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Part 3FOREX TRADINGPROFESSIONAL

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Spot operations

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1. Concept

Spot Transaction

An exchange of one currency for another

with settlement in two business days

Spot rate = current market rate

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=


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1. Concept

An FX spot transaction is a deal in which twocounterparties exchange two difference currenciesat an agreed exchange rate for settlement in twobusiness days time.

Deal date: t

Value date: t + 2Spot rate = current market rate

Spot contract: the counterparty, currencies, spotrate, amounts, trade date, value date, charges.

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Minh hoa

On 07.08.2006, Customer A purchase

$100,000 from Dong A Bank, given:

Exchange rate USD/VND 7/8 :16246-16248

Exchange rate USD/VND 9/8 :16243-16245

Determining VND A to pay for Bank

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Exercise

A customer go to Bank of Tokyo to pay some feeswith value of $40, using a 100GBP note and getchange in JPY. Please indicate the amount of JPYthat customer get back on this transaction.

Knowing: USD/JPY: 120.21 32 GBP/USD: 1.7843 55

A. 16,655.8976 JPY

B. 16,670.3340 JPY

C. 16,640.6703 JPY

D. 16,655.0955 JPY

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Exercise exchange market has the following information:

EUR/USD: 1.3161 64

USD/TWD: 32.9882 89

Buy 27000 EUR by TWD. Amount of TWDcustomer pay:

A. 1,172,514.6238

B. 1,172,263.1867

C. 1,172,225.7905

D. 1,172,517.8749

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Exercise Gilimex company export clothing value of 75,000.

Balance in the account are 565,000, $24,500 and 500million home currency. While companies must payImport goods, value of 59,000, at sight. W hat is totalbalance of local currency?

Info:

GBP/USD = 1.7347 52

EUR/USD = 1.1688 91

USD/JPY = 117.45 50

AUD/USD = 0.7302 06

USD/VND = 19100 150

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Forward operations

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Concept FX forward contracts are transactions in which

counterparties agree to exchange a specifiedamount of different currencies at some future

date, with the exchange rate being set at the

time the contract is entered into.

The user is protected from adverse movements

in future FX rates, but he also does not benefit

from favorable movements.

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Illustration

Company A in Australia import goods 100.000USD from Company B in Switzerland, post pay3 months. So company A buy the above amount

from Maybank and Bank offered AUD/USD =

0,7300. Know that:

Exchange rate on trade date: AUD/USD = 0,7302/06

Exchange rate on maturity date: AUD/USD =0,7289/95

?? Value date.

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1. Technical terms Forward rate

Forward FX contract: Trade date (deal date t) ,counterparties, currencies, Amounts, Forward rate,maturity date (t+n), value date (t+n+2), charges.

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1. Concept

A binding obligation to buy or sell a certain amount of

currency at a pre-agreed rate of exchange on a certainfuture date.

Example: a Three-months GBP/USD forward contract

Deal date: 10 May 2005

Maturity date: 10 August 2005

Forward rate: 1.8900

ABC company to sell: 1,000,000

ABC company to buy: $1,890,000

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2. Calculation of a ForwardQuote

Formula 1:

F= S(1+nrB)/(1+nrA) In which:

F:

S:

rB:

rA:

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2. Calculation of a Forward Quote

Cach tnh ty gia ky han:

Forward Rate = (Spot rate) + / - (Forward points)

Forward points: discount/premium

F= S + S.N. [LS(B) LS(A)]

Formula 2:

Fm=Sm + Sm.N.[LSTG(B) LSCV(A)]

Fb= Sb + Sb .N.[LSCV(B) LSTG(A)]

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Example 1

USD/SGD = 1.3420 25

USD: 4.5 5%/annum

SGD : 5.15 6%/annum Calculate 3 month Forward USD/SGD

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Example 2

GBP/USD = 1.2195 01

USD: 3 3.5%/year

GBP: 4 4.5%/year

Calculate 86 day Forward rate GBP/USD

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2. Determination of Forward rate

[ ]36000

)()( nFCIRVNDDRSSF b

bb

+=

[ ]36000

)()( nFCDRVNDIRSSF s

ss

+=

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Clause 2, Decision 65/1999/QNHNN Decision 679/2002/QNHNN dated 1/7/2002 Decision 648/2004/QNHNN Formula of Commercial banks in VN:


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1/1/08: GBP/USD: 2.0110 15

Interest rate 3month term: GBP: 3 4.5% pa

USD: 2 3.5% pa

Co. A has an import contract value of GBP 1 mil lion, paid to Co.

B delay 3mth. Co A signed forward contracts with banks toavoid exchange risk.A. Co. A would like to cancel the forward contract. Determine

amount arising for this transaction. Given: Spot GBP/USD 3 month later is 2.1018 25.

B. 3 months later, Co. A want to extent this contract for one moremonth. Determine amount arising for this transaction.

Given, Spot GBP/USD 3 months later is 2.1018 25, 1-month interestrate: GBP: 3.95 5.25%pa, USD: 3.5 4.25%/pa

C.After 2 months, Co. B deliver G&S early to Co. A so Co. Aneeded GBP amount to pay Co. B.Determine amount arising for this transaction.

Given, Spot rate GBP/USD: 2.0180 90, 1-month interest rate: GBP:3.75 5.15%/pa, USD: 3 4%/pa.

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IV. Swap operations

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1. Concept Currency swap is a arrangement between two

parties to exchange a series of cashflows of onecurrency for a series of currency in anothercurrency over a specified period of time.

Decision No. 1452/2004/Q-NHNN dated10/11/2004

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Forward Exchange Swaps - FX Swaps Two opposite exchange transactions, one spot deal and one forward deal,

entered into at the same time for different value dates.

Example: ABC Company requests to sell USD1,000,000 against VND value spot,

and Buy USD1,000,000 against VND in 3 months time.

USD/VND 16000

3mth 81 - 96

- Today: ABC sell USD1,000,000 buy VND at 16,000- 3 months later: ABC buy USD1,000,000 sell VND at 16,096

Example 1 ABC Company requests to sell GBP1,000,000 for

USD value spot, and Buy GBP 1,000,000 for

USD three months forward.

GBP/USD 1.9023 - 1.9025

3mth 152 - 145

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Example 2 ABC Company requests to sell USD1,000,000 for

GBP value spot, and Buy USD 1,000,000 for

GBP three months forward.

GBP/USD 1.9023 - 1.9025

3mth 152 - 145

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Model

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A Bank B Bank C

Borrow SGD

Spot sell X USD

Forward buy X USD

Y SGDZ SGD

In Vietnam Decision No. 893/2001/Q/NHNN dated 17 /7 /2001

Decision No. 679/2002-Q/NHNN dated 01/7/2002

Decision No. 1452/2004/Q-NHNN dated 10/11/2004

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1. Lending for the foreign payment of imported goods and servicesused for the production and business activities of customers;

2. Lending for early repayment of foreign loans if loans satisfyfollowing conditions:

compliance with borrowing and payment of foreign loans inaccordance with forex control regulations borrowers are capable to repay the principals and interests in

foreign currency and saving the expenses for loan funds compared with the foreign

loans;

3. Direct investment overseas in accordance with regulations oninvestment and guidelines issued by State Bank of Vietnam

Who can borrow FCY? (Decision09/2008/QD-NHNN)


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V. Futures Operation

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Definition

A futures contract is an agreement between twoparties to buy or sell an asset at a certain time inthe future for a certain price.

Traded on an organized exchange Follows a daily settlement procedure with margin

requirements. The exchange specifies certain standardized

features of contracts such as quantity, quality,delivery months, delivery dates, minimum pricefluctuation, daily price limit.

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Major Futures Exchanges

Chicago Board of Trade (CBOT) www.cbot.com

Chicago Mercantile Exchange (CME) www.cme.com

LIFFE (London) www.liffe.com

Euronext = (9/2002, Merger of Amsterdam, Brussels and

Paris formed Euronext)Acquired liffewww.euronext.liffe.com

Eurex (Europe)

BM&F (Sao Paulo, Brazil)

TIFFE (Tokyo)

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Currency derivatives(options)

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A currency option gives the holder of the

option

the right but not the obligation

to buy orsell a specific amount of currency

at a specific exchange rate

on or before a specific future date

Strike or

exercise

price

Expiry date

Exercise date

Maturity

Concept

Call

Put

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Concept

For this right, the buyer typically pays a fixed price

which is referred to as the option premium

The seller of the option, correspondingly has the

obligation to meet the financial responsibilities in

the event the buyer decides to exercise this right

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Options Option contract:

Trade value,

Type of option, Counterparties,

Direction,

Currencies,

Amounts,

Strike price,

Premium cost,

Maturity date (expriry date),

Value date.34

Some related terms

option buyer

option seller - writer

underlying asset

Strike Price

volume: standardised.

Maturity: tenor

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Call and Put Two basic types of options:

A call option is the right to buy

A put is the right to sell

Two sides to an option contract

long position

short position

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To evaluate an option based on:

current market conditions

as well as

expectations about future conditions...

Option Pricing

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Example of FX Option (Vanilla)...

EUR CALL/ USD PUT, European Style

Spot Lvl: 1.1935 USD/EUR

Expiry: In 4 Months time at 3pm Tokyo time

Forward Lvl: 1.2030 USD/EUR

Strike: 1.2030 USD/EUR

Amount: EUR 2,000,000.00

Premium: 2.8 % of the EUR amount

(i.e. EUR 56,000)

OPTION PREMIUM

CALL EUR & PUT USD

AMERICAN STYLE

VOLUME: 100,000EUR

STRIKE (SPOT, AT THE MONEY):1.3670

EXPIRY 1 MONTH: FEE 3320USD

2 MONTH: FEE 3620USD

3 MONTH: FEE 3820USD

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Using options to speculate

Illustration CHF CALL/ USD PUT, American Style

Expiry: In 60 Days

Strike: 0.64 USD/CHF

Amount: CHF 62500

Premium: 0.02 USD/CHF

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CHF/USD 0.62 0.64 0.66 0.68 0.7

Option 1:Call Spot CHF

Option 2:Premium

Exercise Options

P/L

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Using options to speculate

Illustration of Put Options

Put EUR / Call USD

Volume: 62,500 EUR

Tenor: 60 days Strike: 0.64 USD/EUR

Premium: 0,02 USD/EUR

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