FORWARD RATE AGREEMENT (FRA)

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "FORWARD RATE AGREEMENT (FRA)"

Transcription

1 FORWARD RATE AGREEMENT (FRA) 1. Terminology Hedging with FRAs Determination of Forward Interest Rates (FRA) The Principle of Forward Interest Rates Highest and Lowest FRA Price Limits The FRA Formula Calculating FRA Rates through Fwd/Fwd Rates FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 1 of 18

2 FORWARD RATE AGREEMENT (FRA) The forward, or future rate agreement, is a contract between two parties to fix a future interest rate. This contract defines the interest rate for a future period based on an agreed principal. If on the agreed date (fixing date) the FRA rate differs from the current market rate (reference rate), a settlement payment depending on the difference must be paid by one of the contractors. The principal is not exchanged and there is no obligation by either party to borrow or lend capital. The FRA can be used by market participants who wish to hedge against future interest rate risks by setting the future interest rate today (Hedging). by market participants who want to make profits based on their expectations on the future development of interest rates (Trading). by market participants who try to take advantage of the different prices of FRAs and other financial instruments, e.g. futures, by means of arbitrage. FRAs are over-the-counter (OTC) products and are available for a variety of periods: starting from a few days to terms of several years. In practice, however, the FRA-market for 1-year FRAs offers the highest liquidity and is therefore also regarded as a money-market instrument. The FRA is not an obligation to borrow or lend any capital in the future. At settlement date, the principal just serves as the basis to calculate the difference between the two interest rates, or rather the settlement payment that results from this difference. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 2 of 18

3 1. Terminology On 10th January the following FRA is dealt: FRA 6/12 spot Principal: EUR 100 m FRA rate: 4½ % + 6 mo - 2 working days + FRA term t0 t1 t2 t3 t4 today value date spot 7/10 1/12 1/10 1/12 fixing date maturity date 7/12 settlement date t0 : trading date t1 : value date spot t2 : fixing date: the difference between contract rate and reference rate is determined 2 working days before settlement date. t3 : settlement date: the settlement payment is exchanged ("amount due") t4 : maturity date (final maturity): defines the end of the FRA period, there are no more payments to be made, but the exact term of the FRA is determined; final maturity settlement date = days of FRA term FRA rate The FRA rate is the interest rate stipulated in the contract, e.g. here 4½%. FRA term The FRA term is the period from settlement date until maturity date. For this period the interest rate has been fixed. E.g. the term of an 3/9 FRA is 6 months. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 3 of 18

4 Reference rate The reference rate is the rate which the FRA rate is compared to on the fixing date. The basis for the reference rate is agreed upon on the trade date. Usually for the main currencies (e.g. USD, GP, CHF, JPY, AUD, etc.) the LIOR calculated by A (ritish ankers Association) is used. For the EUR it is mostly EURIOR. For currencies where there is no LIOR calculated local fixings are used (e.g. WIOR for PLN, PRIOR for CZK, etc.). It has to be taken into account that all reference rates represent an offer side (LIOR, EURIOR, WIOR, etc.) and are therefore a rate for taking money (as market user), no matter if the FRA was traded in order to hedge a future borrowing or lending. FRA purchase (buy FRA) The buyer of an FRA receives the amount due if on the fixing date the reference rate is higher than the FRA rate. If the reference rate is below the FRA rate the buyer has to pay the amount due. An FRA can be purchased in order to speculate on rising interest rates in the future or as a hedge for a future short position in deposits and thus a protection against rising interest rates. FRA sale (sell FRA) The seller of an FRA receives the amount due if on the fixing date the reference rate is lower than the FRA rate. If the reference rate is above the FRA rate the seller has to pay the amount due. An FRA can be sold in order to speculate on falling interest rates in the future or as a hedge for a future long position in deposits and thus a protection against falling interest rates. Fixing date Usually the fixing date is 2 working days before settlement date. GP FRAs are settled on the same-day (not at value date after 2 days) and constitute therefore an exception. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 4 of 18

5 Amount due The amount due is the only cash-flow that exists in an FRA and is due on the settlement date. The amount due is determined by the difference between FRA rate and reference rate multiplied by the amount of capital times the FRA term and is discounted to the settlement date (because the calculation would be due on maturity date). The formula to calculate the settlement payment is: AD REF FRA VOL D 1 REF D AD REF VOL FRA D = amount due = reference rate (e.g. LIOR) in decimals = volume of the FRA (+ = buy; = sell) = FRA rate in decimals = number of days of the FRA term = day basis of calculation You have sold the following FRA: EUR 100 m FRA 3/9 at 4.50% Days of FRA (interest period): months LIOR at fixing date: 4.75 % What is the amount due? ,000,000 AD , You have to pay EUR 122, value settlement date. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 5 of 18

6 Quotation FRA terms are usually labeled by a slash (3/9) or by a dot (3 6). The FRA terms most commonly used are terms of 3, 6, 9, or 12 months. 1/4 1/7 2/5 2/8 3/6 3/9 3/12 6/12 6/18 9/12 9/15 9/18 12/18 12/24 Usual FRA periods As FRAs are OTC instruments the maturities and the periods of FRAs can be freely agreed upon by the counterparties. For the standard periods like 3, 6 and 12 months market liquidity is the highest. Generally also an FRA with a e.g. 5-months period (e.g. a 2/7 FRA) can be traded. Regarding the settlement date you have the following categories: Spot FRAs: the settlement date is exactely x full months after spot value roken dates: the settlement date is not exactely x full months after spot value IMM FRAs: the settlement date is a future maturity, i.e. on an IMM date (International Monetary Market). The IMM dates are always the 3rd Wednesday in March, June, September and December. Therefore IMM FRAs are a special kind of broken dates. trade date: Tue 22 nd Mar 2005 spot value: Thu 24 th Mar 2005 What is the term of a 3/6 spot, of a 3/6 over the 7th and of a 3/6 IMM FRA? 3/6 spot FRA: settlement: Fri 24 th Jun 2005 maturity: Mon 26 th Sep /6 over the 7 th : settlement: Tue 7 th Jun 2005 (=roken Date) maturity: Wed 7 th Sep /6 IMM: settlement: Wed 15 th Jun 2005 (3 rd Wed in June) maturity: Thu 15 th Sep 2005 FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 6 of 18

7 Excerpt from a Reuters page for EUR Spot FRAs: Market liquidity and spreads FRA-markets in USD, EUR and GP are the most liquid ones. As a rule: FRAs with MM futures-underlying low spreads (e.g. EUR 6/12, Quotation ) FRAs without MM futures-underlying greater spreads (e.g. HUF 6/12, quotation ) Regarding the maturity the liquidity of IMM FRAs is the highest followed by spot FRAs and broken dates. Therefore the spread for IMM FRAs is often only 1 P whereas for broken dates spreads of 3-5 P are common. Standard documentation The usual legal contract basis for FRAs are the so-called FRAA terms which are composed by the ritish ankers Association (A). FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 7 of 18

8 Credit risk (Risk of Default) of an FRA The FRA comprises no exchange of principal. Therefore, the only risk is the non-fulfillment of the amount due at settlement date (replacement risk). The credit risk is thereby limited to the difference between FRA rate and the locked-in reference rate at settlement date. The credit line (partner limit) used by an FRA is therefore usually between 1-5 % p.a. of the principal amount (with regard to the term of the FRA-period), from spot until settlement date. In addition one should also take into account the following factors: Period to settlement: the longer the period to settlement, the higher the risk that the reference rate differs strongly from the FRA rate which would lead to a higher amount due FRA period: the longer the FRA period, the stronger the impact of the interest rate differential on the amount due Volatility: the higher the statistical margin of deviation (=volatility), the higher the probability that the reference rate differs strongly from the FRA rate Ideally limit-systems guarantee a permanent mark-to-market-valuation plus an add-on factor for the remaining time until settlement which can be calculated with the Value at Risk (VAR) approach. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 8 of 18

9 2. Hedging with FRAs The main advantage of derivatives like FRAs is the separation of liquidity and interest rate risk. Thus the interest rate risk can be controlled more efficient, i.e. at more favourable prices (closer spreads) and by avoiding additional credit risk which would occur for controlling the interest rate risk with cash instruments. When hedging cash positions with derivatives you have to take into account that you always only hedge a reference rate (e.g. LIOR, EURIOR, etc.). For the total result the spreads to the reference rate that have to be paid in the cash market have to be considered. For example you cannot assume that you can lend at LIOR. For borrowings a premium on the LIOR (credit spread) has to be considered. Your position shows that you have to refinance EUR 100 m from 3 to 6 months. 3/6 FRA: % Your condition for refinancing: EURIOR + 25 P You are hedging your position with an FRA. What is your result assuming that the 3-months EURIOR in 3 months will be 4.25%? You have the risk that the 3-months EURIOR rises and therefore buy a 3/6 EUR FRA 100 m at 3.50% for hedging. After 3 months you refinance at the current rate of 4.50% (EURIOR credit spread). You receive a cash settlement of 0.75% (4.25%-3.50%). Thus your total result is 3.75% ( = cash rate amount due). The 3.75% can also be interpreted as: FRA rate + spread EURIOR (= ). FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 9 of 18

10 Your cash position shows a liquidity overhang from 3 to 6 months. You are hedging the interest rate by a 3/6 FRA sale at 3.46%. What is your result, assuming that you can lend cash at EURIOR - 5 P? The result will be 3.41% (= FRA rate spread EURIOR = ). The following table shows the result for different interest rate scenarios: EURIOR in 3 months 3.00% 4.00% 5.00% Interest rate for lending (E 5 P) 2.95% 3.95% 4.95% Amount due (FRA - E) +0.46% -0.54% -1.54% Result (lending + amount due) 3.41% 3.41% 3.41% Remaining risks when hedging with derivatives LIOR risk: As shown in the example, the result remains the same and is therefore independent of the LIOR resp. EURIOR level. ut only assuming, that the cash transaction can be done exactely at LIOR plus a certain spread. Thus you have the risk that the market rate (at which you lend or borrow cash) does not comply with the LIOR. (e.g. LIOR has been fixed at 11:00 a.m. at 3%, you make the refinancing at 1:00 p.m. and the market has changed to 3.05%) Liquidity risk: Assuming that interest rates are unchanged, you still have the risk that the spread (at which you can lend or borrow cash) changes. In the example a credit spread of 25 P is calculated (LIOR + 25 P). You have the risk that this spread increases up to + 35 P, for example. Here liquidity risk is the risk of higher refinancing costs due to a widening of the credit spreads (e.g. because of a worsening of your own credit rating or because the market asks for higher premiums for the same credit ratings). FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 10 of 18

11 3. Determination of Forward Interest Rates (FRA) 3.1 The Principle of Forward Interest Rates Forward interest rates can be derived from the current yield curve as you can always produce a forward deposit by means of 2 deposits with different terms. For example you can produce a forward borrowing from 6 to 12 months by borrowing for 12 months and lending for 6 months at the same time. The resulting interest rate depends on the costs resp. returns of the 2 deposits and therefore on the yield curve. Money market rates: 6 months: 4.00% 12 months: 4.50% How can you produce today the interest rate for a borrowing from 6 to 12 months? Answer: orrowing for 12 months at 4.50% and lending for 6 months at 4.00% at the same time Cash-flows: orrowing 12 mo at 4.50% Lending 6 mo at 4.00% today 6mo 12mo % 102 You have a positive cash-flow of +102 after 6 months (= borrowing of 102) and a negative cash-flow of after 12 months (= paying back the principle plus 2.5 interest rate). Interest of 2.5 for half a year based on a starting capital of 102 results in an interest rate of 4.90% p.a. (see above calculation). Thus the forward interest rate is 4.90%. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 11 of 18

12 3.2 Highest and Lowest FRA Price Limits The highest resp. lowest FRA price limits are determined by the forward rates. A future interest rate can be produced (as shown above) by means of 2 deposits (forward deposit). ut it can also be produced by means of derivatives, e.g. FRAs. oth interest rates have to be linked to each other; otherwise it would be possible to profit from the price differences without any risk (= Arbitrage). The theoretical highest resp. lowest FRA price limits can be derived from the money market cash forward rates. Determination of the highest FRA price limit The question is: At what rate can a FRA sale position be closed in the cash market? The FRA price has to be lower than that synthetic cash price. Otherwise you could sell the FRA directly in the market and close the position by a synthetic FRA purchase in the cash market at the same time. Money market rates: 6 mo % (180 days) 12 mo % (360 days) What is the highest FRA price limit of a 6/12 FRA with the given yield curve? With a sold FRA you can fix a rate for a future lending. Therefore the FRA sale is equivalent to a future lending. Thus this interest rate position can be closed by fixing an interest rate for a future borrowing (= synthetic FRA purchase = borrowing 12 months + lending 6 months). The highest FRA price limit is therefore defined by the price of a synthetic FRA purchase. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 12 of 18

13 Cash-flows: + spot (1) 100 (2) 1) borrowing 12 mo at 4.50% synthetic FRA 6/12 uy + 6 mo - 2) lending 6 mo at 4.00% (3) at % mo - 3) FRA sale at 4.90% same result for FRA 4.90% If the FRA can be sold above 4.90%, arbitrage is possible. Thus the highest FRA price limit is 4.90% and is equivalent to the price of a synthetic FRA purchase which can be produced by borrowing for the long period and lending for the short period (= take long + give short). Note: You have a remaining risk for the cash lending at LIOR in 6 months. In this example it is the risk at the FRA maturity date to give 6 months cash at LIOR (= LIOR risk). If you only get less, e.g. LIOR - 10 P, your result is reduced. Determination of the lowest FRA price limit Here the question is: At what rate can an FRA long position be closed in the cash market? The FRA price has to be higher than that cash price. Otherwise you could buy the FRA directly in the market and close the position by a synthetic FRA sale in the cash market at the same time. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 13 of 18

14 Money market rates: 6 mo % (180 days) 12 mo % (360 days) What is the lowest FRA price limit of a 6/12 FRA with the given yield curve? With a bought FRA you can fix a rate for a future borrowing. Therefore the FRA purchase is equivalent to a future borrowing. Thus this interest rate position can be closed by fixing an interest rate for a future lending (= synthetic FRA sale = lending 12 months + borrowing 6 months). The lowest FRA price limit is therefore defined by the price of a synthetic FRA sale. Cash-flows: + spot (1) 100 (2) 1) borrowing 6 mo at 4.10% synthetic FRA 6/12 Sell + 6 mo - 2) lending 12 mo at 4.40% (3) at % mo - 3) FRA purchase at % same result for FRA 4.606% If the FRA can be bought below 4.606%, arbitrage is possible. Thus the lowest FRA price limit is 4.606% and is equivalent to the price of a synthetic FRA sale which can be produced by lending for the long period and borrowing for the short period (= give long + take short). Note: You have a remaining risk for the cash borrowing at LIOR in 6 months. In this example it is the risk at the FRA maturity date to take 6 months cash at LIOR (= LIOR risk). If you pay more, e.g. LIOR + 10 P, your result is reduced. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 14 of 18

15 Consequences for the highest and lowest FRA price limits The FRA market prices should always lie between the price limits which are determined by the cash rates. In the above example this would be 4.60% and 4.90%. If the market prices were outside this range, arbitrage would be possible. The position of the FRA price within this range shows the market participants expectations. If the FRA rate is positioned just under the higher price limit, the market participants expect the rates to rise and therefore the demand for FRAs rises. Thus the FRA price rises though the cash rates are still unchanged, as these are mainly influenced by the liquidity situation resp. the central bank. Analogically, if the FRA rate is positioned just above the lower price limit, the market participants expect the rates to fall. 3.3 The FRA Formula For calculating FRA prices and forward deposit rates you have the following formulae: FRA bid r 1 r 1 L(bid) S(offer ) D L 1 D S D FRA FRA offer r 1 r 1 L(offer) S(bid) D L 1 D S D FRA r L r S D L D S D FRA = interest rate, long-term = interest rate, short-term = day basis of calculation = number of days, long-term = number of days, short-term = number of days, FRA Money market rates: 6 mo % (180 days) 12 mo % (360 days) FRA % FRA % offer bid FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 15 of 18

16 Compare the FRA prices to the results of the calculation of the higher and lower FRA price limits! You will notice that the lower price limit (4.606%) complies with the bid side and the higher price limit (4.902%) complies with the offer side. The Connection between Yield Curve and FRA Rates As shown above, the FRA rates can be derived from the yield curve. The steeper the yield curve, the higher the FRA rates. The flatter the yield curve, the lower the FRA rates. For a normal yield curve FRA rates are higher than the interest rate level. For an inverse yield curve FRA rates are lower than the interest rate level. 3.4 Calculating FRA Rates through Fwd/Fwd Rates FRA rates can be calculated from cash and futures rates as well as from forward/forward swaps. EUR/USD spot: months forward rate: /6 forward/forward swap: (90 days) 3/6 EUR FRA: % (90 days) How can you compute the price for a 3/6 USD FRA purchase for 100 m USD synthetically? The purchase of a 3/6 FRA is equivalent to the interest rate of a future borrowing. This can also be produced by buying the USD in 3 months and selling the USD in 6 months (= Fwd/Fwd FX swap sell and buy EUR/USD). The EUR side of the swap has to be closed with a purchase of a 3/6 EUR FRA. The rate for the period 3/6 can be derived from the USD cash-flows. FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 16 of 18

17 Cash-flows: 1) sell EUR at EUR - 3 m. + USD % 2) buy EUR at EUR - 6 m. + USD ) 3/6 Fwd/Fwd swap: sell EUR at 3-months forward at ) 3/6 Fwd/Fwd swap: buy EUR at 6-months forward at ( ) 3) uy 3/6 EUR FRA at 2.50% Result: ( ) / x 360/90 = % You can buy the 3/6 USD FRA synthetically at %. Note: In 3 months the short leg of the FX swap is delivered, i.e. you sell EUR and buy USD. These cash-flows have to be closed again, e.g. with a 3-months FX swap buy and sell EUR/USD. Formula for calculating FRA Rates from Fwd/Fwd Swaps A spot FX swap is derived from the interest rates of the two currencies. Therefore you can also derive the interest rates of the two currencies from the FX swap prices. As a Fwd/Fwd swap is a future FX swap, the interest rates are forward resp. FRA rates. According to this, the FRA rates can be calculated by means of an adapted formula for the calculation of interest rates out of FX swaps: FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 17 of 18

18 FRA base currency FRA quote currency FRA D 1 FRA Q FWD Q FWD L S 1 D FRA Q D 1 FRA FWD FWD S 1 D L Q FWD = forward FX rate FRA Q = FRA p. a. in decimals, quote currency FRA = FRA p. a. in decimals, base currency Q = basis quote curreny (360 or 365) = basis base currency (360 or 365) D = days S = short period L = long period Excursus: With FRAs you can also extend the period of an FX Outright deal before maturity. This can be calculated with the normal forward rate formula (the spot rate is replaced by the forward rate and both deposit rates by the FRA rates): O long O short 1 FRA 1 FRA Q D Q D D = days O long = outright rate O short = spot rate FRA Q = FRA p. a. in decimals, quote currency FRA = FRA p. a. in decimals, base currency Q = basis quote curreny (360 or 365) = basis base currency (360 or 365) FINANCE TRAINER International Forward Rage Agreement (FRA) / Page 18 of 18

MONEY MARKET FUTURES. FINANCE TRAINER International Money Market Futures / Page 1 of 22

MONEY MARKET FUTURES. FINANCE TRAINER International Money Market Futures / Page 1 of 22 MONEY MARKET FUTURES 1. Conventions and Contract Specifications... 3 2. Main Markets of Money Market Futures... 7 3. Exchange and Clearing House... 8 4. The Margin System... 9 5. Comparison: Money Market

More information

OUTRIGHTS / FX SWAPS. FINANCE TRAINER International Outrights / FX swaps / Page 1 of 43

OUTRIGHTS / FX SWAPS. FINANCE TRAINER International Outrights / FX swaps / Page 1 of 43 OUTRIGHTS / FX SWAPS 1. FX Forward Outrights... 2 1.1 Conventions and Terminology... 2 1.2 Computing Outright Rates... 3 1.3 Quotation of Outright Rates... 7 1.4 Cross Rates of Outrights... 14 1.5 Time

More information

INTEREST RATE SWAP (IRS)

INTEREST RATE SWAP (IRS) INTEREST RATE SWAP (IRS) 1. Interest Rate Swap (IRS)... 4 1.1 Terminology... 4 1.2 Application... 11 1.3 EONIA Swap... 19 1.4 Pricing and Mark to Market Revaluation of IRS... 22 2. Cross Currency Swap...

More information

BOND FUTURES. 1. Terminology... 2 2. Application... 11. FINANCE TRAINER International Bond Futures / Page 1 of 12

BOND FUTURES. 1. Terminology... 2 2. Application... 11. FINANCE TRAINER International Bond Futures / Page 1 of 12 BOND FUTURES 1. Terminology... 2 2. Application... 11 FINANCE TRAINER International Bond Futures / Page 1 of 12 1. Terminology A future is a contract to either sell or buy a certain underlying on a specified

More information

FINANCIAL MATHEMATICS MONEY MARKET

FINANCIAL MATHEMATICS MONEY MARKET FINANCIAL MATHEMATICS MONEY MARKET 1. Methods of Interest Calculation, Yield Curve and Quotation... 2 1.1 Methods to Calculate Interest... 2 1.2 The Yield Curve... 6 1.3 Interpolation... 8 1.4 Quotation...

More information

Learning Curve Forward Rate Agreements Anuk Teasdale

Learning Curve Forward Rate Agreements Anuk Teasdale Learning Curve Forward Rate Agreements Anuk Teasdale YieldCurve.com 2004 Page 1 In this article we review the forward rate agreement. Money market derivatives are priced on the basis of the forward rate,

More information

An introduction to the foreign exchange market Moorad Choudhry September 2002

An introduction to the foreign exchange market Moorad Choudhry September 2002 An introduction to the foreign exchange market Moorad Choudhry September 2002 The market in foreign exchange is an excellent example of a liquid, transparent and immediate global financial market. Rates

More information

1. HOW DOES FOREIGN EXCHANGE TRADING WORK?

1. HOW DOES FOREIGN EXCHANGE TRADING WORK? XV. Important additional information on forex transactions / risks associated with foreign exchange transactions (also in the context of forward exchange transactions) The following information is given

More information

Chapter 4 - The Foreign Exchange Market. Functions of the FX Market

Chapter 4 - The Foreign Exchange Market. Functions of the FX Market Chapter 4 - The Foreign Exchange Market Market Structure and Roles Volume and distribution by Country, Currencies Who trades with Whom Introduction to different kinds of Foreign Exchange contracts Spot,

More information

Chapter 5: Foreign Currency Options. Definitions

Chapter 5: Foreign Currency Options. Definitions Chapter 5: Foreign Currency Options Overview 1. Definitions 2. Markets for Options 3. Speculation with Options 4. Option Pricing and Valuation (as time permits.) Suggested Problems & Exercises: All 1 de

More information

OPTIONS. FINANCE TRAINER International Options / Page 1 of 38

OPTIONS. FINANCE TRAINER International Options / Page 1 of 38 OPTIONS 1. FX Options... 3 1.1 Terminology... 4 1.2 The Four Basic Positions... 5 1.3 Standard Options... 7 1.4 Exotic Options... 7 1.4.1 Asian Option (Average Rate Option, ARO)... 7 1.4.2 Compound Option...

More information

Currency Derivatives Guide

Currency Derivatives Guide Currency Derivatives Guide What are Futures? In finance, a futures contract (futures) is a standardised contract between two parties to buy or sell a specified asset of standardised quantity and quality

More information

Introduction to swaps

Introduction to swaps Introduction to swaps Steven C. Mann M.J. Neeley School of Business Texas Christian University incorporating ideas from Teaching interest rate and currency swaps" by Keith C. Brown (Texas-Austin) and Donald

More information

550.444 Introduction to Financial Derivatives

550.444 Introduction to Financial Derivatives 550.444 Introduction to Financial Derivatives Week of October 7, 2013 Interest Rate Futures Where we are Last week: Forward & Futures Prices/Value (Chapter 5, OFOD) This week: Interest Rate Futures (Chapter

More information

Learning Curve Interest Rate Futures Contracts Moorad Choudhry

Learning Curve Interest Rate Futures Contracts Moorad Choudhry Learning Curve Interest Rate Futures Contracts Moorad Choudhry YieldCurve.com 2004 Page 1 The market in short-term interest rate derivatives is a large and liquid one, and the instruments involved are

More information

ACI THE FINANCIAL MARKETS ASSOCIATION

ACI THE FINANCIAL MARKETS ASSOCIATION ACI THE FINANCIAL MARKETS ASSOCIATION EXAMINATION FORMULAE 2009 VERSION page number INTEREST RATE..2 MONEY MARKET..... 3 FORWARD-FORWARDS & FORWARD RATE AGREEMENTS..4 FIXED INCOME.....5 FOREIGN EXCHANGE

More information

The Foreign Exchange Market

The Foreign Exchange Market Chapter 3 The Foreign Exchange Market The foreign exchange market (FX market) is the market on which different currencies are traded against one another. The rate at which this happens is called the exchange

More information

Product Disclosure Statement

Product Disclosure Statement Product Disclosure Statement Sumo Forex Limited Level 4, 228 Queen Street, Auckland, 1010, New Zealand Tel: +6498871044 Email: support@sumoforex.com 1. Important Information and Disclaimer 1.1 Financial

More information

NEW TO FOREX? FOREIGN EXCHANGE RATE SYSTEMS There are basically two types of exchange rate systems:

NEW TO FOREX? FOREIGN EXCHANGE RATE SYSTEMS There are basically two types of exchange rate systems: NEW TO FOREX? WHAT IS FOREIGN EXCHANGE Foreign Exchange (FX or Forex) is one of the largest and most liquid financial markets in the world. According to the authoritative Triennial Central Bank Survey

More information

DERIVATIVES Presented by Sade Odunaiya Partner, Risk Management Alliance Consulting DERIVATIVES Introduction Forward Rate Agreements FRA Swaps Futures Options Summary INTRODUCTION Financial Market Participants

More information

SYLLABUS The ACI Dealing Certificate (Prometric Code: 3I0-008)

SYLLABUS The ACI Dealing Certificate (Prometric Code: 3I0-008) SYLLABUS The ACI Dealing Certificate (Prometric Code: 3I0-008) Examination delivered in ENGLISH and GERMAN The ACI Dealing Certificate is a foundation programme that allows candidates to acquire a working

More information

Forwards, Futures and Money Market Hedging. Prof. Ian Giddy New York University. Hedging Transactions Exposure. Ongoing transactions exposure

Forwards, Futures and Money Market Hedging. Prof. Ian Giddy New York University. Hedging Transactions Exposure. Ongoing transactions exposure 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 One-shot exposure Hedging approaches:

More information

ACI Dealing Certificate (012)

ACI Dealing Certificate (012) I ealing ertificate (012) Sample Questions Setting the benchmark in certifying the financial industry globally 8 Rue du Mail, 75002 Paris - France T: +33 1 42975115 - F: +33 1 42975116 - www.aciforex.org

More information

Eurodollar Futures, and Forwards

Eurodollar Futures, and Forwards 5 Eurodollar Futures, and Forwards In this chapter we will learn about Eurodollar Deposits Eurodollar Futures Contracts, Hedging strategies using ED Futures, Forward Rate Agreements, Pricing FRAs. Hedging

More information

ONIA Swap Index. The derivatives market reference rate for the Euro

ONIA Swap Index. The derivatives market reference rate for the Euro ONIA Swap Index The derivatives market reference rate for the Euro Contents Introduction 2 What is an EONIA Swap? 3-4 EONIA Swap Index The new benchmark 5-8 EONIA 9-10 Basis Swaps 10 IRS vs. EONIA Swap

More information

Ch. 6 The Foreign Exchange Market. Foreign Exchange Markets. Functions of the FOREX Market

Ch. 6 The Foreign Exchange Market. Foreign Exchange Markets. Functions of the FOREX Market Ch. 6 The Foreign Exchange Market Topics FOREX (or FX) Markets FOREX Transactions FOREX Market Participants FOREX Rates & Quotations Cross Rates and Arbitrage Foreign Exchange Markets The FOREX market

More information

Annex 2 Statistical definitions for the Foreign Exchange market

Annex 2 Statistical definitions for the Foreign Exchange market DNR 2009-333-AFS Annex 2 Statistical definitions for the Foreign Exchange market Sources: Sveriges Riksbank, Bank for International Settlements (BIS), European Commission and Nasdaq OMX. Selma FX (Foreign

More information

International Financial Management. Prerequisites

International Financial Management. Prerequisites International Financial Management Prerequisites 1. The quoted interest rate is 5% p.a. What is the effective interest rate for 6 months if the quoted interest rate is a) simple, b) annually compounded,

More information

FX Derivatives Terminology. Education Module: 5. Dated July 2002. FX Derivatives Terminology

FX Derivatives Terminology. Education Module: 5. Dated July 2002. FX Derivatives Terminology Education Module: 5 Dated July 2002 Foreign Exchange Options Option Markets and Terminology A American Options American Options are options that are exercisable for early value at any time during the term

More information

Chapter 5. The Foreign Exchange Market. Foreign Exchange Markets: Learning Objectives. Foreign Exchange Markets. Foreign Exchange Markets

Chapter 5. The Foreign Exchange Market. Foreign Exchange Markets: Learning Objectives. Foreign Exchange Markets. Foreign Exchange Markets Chapter 5 The Foreign Exchange Market Foreign Exchange Markets: Learning Objectives Examine the functions performed by the foreign exchange (FOREX) market, its participants, size, geographic and currency

More information

PRODUCT DISCLOSURE STATEMENT FOR MARGIN FX & CONTRACTS FOR DIFFERENCE

PRODUCT DISCLOSURE STATEMENT FOR MARGIN FX & CONTRACTS FOR DIFFERENCE PRODUCT DISCLOSURE STATEMENT FOR MARGIN FX & CONTRACTS FOR DIFFERENCE This document provides important information about Margined Foreign Exchange and Contracts for Difference contracts to help you decide

More information

Foreign Exchange and Money Markets

Foreign Exchange and Money Markets Foreign Exchange and Money Markets Butterworth-Heinemann The Securities Institute A publishing partnership About The Securities Institute Formed in 1992 with the support of the Bank of England, the London

More information

Development Trends in the Danish Money Market

Development Trends in the Danish Money Market 97 Development Trends in the Danish Money Market Palle Bach Mindested, Market Operations, and Lars Risbjerg, Economics INTRODUCTION AND SUMMARY A well-functioning money market ensures a clear transmission

More information

FIXED-INCOME SECURITIES. Chapter 10. Swaps

FIXED-INCOME SECURITIES. Chapter 10. Swaps FIXED-INCOME SECURITIES Chapter 10 Swaps Outline Terminology Convention Quotation Uses of Swaps Pricing of Swaps Non Plain Vanilla Swaps Terminology Definition Agreement between two parties They exchange

More information

5. Foreign Currency Futures

5. Foreign Currency Futures 5. Foreign Currency Futures Futures contracts are designed to minimize the problems arising from default risk and to facilitate liquidity in secondary dealing. In the United States, the most important

More information

CURRENCY TRADER. Currency Trading. Introduction to currency futures. What are currency futures?

CURRENCY TRADER. Currency Trading. Introduction to currency futures. What are currency futures? Introduction to currency futures The South African Rand is one of the most volatile currencies in the world; it can exhibit moves of greater than 0.20c in a single day of trading versus the US dollar.

More information

19. Interest Rate Swaps

19. Interest Rate Swaps 19. Interest Rate Swaps Reading: Stigum 19 on Swaps. See also Hull who builds from the idea (mentioned in Stigum) that swaps are like a portfolio of forward contracts. Daily Financial Times includes bid-ask

More information

Cash-Settled Forward (CSFs)

Cash-Settled Forward (CSFs) Cash-Settled Forward (CSFs) CME has filed rules with the CFTC for 26 CSF contracts to be clearing eligible by Jan 3, 2012. The intent of the CSFs is to provide FX market participants with a clearable alternative

More information

Chapter 15 OPTIONS ON MONEY MARKET FUTURES

Chapter 15 OPTIONS ON MONEY MARKET FUTURES Page 218 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 15 OPTIONS

More information

FIN 684 Fixed-Income Analysis From Repos to Monetary Policy. Funding Positions

FIN 684 Fixed-Income Analysis From Repos to Monetary Policy. Funding Positions FIN 684 Fixed-Income Analysis From Repos to Monetary Policy Professor Robert B.H. Hauswald Kogod School of Business, AU Funding Positions Short-term funding: repos and money markets funding trading positions

More information

Trading Station II / MetaTrader 4 Product Guide 12 November 2012. Page 1 of 14

Trading Station II / MetaTrader 4 Product Guide 12 November 2012. Page 1 of 14 Trading Station II / MetaTrader 4 Product Guide 12 November 2012 Page 1 of 14 Notice This product summary should be read in conjunction with our Terms of Business. Whilst every effort has been made to

More information

CM-Equity AG. General Information and Risk Disclosure for Foreign Exchange (Forex) Transactions ( General Information and Risk Disclosure )

CM-Equity AG. General Information and Risk Disclosure for Foreign Exchange (Forex) Transactions ( General Information and Risk Disclosure ) CM-Equity AG General Information and Risk Disclosure for Foreign Exchange (Forex) Transactions ( General Information and Risk Disclosure ) Contents I. General Informations regarding Foreign Exchange (Forex)...

More information

MARGIN FOREIGN EXCHANGE AND FOREIGN EXCHANGE OPTIONS

MARGIN FOREIGN EXCHANGE AND FOREIGN EXCHANGE OPTIONS CLIENT SERVICE AGREEMENT Halifax New Zealand Limited Client Service Agreement Product Disclosure Statement for MARGIN FOREIGN EXCHANGE AND FOREIGN EXCHANGE OPTIONS Halifax New Zealand Limited Financial

More information

Chapter 16: Financial Risk Management

Chapter 16: Financial Risk Management Chapter 16: Financial Risk Management Introduction Overview of Financial Risk Management in Treasury Interest Rate Risk Foreign Exchange (FX) Risk Commodity Price Risk Managing Financial Risk The Benefits

More information

CommSeC CFDS: IntroDuCtIon to FX

CommSeC CFDS: IntroDuCtIon to FX CommSec CFDs: Introduction to FX Important Information This brochure has been prepared without taking account of the objectives, financial and taxation situation or needs of any particular individual.

More information

XIV. Additional risk information on forward transactions in CFDs

XIV. Additional risk information on forward transactions in CFDs XIV. Additional risk information on forward transactions in CFDs The following information is given in addition to the general risks associated with forward transactions. Please read the following information

More information

J. Gaspar: Adapted from Jeff Madura, International Financial Management

J. Gaspar: Adapted from Jeff Madura, International Financial Management Chapter5 Currency Derivatives J. Gaspar: Adapted from Jeff Madura, International Financial Management 5. 1 Currency Derivatives Currency derivatives are financial instruments whose prices are determined

More information

COMMISSIONS, CHARGES & MARGIN SCHEDULE

COMMISSIONS, CHARGES & MARGIN SCHEDULE COMMISSIONS, CHARGES & MARGIN SCHEDULE This schedule outlines the various commissions, charges, margins, interest, any other rates and important information that you should be aware of and/or are referred

More information

Chapter 3 noted that the United States has both an over-the-counter market in foreign

Chapter 3 noted that the United States has both an over-the-counter market in foreign ALL ABOUT... CHAPTER 5 Chapter 3 noted that the United States has both an over-the-counter market in foreign exchange and an exchange-traded segment of the market. The OTC market is the U.S. portion of

More information

BELL FX PRODUCT DISCLOSURE STATEMENT. Incorporating Schedule of Fees

BELL FX PRODUCT DISCLOSURE STATEMENT. Incorporating Schedule of Fees BELL FX PRODUCT DISCLOSURE STATEMENT. Incorporating Schedule of Fees Issued by: Bell Potter Securities Limited AFSL No. 243480 ABN 25 006 390 772 Issue Date: 22 July 2008 The information in this Product

More information

Foreign Exchange Risk Management

Foreign Exchange Risk Management Foreign Exchange Risk Management Perry D. Mehta Federal Reserve Bank of Richmond, Charlotte Office perry.mehta@rich.frb.org Seminar for Senior Bank Supervisors from Emerging Economies Washington, DC October,

More information

Foreign Exchange Market INTERNATIONAL FINANCE. Function and Structure of FX Market. Market Characteristics. Market Attributes. Trading in Markets

Foreign Exchange Market INTERNATIONAL FINANCE. Function and Structure of FX Market. Market Characteristics. Market Attributes. Trading in Markets Foreign Exchange Market INTERNATIONAL FINANCE Chapter 5 Encompasses: Conversion of purchasing power across currencies Bank deposits of foreign currency Credit denominated in foreign currency Foreign trade

More information

Trading Station / MetaTrader 4 Product Guide 2 October 2015. Page 1 of 15

Trading Station / MetaTrader 4 Product Guide 2 October 2015. Page 1 of 15 Trading Station / MetaTrader 4 Product Guide 2 October 2015 Page 1 of 15 Notice This product summary should be read in conjunction with our Terms of Business. Whilst every effort has been made to ensure

More information

Important Facts Statement

Important Facts Statement Bank of China (Hong Kong) Limited Important Facts Statement Currency Linked Deposits - Premium Deposits Currency Linked Deposits 13 April 2015 This is a structured investment product which is NOT protected

More information

Product Descriptions Credit Derivatives. Credit Derivatives Product Descriptions

Product Descriptions Credit Derivatives. Credit Derivatives Product Descriptions Credit Derivatives Product Descriptions 1 Products Credit Derivatives Indices Credit Derivatives Tranches Credit Derivatives Options Product Specifications Credit Derivatives Indices A credit default swap

More information

General Forex Glossary

General Forex Glossary General Forex Glossary A ADR American Depository Receipt Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, with the aim of creating profits without

More information

Application of Interest Rate Swaps in Indian Insurance Industry Amruth Krishnan Rohit Ajgaonkar Guide: G.LN.Sarma

Application of Interest Rate Swaps in Indian Insurance Industry Amruth Krishnan Rohit Ajgaonkar Guide: G.LN.Sarma Institute of Actuaries of India Application of Interest Rate Swaps in Indian Insurance Industry Amruth Krishnan Rohit Ajgaonkar Guide: G.LN.Sarma 21 st IFS Seminar Indian Actuarial Profession Serving the

More information

ACI Operations Certificate (010) Sample Questions

ACI Operations Certificate (010) Sample Questions ACI Operations Certificate (010) Sample Questions Setting the benchmark in certifying the financial industry globally 8 Rue du Mail, 75002 Paris - France T: +33 1 42975115 - F: +33 1 42975116 - www.aciforex.org

More information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information

The Danish Foreign-Exchange Market

The Danish Foreign-Exchange Market 33 The Danish Foreign-Exchange Market by Henrik Smed Krabbe, Market Operations Department and Lisbeth Stausholm Pedersen, Economics Department The foreign-exchange market is a market for purchase and sale

More information

Fundamentals of Futures and Options (a summary)

Fundamentals of Futures and Options (a summary) Fundamentals of Futures and Options (a summary) Roger G. Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA Published 2013 by the Research Foundation of CFA Institute Summary prepared by Roger G.

More information

The Market for Foreign Exchange

The Market for Foreign Exchange The Market for Foreign Exchange Chapter Objective: 5 Chapter Five This chapter introduces the institutional framework within which exchange rates are determined. It lays the foundation for much of the

More information

BERMUDA MONETARY AUTHORITY DETERMINATION OF DISCOUNT RATES FOR ECONOMIC BALANCE SHEET FRAMEWORK July 2015

BERMUDA MONETARY AUTHORITY DETERMINATION OF DISCOUNT RATES FOR ECONOMIC BALANCE SHEET FRAMEWORK July 2015 BERMUDA MONETARY AUTHORITY DETERMINATION OF DISCOUNT RATES FOR ECONOMIC BALANC CE SHEET FRAMEWORK July 2015 Contents I. BACKGROUND... 3 II. DETERMINATION OF DISCOUNT RATES... 4 III. STANDARD APPROACH...

More information

Security Bank Treasury FX and Rates Hedging Division Gearing Up for External Competitiveness November 19, 2014. Treasury FXRH

Security Bank Treasury FX and Rates Hedging Division Gearing Up for External Competitiveness November 19, 2014. Treasury FXRH Security Bank Treasury FX and Rates Hedging Division Gearing Up for External Competitiveness November 19, 2014 HEDGING, DERIVATIVES AND SPECULATION HEDGING Making an investment to reduce the risk of adverse

More information

Important Facts Statement

Important Facts Statement Important Facts Statement Bank of China (Hong Kong) Limited Currency Linked Deposits - Option Linked Deposits Currency linked deposit 13 April 2015 This is a structured investment product which is NOT

More information

Central Bank of Nigeria GUIDELINES FOR FX DERIVATIVES AND MODALITIES FOR CBN FX FORWARDS

Central Bank of Nigeria GUIDELINES FOR FX DERIVATIVES AND MODALITIES FOR CBN FX FORWARDS Central Bank of Nigeria GUIDELINES FOR FX DERIVATIVES AND MODALITIES FOR CBN FX FORWARDS 1.0 Introduction Development of the Nigerian financial markets and assurance of financial system stability are two

More information

Currency Futures trade on the JSE s Currency Derivatives Trading Platform

Currency Futures trade on the JSE s Currency Derivatives Trading Platform Currency Futures trade on the JSE s Currency Derivatives Trading Platform DERIVATIVE MARKET Currency Derivatives Currency Futures www.jse.co.za Johannesburg Stock Exchange Currency Futures & Options trade

More information

INTEREST RATE SWAPS September 1999

INTEREST RATE SWAPS September 1999 INTEREST RATE SWAPS September 1999 INTEREST RATE SWAPS Definition: Transfer of interest rate streams without transferring underlying debt. 2 FIXED FOR FLOATING SWAP Some Definitions Notational Principal:

More information

The Money Market. Juan Barragan ECP January 2009

The Money Market. Juan Barragan ECP January 2009 The Money Market Juan Barragan ECP January 2009 The Money Market Central Banks They drive the Money Market. They make funds available to commercial banks. They ensure liquidity. Funds available for a short

More information

EEX Product Brochure Power

EEX Product Brochure Power EEX Product Brochure Power Datum / Date 07/08/2012 Ort / Place Dokumentversion / Document Release Leipzig 3A 1. Table of contents 1. Table of contents... 4 2. Preliminary remarks... 4 3. Power Trading

More information

Currency Options. www.m-x.ca

Currency Options. www.m-x.ca Currency Options www.m-x.ca Table of Contents Introduction...3 How currencies are quoted in the spot market...4 How currency options work...6 Underlying currency...6 Trading unit...6 Option premiums...6

More information

The new ACI Diploma. Unit 2 Fixed Income & Money Markets. Effective October 2014

The new ACI Diploma. Unit 2 Fixed Income & Money Markets. Effective October 2014 The new ACI Diploma Unit 2 Fixed Income & Money Markets Effective October 2014 8 Rue du Mail, 75002 Paris - France T: +33 1 42975115 - F: +33 1 42975116 - www.aciforex.org The new ACI Diploma Objective

More information

Assumptions: No transaction cost, same rate for borrowing/lending, no default/counterparty risk

Assumptions: No transaction cost, same rate for borrowing/lending, no default/counterparty risk Derivatives Why? Allow easier methods to short sell a stock without a broker lending it. Facilitates hedging easily Allows the ability to take long/short position on less available commodities (Rice, Cotton,

More information

Practice set #4 and solutions

Practice set #4 and solutions FIN-465 Derivatives (3 credits) Professor Michel Robe Practice set #4 and solutions To help students with the material, seven practice sets with solutions will be handed out. They will not be graded: the

More information

4. ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK

4. ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK Annexure 3 (PRR) - Part 3, Clause 18 - Foreign Exchange Position Risk Amount 4 ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK (a) CLAUSE 18 - FOREIGN EXCHANGE POSITION RISK AMOUNT (i) Rule PART 3

More information

Interest Rate Futures Pricing, Hedging, Trading Analysis and Applications

Interest Rate Futures Pricing, Hedging, Trading Analysis and Applications Interest Rate Futures Pricing, Hedging, Trading Analysis and Applications Vincent Chia Last Updated on 30 Nov 2010 vincent.chia@thomsonreuters.com Agenda 1. Financial Instruments 2. Pricing Methodology

More information

INTRODUCTION TO OPTIONS MARKETS QUESTIONS

INTRODUCTION TO OPTIONS MARKETS QUESTIONS INTRODUCTION TO OPTIONS MARKETS QUESTIONS 1. What is the difference between a put option and a call option? 2. What is the difference between an American option and a European option? 3. Why does an option

More information

The purpose of this ebook is to introduce newcomers to the forex marketplace and CMTRADING. Remember that trading in forex is inherently risky, and

The purpose of this ebook is to introduce newcomers to the forex marketplace and CMTRADING. Remember that trading in forex is inherently risky, and The purpose of this ebook is to introduce newcomers to the forex marketplace and CMTRADING. Remember that trading in forex is inherently risky, and you can lose money as well as make money. Manage your

More information

Obligatory transactions on a specified date at a predetermined price

Obligatory transactions on a specified date at a predetermined price Obligatory transactions on a specified date at a predetermined price DERIVATIVE MARKET Bond Derivatives Bond Futures www.jse.co.za Johannesburg Stock Exchange A bond future is a contractual obligation

More information

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Graduate School of Business Administration University of Virginia VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Interest-rate swaps have grown tremendously over the last 10 years. With this development,

More information

FINANCIAL MATHEMATICS FIXED INCOME

FINANCIAL MATHEMATICS FIXED INCOME FINANCIAL MATHEMATICS FIXED INCOME 1. Converting from Money Market Basis to Bond Basis and vice versa 2 2. Calculating the Effective Interest Rate (Non-annual Payments)... 4 3. Conversion of Annual into

More information

ASX CFD market fundamentals

ASX CFD market fundamentals Course #: Title Course 1 ASX CFD market fundamentals Topic 1: The ASX CFD Market... 3 What are CFDs?... 3 The popularity of ASX CFDs has arisen from two main features:... 3 ASX CFDs offer additional features

More information

Reference Manual Currency Options

Reference Manual Currency Options Reference Manual Currency Options TMX Group Equities Toronto Stock Exchange TSX Venture Exchange TMX Select Equicom Derivatives Montréal Exchange CDCC Montréal Climate Exchange Fixed Income Shorcan Energy

More information

Introduction to Derivative Instruments Part 1 Link n Learn

Introduction to Derivative Instruments Part 1 Link n Learn Introduction to Derivative Instruments Part 1 Link n Learn June 2014 Webinar Participants Elaine Canty Manager Financial Advisory Deloitte & Touche Ireland ecanty@deloitte.ie +353 1 417 2991 Christopher

More information

The U.S. Dollar Rally: Understanding its impact on your business

The U.S. Dollar Rally: Understanding its impact on your business David Coomer, CPA dcoomer@cshco.com 937.226.0070 Rick Jones rick.jones@bbgfx.com 513.386.7447 The U.S. Dollar Rally: Understanding its impact on your business Agenda Introduction and Overview The Foreign

More information

Paper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants

Paper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants Fundamentals Pilot Paper Skills module Financial Management Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper

More information

NASDAQ OMX Swedish STIBOR-FRA

NASDAQ OMX Swedish STIBOR-FRA NASDAQ OMX Swedish STIBOR-FRA NASDAQ OMX STOCKHOLM OFFERS CLEARING OF 3-MONTH STIBOR-FRA CONTRACTS The STIBOR-FRA contract constitutes a valuable tool in management of Swedish short-term interest rate

More information

Complex Products. Non-Complex Products. General risks of trading

Complex Products. Non-Complex Products. General risks of trading We offer a wide range of investments, each with their own risks and rewards. The following information provides you with a general description of the nature and risks of the investments that you can trade

More information

Futures Price d,f $ 0.65 = (1.05) (1.04)

Futures Price d,f $ 0.65 = (1.05) (1.04) 24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding

More information

Interest Rate Options

Interest Rate Options Interest Rate Options A discussion of how investors can help control interest rate exposure and make the most of the interest rate market. The Chicago Board Options Exchange (CBOE) is the world s largest

More information

This act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers

This act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers Section 7.3 and Section 4.5 Oct. 7, 2002 William Pugh 7.3 Example of a forward contract: In May, a crude oil producer gets together with a refiner to agree on a price for crude oil. This price is for crude

More information

GFMA GLOBAL FX DIVISION OTC FX OPTIONS CLEARING & SETTLEMENT ANALYSIS RESULTS NOVEMBER 18, 2013

GFMA GLOBAL FX DIVISION OTC FX OPTIONS CLEARING & SETTLEMENT ANALYSIS RESULTS NOVEMBER 18, 2013 GFMA GLOBAL FX DIVISION OTC FX OPTIONS CLEARING & SETTLEMENT ANALYSIS RESULTS NOVEMBER 18, 2013 OTC FX Options Clearing & Analysis Results Contents I. Executive Summary II. Background III. Summary Results

More information

Derivatives Usage by Insurer

Derivatives Usage by Insurer Derivatives Usage by Insurer and Role of Derivatives es in Recent Economic Meltdown Prabhat Kumar Maiti DD(Actl)/ IRDA 11th GCA, Mumbai 1 Possible uses of derivatives by Insurance companies Efficient portfolio

More information

Risk Information for Expanded Investment Transactions and Forward Exchange Transactions

Risk Information for Expanded Investment Transactions and Forward Exchange Transactions Risk Information for Expanded Investment Transactions and Forward Exchange Transactions May 2010 TABLE OF CONTENTS Preliminary Remarks...3 1. General Investment Risks...3 2. Forward Exchange Transactions...4

More information

The foreign exchange market is global, and it is conducted over-the-counter (OTC)

The foreign exchange market is global, and it is conducted over-the-counter (OTC) FOREIGN EXCHANGE BASICS TERMS USED IN FOREX TRADING: The foreign exchange market is global, and it is conducted over-the-counter (OTC) through the use of electronic trading platforms, or by telephone through

More information

INTRODUCTION TO FOREIGN EXCHANGE

INTRODUCTION TO FOREIGN EXCHANGE INTRODUCTION TO FOREIGN EXCHANGE Capademy Tutorial Series Option Banque Training Series Vol. 1 The foreign exchange market known as forex for short is the market in which currencies or sovereign money

More information

Introduction to Eris Exchange Interest Rate Swap Futures

Introduction to Eris Exchange Interest Rate Swap Futures Introduction to Eris Exchange Interest Rate Swap Futures Overview Eris Exchange interest rate swap futures ( Eris contracts ) have been designed to replicate the net cash flows associated with plain-vanilla,

More information

Introduction to Futures Contracts

Introduction to Futures Contracts Introduction to Futures Contracts September 2010 PREPARED BY Eric Przybylinski Research Analyst Gregory J. Leonberger, FSA Director of Research Abstract Futures contracts are widely utilized throughout

More information

Practice Set #1: Forward pricing & hedging.

Practice Set #1: Forward pricing & hedging. Derivatives (3 credits) Professor Michel Robe What to do with this practice set? Practice Set #1: Forward pricing & hedging To help students with the material, eight practice sets with solutions shall

More information

Online Share Trading Currency Futures

Online Share Trading Currency Futures Online Share Trading Currency Futures Wealth warning: Trading Currency Futures can offer significant returns BUT also subject you to significant losses if the market moves against your position. You may,

More information