put: Strike < Spot
•Currency •Amount of the
trading currency

33 34

35 36

9
 7/14/20

Spot exchange rate

Buyer’s Profit/Loss
at expiry date
Increase sharply Get unlimited profit

Increase slightly
Loss (the loss < Premium)
(Spot rate < Strike + premium)
= Strike Max loss = Premium
Decrease sharply Max loss = Premium

37 38

39 40

10
 7/14/20

41 42

43 44

11