...Management Goldman, Sachs & Co. October 2008 Table of Contents Introduction to the FX Markets I Market Update II FX Hedging III Slide 2 Introduction the FX Markets Statistics FX is the largest / most liquid global market Daily Turnover Bid / Offer Number of securities FX Market 3.2 Trillion 4 bp (0.04%) 150 (40 actively traded) Bond Market 900 Billion 5 bp 2,000,000 Equity Market 400 Billion 15 bp 20,000+ Source: BIS (September, 2007) Slide 3 Market Dynamics Short Term Drivers of the Market Market sentiment Release of new data (economic and political) Equity and bond market performance Positions of market participants Central Bank intervention Options activity Hedging mechanism, and protection from a knockout level are reasons for heavy trading Technical analysis Slide 4 Market Dynamics Long Term Drivers of the Market Supply/demand Current account vs. capital account + reserves “Current account” associated with trade flows “Capital account” associated with investments and speculation “Reserves” associated with central bank activities FX and Interest Rate policies are closely linked Purchasing Power Parity (PPP), e.g. the Economist Magazine’s “Big Mac” index Central Banks Mission is to preserve economic stability, in particular to preserve price stability Interest rates can drive FX markets... “Interest Rate Defense”: Raising interest rates can attract foreign investment & support...
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...Giddy Forwards, Futures and Money-Market Hedging/1 Forwards, Futures and Money Market Hedging Prof. Ian Giddy New York University Hedging Transactions Exposure Types of exposure l One-shot exposure l Hedging approaches: l u Open u Forward u Money market u Futures u Options l Ongoing transactions exposure Forwards, Futures and Money-Market Hedging 7 Copyright ©1997 Ian H. Giddy Giddy Forwards, Futures and Money-Market Hedging/2 Tools for Hedging l Petrobras has to pay for equipment from Japan, in Japanese yen, in 3 months u Borrow and pay now? u Use a forward contract/FX swap? u Pay later at spot? Copyright ©1997 Ian H. Giddy Forwards, Futures and Money-Market Hedging 8 Forward Contracts, Futures and Money Market Hedging Money market hedging: match currency of assets and liabilities l Forwards: OTC agreement to exchange currencies at certain exchange rate in the future l FX swap: simultaneous spot sale and forward purchase of a currency l Futures: Exchange-traded contracts for notional future delivery, minimizing default risk via marking-to-market l Copyright ©1997 Ian H. Giddy Forwards, Futures and Money-Market Hedging 9 Giddy Forwards, Futures and Money-Market Hedging/3 Forward Contracts Agreement to exchange currencies at certain exchange rate in the future l Default risk in forward contracts arises because such a contract is a commitment for future performance, and one or other party may be unwilling or unable...
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...FX Spot Trading and Risk Management from A Market Maker’s Perspective by Mu Yang A thesis presented to the University of Waterloo in fulfilment of the thesis requirement for the degree of Master of Quantitative Finance Waterloo, Ontario, Canada, 2011 c Mu Yang 2011 Author’s Declaration I hereby declare that I am the sole author of this thesis. This is a true copy of the thesis, including any required final revisions, as accepted by my examiners. I understand that my thesis may be made electronically available to the public. ii Abstract Due to the rapid development of computing technology and faster growth of financial industry, Foreign Exchange high-frequency trading has become substantially more prominent to today’s market players, especially to bankers and market makers. This research aims at introducing today’s FX high-frequency trading structure and discussing how a market maker can effectively reduce downside risk when market faces a huge upward or downward stress. An Exponential Moving Average operator is introduced and implemented using a Matlab software for tick-by-tick data analysis. Simulation framework for market high-frequency data and client trading flow is also introduced and implemented using the Matlab software. Real-time P&L calculation is introduced and used to determine the performance of a proposed risk hedging strategy. On the other hand, due to the financial crisis we experienced in 2007, 2008, and 2009, we analyze the tail risk of foreign exchange...
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...Giddy | Hedging 1 Hedging Techniques Dr. Ian Giddy New York University Techniques of Hedging A brief comparison of hedging tools Forwards, futures, swaps Asset-liability matching Pricing and linkages among the tools Uses and abuses of options When to use, and when not to use Copyright ©2009 Ian H Giddy 4 Giddy | Hedging 2 What Hedging Instruments? What Protection Needed? Volatility & Direction Direction Complex risks Or arbitrage Exotics, Hybrids, structured notes OTC options, Caps and Floors Forwards, Futures, Swaps Copyright ©2009 Ian H Giddy 5 Tools for Hedging Petrobras has to pay for equipment from Japan, in Japanese yen, in 3 months Borrow and pay now? Use a forward contract/FX swap? Pay later at spot? Copyright ©2009 Ian H Giddy 6 Giddy | Hedging 3 Forward Contracts, Futures and Money Market Hedging Money market hedging: match currency of assets and liabilities Forwards: Agreement to exchange currencies at certain exchange rate in the future Futures: Exchange-traded contracts for notional future delivery, minimizing default risk via marking-tomarket Currency swap: match payments on foreign-currency debt Interest-rate swap: change floating cost to fixed Copyright ©2009 Ian H Giddy 7 A Typical Forward Exchange Contract We agree today to pay a certain price for a currency in the future JPY Sony Sony B of A B of A Copyright ©2009 Ian H Giddy 8 Giddy | Hedging 4 Forward Quotations ...
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...Hedging FX Exposures: Which Strategy is Right for Your Business? This article addresses foreign exchange (FX) risk, examines a large Swiss multinational company and the impact on its financial statements (second half of 2011), and suggests various hedging strategies using FX options. Udi Sela - Vice President - Numerix - 27 Oct 2011 Since the sub-prime crisis, the markets have witnessed unprecedented levels of volatility across all asset classes. The impact of unpredicted volatility could be significant for the core businesses of corporations across the globe. In response, various hedging strategies were prepared towards the end of August 2011, and subsequently measured the performance of all strategies six weeks later (the beginning of October 2011). The FX Market: Facts and Figures The foreign exchange (FX) market is the most liquid market today, serving a crucial role in facilitating international trade. According to the latest Bank of International Settlements (BIS) survey, published in April 2010, the market’s daily volume is US$4 trillion. This represents a 20% growth rate, as compared to April 2007 when the previous survey was carried out. Over the same period, FX derivatives volume has increased by 9%. Interestingly, the market has become more global as the cross-border trading represents now 65% of all FX trading. Corporations Hedging A new survey shows that 94% of the world’s largest corporations report using derivatives to manage business and macroeconomic...
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... Foreign Exchange Risk Management Introduction Foreign exchange (FX) is a risk factor that must be considered by all firms that wish to enter, grow, and succeed in the global marketplace. Although most U.S. exporters prefer to sell their goods in U.S. dollars, creditworthy foreign buyers are increasingly demanding to pay in their local currencies (“Foreign Exchange Risk Management”, n.d.). Therefore, this currency exchange adds risk to any global trade that must be accounted for and managed, for a firm to remain competitive in the global marketplace. Definitions Foreign Exchange Risk Before we begin our discussion, we must define a working definition of foreign exchange risk. Global commerce is facilitated through foreign exchange markets. These markets affect global commerce in two ways. First, importers exchange their domestic currency for foreign currency, in order to purchase international goods. Second, multinational companies exchange profits earned in foreign currencies for domestic currency to use in their home nation. The foreign currency exchange market is made up of corporations, governments, and private individuals who trade international currencies among themselves (Bofah, n.d.a). The exchange rates for currency pairs such as the United States (U.S.) dollar and the Euro (USD/EUR), are set by trades among market participants based on factors associated with the economic and political environment that exist in the...
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...exchange market 1. Introduction In 2010, the debt crisis caused the euro to go down 10% in a three-month period. Some largest hedge funds in America discovered this opportunity and short euro in groups to an enormous scale. Later on, the British pound is being infected. It continuously dropped for six days, which wrote the longest dropping period record. In this paper, the objective is to critically analyse how the European sovereign debt crisis affects foreign exchange markets. The theme focuses on the contagion on the markets. The contagion phenomenon exists between foreign exchange spot and derivative markets. One of the channels is the investor sentiment, which makes large scale of influences on both markets and volatility dynamics (Corredor, P., Ferrer, E., Santamaria, R., 2015). It makes sense on aspects like trading volume, effective transaction costs and so on. This paper has two main parts. The first part is to evaluate impacts on foreign exchange spot market through analysing the political channel, bank channel and financial markert channel. The second part is to investigate impacts on foreign exchange derivatives, especially on the foreign exchange swap. 2. Contagious impact on the foreign exchange market 2-1 Impacts on foreign exchange spot (impacts on euro) In this part, we explain how the debt crisis makes impacts on the foreign exchange spot market, especially, we focus on the exchange rate of euro against dollar. In FX spot market, two parties...
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...Best Buy enters India by Francisco Polo Professor Hamid Assar International Finance – FIN535 May 22, 2012 Summary Best Buy Co., Inc. is an American specialty retailer of consumer electronics in the United States, accounting for 19% of the market. It also operates in Puerto Rico, Mexico, Canada and China. The company's subsidiaries include Geek Squad, CinemaNow, Magnolia Audio Video, Pacific Sales, and, in Canada operates under both the Best Buy and Future Shop label. Together these operate more than 1,150 stores domestically and internationally. In addition, the company operates over 100 Best Buy Express Automated Retail stores or "ZoomShops", operated by Zoom Systems, in airports and malls around the U.S. The company is headquartered in Richfield, Minnesota, United States. On March 9, 2009, Best Buy became the largest electronics retail store (online and bricks and mortar) in the eastern United States, after smaller rival Circuit City went out of business. Fry's Electronics remains a major competitor in the western United States, while Hhgregg remains competitive in the eastern United States. Many locations feature in-store pickup, which can be arranged through the company's website. As of December 28, 2008, the company operated 1,010 Best Buy Stores, 13 Magnolia Audio Video Stores (specializing in high-end electronics), 7 stand-alone Geek Squad stores, 3 Audio Visions Stores, 13 Best Buy Mobile Stores (standalone) and...
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...Part 2 Introduction China’s export growth and penetration have been remarkable. While China was basically a closed economy 30 years ago, it is now the leading exporter to Japan, the second leading exporter to Europe, and the third leading exporter to the US. This surge in exports has been accompanied by growing trade imbalances between China and the rest of the world. China’s global current account surplus equaled 9% of Chinese GDP in 2006 and 11% of GDP in 2007 (Thorbecke & Smith, 2010). These surpluses are primarily with the US and Europe. Due to these factors, the exchange rate policy of China has attracted a great deal of attention in academic, industrial and political arenas. With the emerging China economy as the largest reserve country and the largest “world factory”, the Chinese renminbi (RMB) exchange rate has been the centre of ongoing debate over the source of global current account imbalance, especially with the United States (Sato, Shimizu, Shrestha & Zhang, 2012). Since the direct peg to the dollar was ended in 2005, the RMB has continued its appreciation about 6% per year and enhanced flexibility over the past 7 years. However, appreciation pressure on the RMB remains intense and it is still debatable whether and to what extent the current level of the RMB exchange rate is overvalued or undervalued. Issues Political Influences One of the main reasons for the appreciation pressure on the RMB is the US’ claim that the Chinese government has made the...
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...will contribute in the preparation of financial and management accounting reports, risk policies compliance, trading and hedging monitoring/reporting. The incumbent will support the review and analysis of Treasury Finance initiatives relating to FX hedging activities, assist in liquidity risk management analytics and actively participate in Treasury projects. The incumbent will be liaising with Treasury Capital Project Management, Corporate Actuarial, Corporate and Investment Controllers, Derivatives Middle Office, Asset Liability Management, Variable Annuity Hedging, Treasury Operations, Corporate Tax, Corporate Law, Investments and Audit. Responsibilities: • Responsible for data gathering, data mining to support liquidity risk management analytics, including liquidity sensitivity analysis, assessment of stress testing scenarios, impact of different asset mix on liquidity, evaluation of collateral funding alternatives • Determine the impact of regulatory reforms on the company's collateral obligations and liquidity (Dodd Frank Act) • Support monthly and quarterly reporting associated with the Liquidity Risk Management Policy and FX Risk Policy • Contribute in the preparation of cash flow forecasts and FX exposure forecasts • Support the maintenance of the FX VaR model and FX model back-testing • Prepare trade requests for FX Forwards to hedge net investment in foreign operations and ensure compliance with hedge accounting requirements • Support...
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...Executive Summary With the world demand for oil and gas is increasing and likely to increase further and as a developing country creating a best way to produce oil and gas to the unlimited demand. Petroliam Nasional Berhad(PETRONAS) has decided to analyse its business venture in three different countries all over the world. The countries are United States, China and Russia. Investing in international country may give out some financial risk. This paper is discussing the method Petronas can use to overcome all the financial risk in United States, China and Russia. A study on the derivative market of all the three countries is done to measure the risks and to know the ways to overcome the risks. Besides, this paper also discusses the taxation of every each country and how Petronas can minimize the tax burden. At the end of this paper, a conclusion is made (based on the criteria mention above) to which country to invest with different proportion. 1.0 Company Background and Risk Profile 1.1 Introduction to Oil and Gas industry in Malaysia Malaysia is one of the largest net exporters of oil and gases its region and the world. They have many gas and oil deposits on land and in the oceans surrounding the country. The country produces almost 2% of the world’s natural gas and nearly 13% of the world’s liquefied natural gas (LNG) and is ranked 25th in oil production in the world producing more than 750,000...
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...negative implications at the bottom line of the corporate, banks, FI and trading houses P&L A/cs. That is something risk management struggles with, say the experts. In Richard Meyers’ estimation, risk managers or traders do not socialize enough. “It’s all about visibility,” he said. Meyers, chairman and CEO of Richard Meyers & Associates, a talent acquisition and management firm in New Jersey, relates the story of a firm that decided to adopt an Enterprise Risk Management (ERM) strategy. Instead of appointing its risk manager to head ERM, the company brought in someone else. Why? Time has come when organizations across the world have to do deep amendments in their Enterprise Risk Management (ERM) policies covering foreign exchange hedging programs, diversification in derivatives portfolio, Enterprise risk management policies and deeper and deeper understanding towards financial models. With this background paper would...
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...who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that Aspen hedge completely its exposure but after “natural hedging”, which we recommend increasing thanks to the larger financial capacities allowed by its IPO. Using options for aggregated positions (by estimating yearly sales per currency),rather than having multiple forwards contracts, seems reasonable becauseit would enable the company to benefit from good moves in the currency exchange rates, to pay less in transaction costs because of the larger amounts and at the same time use its current human resources (limited hedging skills) by avoiding complex, expensive products. Business and Marketing Strategy Aspen Tech’s business strategy and marketing strategy create financing needs due to the position Aspen puts itself in with its customers. Aspen allows installment payments that hurt the company’s cash flows and in turn require...
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...be managed by experts on an integrated basis with other financial risks and overseen by the financial risk management committee. This case study explains how organisational changes, combined with the introduction of risk management technology, enabled the organisation to plan and execute a consistent, cost-effective hedging strategy, with reduced counterparty risk exposure levels, improved transparency and stronger levels of control. Coca-Cola Hellenic Bottling Company (Coca-Cola HBC) is the world’s second largest bottler of the Coca-Cola Company’s products and the largest in Europe. Net sales revenue for fiscal 2012 was €6.8bn. Coca-Cola HBC is headquartered in Zug, Switzerland, and has a premium listing on the London Stock Exchange and a secondary listing on the Athens Exchange. It serves approximately 581m people in 28 countries. The company decided to concentrate its commodity market risk management within the treasury department, in response to high levels of profit and loss (P/L) volatility and the relatively high credit risk with its suppliers. The ensuing project involved change management for transfer of the company’s commodity risk hedging to treasury, the selection and implementation of a new technology solution and putting in place a reporting environment that would provide the necessary levels of understanding to support decision taking in line with the organisation’s risk appetite. The project described below won the risk management award in the 2013...
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...of global FX markets o Floating exchange rate regime – the exchange rate for a country is allowed to move as factors of supply and demand o AUD, USD, GBP, JPY, EUR o Not controlled by government or central bank (though it can influence the exchange rate when there is rapid appreciation or depreciation i.e. slow it down) o Managed float regime – allows currency to move within a defined range relative to another currency o Crawling peg regime – allows the currency to appreciate gradually over time but within a range established by the government o Pegged rate – currency directly linked to another country Discuss participants in the FX markets o FX dealers and brokers o Central banks – influence exchange rate, change composition of holdings of foreign currencies in managing official reserve assets, purchase foreign currency to pay government imports and interest on or redeem government debt o Firms conducting international trade o Exporters – sell foreign currency and buy AUD o Importers – buy foreign currency and sell AUD o Investors and borrowers in the international money markets and capital markets – investing overseas o Foreign currency speculators – anticipate future rates to make a profit o Arbitrageurs – no risk exposure; o Geographic – taking advantage of when two dealers in different locations quote different rates on same currency o Triangular – taking advantage of when 3 or more currencies are out of alignment Describe the functions and operations of FX markets o Operates...
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