Mechanism of the Foreign Exchange Market

Course Overview

This training course aims to introduce key concepts and fundamental mechanisms of the foreign exchange markets and the various related instruments (spot exchange, forward exchange, derivatives) as well as their usage in trading and in foreign exchange risk hedging.

Course Objective

To equip operators with up to date skill for success in this department

Course Outline

Organization of the market and spot exchange operations
- Market history : end of the Bretton Woods and floating currencies
- Players typolohy : market makers, brokers, investors
- Transactions typology : arbitrage, hedging, speculation
- Electronic trading platforms

Spot exchange:

- Direct quotations and indirect quotations
- Bid/ask spread
- Determination of FX crosses
- Chartist analysis and fundamental analysis  

 Forwards - outright transactions and forex swaps

Forwards:

- Maturity stages and backwardation/forwardation
- Determination of the long term exchange rate
- Application : hedging foreign exchange risk
- NDF (Non Deliverable Forwards) market

FX swap:

- Outline of an FX swap : first leg and second leg
- Comparison between an FX swap and a forward contract
- Application - hedging the FX risk

FX futures and options

Over-the-counter FX options :

- Vanilla options (call/put) : characteristics (sensitiveness), valuation
- Compound options : collar, straddle, strangle
- Application - hedging FX risk

Exercise : comparison between FX risk hedging using an option, compound options, and a forward contract

FX futures options :

- FX futures : characteristics, valuation, margin call
- Futures options : valuation, margin calls
- Comparison with OTC products

Introduction to the Chicago Mercantile Exchange platform

 Case study - hedging FX risk

- Centralization of multiple currency cash flows
- Setting up a hedging strategy : selection of instruments and exposure level (total hedging or partial hedging)
- Managing the hedging efficiency : neutral delat/gamma portfolio