1.–2. foreign exchange markets
DESCRIPTION
1.–2. Foreign Exchange Markets. International Financial Services Karel Bruna. 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 - PowerPoint PPT PresentationTRANSCRIPT
1.–2. Foreign Exchange Markets
International Financial Services
Karel Bruna
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
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
Foreign Exchange Markets Geography
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%
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%
USD in Foreign Reserves
The Circadian Rhythms of the FX Markets
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
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#
EBS Spot Electronic Broker
HotSpot FX
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%
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
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%
% 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
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%
Motivation for Transaction in Foreign Exchange Market
• change of purchasing power
• speculation
• hedging
• arbitrage
Exchange Rate QuotationEuropean quotation
outright quotation small figure
base currency
24,264 CZK/EUR
European quotationquoted currency
big figure
Exchange Rate QuotationAmerican quotation
outright quotation small figure
base currency
0,04122 EUR/CZK
American quotation quoted currency
big figure
Exchange Rate QuotationEuropean vs. American quotation
1European quotation BID = --------------------------------
American quotation ASK
1
European quotation ASK = --------------------------------
American quotation BID
Exchange Rate QuotationDirect quotation
base currency = foreign currency
18,534 CZK/USD
quoted currency = home
currency
Exchange Rate QuotationIndirect quotation
base currency = home currency
0,0540 USD/CZK
quoted currency = foreign currency
Exchange Rate Quotation
26,5346 26,5353 CZK/USD
26,5346/53 CZK/USD
46-53 CZK/USD
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
Cross rateEuropean quotation
USD/CHFcross rate rule GBP/CHF = --------------------
USD/GBP
USD/CHFBID
GBP/CHFBID = -------------------- USD/GBPASK
USD/CHFASK
GBP/CHFASK = -------------------- USD/GBPBID
Cross rateAmerican quotation
GBP/USDcross rate rule GBP/CHF = --------------------
CHF/USD
GBP/USDBID
GBP/CHFBID = -------------------- CHF/USDASK
GBP/USDASK
GBP/CHFASK = -------------------- CHF/USDBID
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
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 %