Forex
Content
Understanding FX
Quotes
BSC 4
Level Zero
Definition
Foreign Exchange is the simultaneous buying of one currency, and
selling of another currency at an agreed price today for an agreed
delivery date.
Currency of one country is like a commodity in another country
and can be bought or sold like any commodity
To buy or sell any foreign currency one will require a rate at which
it can be bought or sold.
December 26, 2005
Fx Trading: Why? Where? How?
Trade and Investment needs
For traveling abroad
For payment of admission fees of foreign universities or subscriptions to Magazines
abroad – foreign currency draft issue
Companies receiving payment In India in foreign currencies for export of goods or
services need to convert such payments to their home currency
Companies paying foreign businesses for import of goods or services
Speculation
Hedging
Where does trading takes place?
Foreign Exchange is traded over-the-counter (OTC), operating worldwide, 24 hours
a day. Trading tends to occur in a center during its normal working hours.
Main methods of trading
Direct Inter-bank trading
Voice brokers
Electronic trading systems
December 26, 2005
Exchange Rates
The first currency quoted in a currency pair is the Base/
Commodity currency and the second currency is the
Term/Reference currency
1 USD = 1.2356 CHF
‘Buy’ and ‘Sell’ rates are quoted simultaneously
USD / YEN is quoted as 110 / 112 (Bid and Offer)
The dealer, giving the quote will buy (bid) or sell (offer) 1USD
in exchange for Y110 and Y 112 respectively
1 USD = Y 110.00 (Buy) / 112.00 (Sell)
December 26, 2005
FX Quotes….
Spot
3 Months
6 Months
9 Months
12 Months
JPY
110 41/48
12/18
22/25
27/35
36/32
CHF
1.18 88/92
05/07
10/12
25/29
30/35
GBP
0.54 13/16
08/10
15/20
21/24
25/28
EUR
0.77 73/74
06/07
12/14
18/21
26/29
CAD
1.20 31/36
09/12
17/21
27/32
34/38
December 26, 2005
Commonly Used Terminology
Terms
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
Deal Parameters
¾Trade date
¾Type of deal (Spot, Forward,
etc…)
¾Deal direction (Bought / Sold)
¾Counterparty
¾Currencies
¾Exchange Rate
¾Amounts
¾Value Date
¾Payment Instructions
Bid
Offer
Big Figure
Pips
Spread
Spot Date
Value Date
Forward Date
Forward Points
Yours/ Mine – trade done
Given/ Paid – reports activity
Long
Short
Flat/ Square
Liquidity
December 26, 2005
FX Direct & Indirect Quotes
In International Markets, Base Currency is quoted in terms of Term
Currency
USD is considered as base currency in the markets world over.
FX Quotes are hence, quoted against US $ except following currencies
GBP
EUR
AUD
NZD
Above currencies are hence, quoted in terms of USD. For e.g. GBP/USD
Direct Quotes
1 USD = 110 JPY
1 GBP = 1.8 USD
Indirect Quotes
1 JPY = 0.009091 USD
1 USD = 0.55556 GBP
December 26, 2005
FX Cross Rates
Cross rates USD/JPY=120, EUR/USD=1.17 Î EUR/JPY = 140.5
If a bank quotes EUR/JPY = 145, what could you do?
1. Sell EUR to and get 145 JPY
2. Sell 145 JPY and get 1.2083 USD
3. Sell 1.2083 USD and get 1.0328 EUR, Your profit = 0.0328 EUR
If bank quotes EUR/JPY = 135, what would you do?
Arriving at bid/ ask cross rates
USD/JPY = 110.10/ 20, USD/INR = 45.30/ 35, INR/JPY = ?/ ?
GBP/USD = 1.8350/ 60, USD/CHF = 1.1890/ 95, GBP/CHF = ?/ ?
GBP/USD = 1.8350/ 60, EUR/USD = 1.2850/ 60, EUR/GBP = ?/ ?
December 26, 2005
Type of FX Trades
Cash Trade: Exchange of currency across the
counter
Spot Trade: Two parties agree to exchange
currencies on a spot date at a spot price (usually on
T+2)
Forward Trade: Two parties agree to exchange
currencies on a specific future date at a rate
decided today which is inclusive of forward margins
(premium/discount) on Spot rates.
Swap Trade – Two parties enters into a contract
whereby they agree to sell/buy one currency at a
spot price at a spot date and buy/sell the same
currency back at a future price at a future date.
Both Spot & Forward rates are agreed at the time of
trade. It could also be two forward trades.
December 26, 2005
Thank You…
December 26, 2005
Quotes
BSC 4
Level Zero
Definition
Foreign Exchange is the simultaneous buying of one currency, and
selling of another currency at an agreed price today for an agreed
delivery date.
Currency of one country is like a commodity in another country
and can be bought or sold like any commodity
To buy or sell any foreign currency one will require a rate at which
it can be bought or sold.
December 26, 2005
Fx Trading: Why? Where? How?
Trade and Investment needs
For traveling abroad
For payment of admission fees of foreign universities or subscriptions to Magazines
abroad – foreign currency draft issue
Companies receiving payment In India in foreign currencies for export of goods or
services need to convert such payments to their home currency
Companies paying foreign businesses for import of goods or services
Speculation
Hedging
Where does trading takes place?
Foreign Exchange is traded over-the-counter (OTC), operating worldwide, 24 hours
a day. Trading tends to occur in a center during its normal working hours.
Main methods of trading
Direct Inter-bank trading
Voice brokers
Electronic trading systems
December 26, 2005
Exchange Rates
The first currency quoted in a currency pair is the Base/
Commodity currency and the second currency is the
Term/Reference currency
1 USD = 1.2356 CHF
‘Buy’ and ‘Sell’ rates are quoted simultaneously
USD / YEN is quoted as 110 / 112 (Bid and Offer)
The dealer, giving the quote will buy (bid) or sell (offer) 1USD
in exchange for Y110 and Y 112 respectively
1 USD = Y 110.00 (Buy) / 112.00 (Sell)
December 26, 2005
FX Quotes….
Spot
3 Months
6 Months
9 Months
12 Months
JPY
110 41/48
12/18
22/25
27/35
36/32
CHF
1.18 88/92
05/07
10/12
25/29
30/35
GBP
0.54 13/16
08/10
15/20
21/24
25/28
EUR
0.77 73/74
06/07
12/14
18/21
26/29
CAD
1.20 31/36
09/12
17/21
27/32
34/38
December 26, 2005
Commonly Used Terminology
Terms
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
Deal Parameters
¾Trade date
¾Type of deal (Spot, Forward,
etc…)
¾Deal direction (Bought / Sold)
¾Counterparty
¾Currencies
¾Exchange Rate
¾Amounts
¾Value Date
¾Payment Instructions
Bid
Offer
Big Figure
Pips
Spread
Spot Date
Value Date
Forward Date
Forward Points
Yours/ Mine – trade done
Given/ Paid – reports activity
Long
Short
Flat/ Square
Liquidity
December 26, 2005
FX Direct & Indirect Quotes
In International Markets, Base Currency is quoted in terms of Term
Currency
USD is considered as base currency in the markets world over.
FX Quotes are hence, quoted against US $ except following currencies
GBP
EUR
AUD
NZD
Above currencies are hence, quoted in terms of USD. For e.g. GBP/USD
Direct Quotes
1 USD = 110 JPY
1 GBP = 1.8 USD
Indirect Quotes
1 JPY = 0.009091 USD
1 USD = 0.55556 GBP
December 26, 2005
FX Cross Rates
Cross rates USD/JPY=120, EUR/USD=1.17 Î EUR/JPY = 140.5
If a bank quotes EUR/JPY = 145, what could you do?
1. Sell EUR to and get 145 JPY
2. Sell 145 JPY and get 1.2083 USD
3. Sell 1.2083 USD and get 1.0328 EUR, Your profit = 0.0328 EUR
If bank quotes EUR/JPY = 135, what would you do?
Arriving at bid/ ask cross rates
USD/JPY = 110.10/ 20, USD/INR = 45.30/ 35, INR/JPY = ?/ ?
GBP/USD = 1.8350/ 60, USD/CHF = 1.1890/ 95, GBP/CHF = ?/ ?
GBP/USD = 1.8350/ 60, EUR/USD = 1.2850/ 60, EUR/GBP = ?/ ?
December 26, 2005
Type of FX Trades
Cash Trade: Exchange of currency across the
counter
Spot Trade: Two parties agree to exchange
currencies on a spot date at a spot price (usually on
T+2)
Forward Trade: Two parties agree to exchange
currencies on a specific future date at a rate
decided today which is inclusive of forward margins
(premium/discount) on Spot rates.
Swap Trade – Two parties enters into a contract
whereby they agree to sell/buy one currency at a
spot price at a spot date and buy/sell the same
currency back at a future price at a future date.
Both Spot & Forward rates are agreed at the time of
trade. It could also be two forward trades.
December 26, 2005
Thank You…
December 26, 2005
