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Part 3
FOREX TRADING
PROFESSIONAL
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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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1. Concept
An FX spot transaction is a deal in which two
counterparties exchange two difference currencies
at an agreed exchange rate for settlement in two
business days time.
Deal date: t
Value date: t + 2
Spot rate = current market rate
Spot contract: the counterparty, currencies, spot
rate, 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 fees
with value of $40, using a 100GBP note and get
change in JPY. Please indicate the amount of JPY
that customer get back on this transaction.
Knowing: USD/JPY: 120.21 32 GBP/USD: 1.7843
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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 TWD
customer 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 500
million home currency. While companies must pay
Import goods, value of 59,000, at sight. What is total
balance 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 specified
amount 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 100.000
USD from Company B in Switzerland, post pay
3 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 certain
future 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 Forward
Quote
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
) ( ) ( n FC IR VND DR S
S F
b
b b

+ =
[ ]
36000
) ( ) ( n FC DR VND IR S
S F
s
s s

+ =
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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 million, paid to Co.
B delay 3mth. Co A signed forward contracts with banks to
avoid 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 more
month. Determine amount arising for this transaction.
Given, Spot GBP/USD 3 months later is 2.1018 25, 1-month interest
rate: 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. A
needed 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 one
currency for a series of currency in another
currency over a specified period of time.
Decision No. 1452/2004/Q-NHNN dated
10/11/2004
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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 SGD
Z 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 services
used for the production and business activities of customers;
2. Lending for early repayment of foreign loans if loans satisfy
following conditions:
compliance with borrowing and payment of foreign loans in
accordance 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 on
investment and guidelines issued by State Bank of Vietnam
Who can borrow FCY? (Decision
09/2008/QD-NHNN)
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V. Futures Operation
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Definition
A futures contract is an agreement between two
parties to buy or sell an asset at a certain time in
the 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 price
fluctuation, 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 liffe
www.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 or sell 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.
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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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