Оглавление
James McDowell. Sharpe. Foreign Exchange: The Complete Deal
Publishing Details
Acknowledgements
About the author
Preface
1. Exchange Rate Systems: From Fixed to Floating, and Chaos
National current accounts
Fixed exchange rates
The gold standard
Bretton Woods and adjustable pegs
The emergence of the floating exchange rate system
Floating exchange rates
Stability under the floating rate system
Adjustment mechanisms with floating exchange rates
The euro experience
Conclusion
Foreign exchange and the UK – 1960 to the 2000s. 1960s
1970s
1980s
1990s
2000s
Endnotes
2. Central Banks and Foreign Exchange Intervention. What is foreign exchange intervention?
Sterilised and unsterilised intervention
How intervention is carried out
Intervention and monetary policy
How monetary policy is conducted
The efficacy of intervention
Recessions and intervention – the case of the Swiss franc
Figure 2.1 – SNB buying CHF to move it from 1.4790 to 1.5340 against the euro
Figure 2.2 – SNB buys CHF to move it from 1.5020 to 1.5380 against the euro
Conclusion
Endnotes
3. The Basics of Foreign Exchange. A definition of foreign exchange
The foreign exchange market
Currency pairs and ISO abbreviations
The size, scope and growth of the foreign exchange market. Market share by country
Table 3.1 – Foreign exchange market share by country in 2007 and 2010
Growth of foreign exchange trading
Table 3.2 – Global foreign exchange market turnover by instrument
Market share by currency
Table 3.3 – Most traded currencies by market share
Market share by currency pair
Table 3.4 – Most traded currency pairs by market share
Who trades foreign exchange?
Corporates, commodity trading accounts (CTAs)
Portfolio fund managers
Hedge funds
Central banks:
Sovereign wealth funds (SWFs)
Commercial banks. Spot trading
Forward trading
Option trading
Private individuals
Banks’ share of global foreign exchange
4. The Theory of Foreign Exchange: How Exchange Rates are Determined
Exchange rates and supply and demand
Figure 4.1 – The supply and demand of pounds traded on the foreign exchange market
Example – the Bank of England increases interest rates
Figure 4.2 – A shift in the demand curve as the demand for pounds rises
Central banks, governments, and supply and demand
Figure 4.3 – Sale of sterling forces the exchange rate down
The effect of exchange rates on an economy
Price elasticity of demand examples
Scenario 1
Scenario 2
Figure 4.4 – The J-curve effect
Interest rate parity (IRP)
Purchasing power parity (PPP)
1. Absolute PPP
2. Relative PPP
Currencies overshooting their expected levels – Rudiger Dornbusch
Endnote
5. Foreign Exchange in Practice
Price quotations
Table 5.1 – Four examples of how bid/offer prices are displayed
Base currency
Bid-offer spread
The size of the spread
Direct and indirect quotations
Cross rates
Table 5.2a – GBP/USD
Table 5.2b – USD/CHF
How dealers cover their exposure
Example – a customer sells GBP and buys CHF
Example – a customer buys GBP and sells CHF
Further example using cross rates. Table 5.3 – Cross rates for USD/JPY and USD/CHF
Covering exposure and making a profit
Legging
Table 5.4 – Bank position having bought GBP and sold EUR (EUR/GBP), then sold EUR and bought USD (EUR/USD)
Table 5.5 – The final position of a legged trade from the bank’s viewpoint
Table 5.6 – The final position of another legged trade from the bank’s viewpoint
Orders
Take profit order
Stop loss order
Call order
One Cancels Other (OCO) order
If Done Do Other (IDO) order
How to calculate trading profits and losses
Example – a 20 pip move in a GBP 4.5m GBP/USD trade
Recording a trade
Rules when making foreign exchange transactions
6. Types of Foreign Exchange Transactions
1. Spot
When spot dates can be confusing
Example 1
Table 6.1 – Effect of market holidays on settlement dates for currency pairs
Example 2
Table 6.2 – Effect of market holidays on settlement dates for different currency pairs
Example 3
Table 6.3 – Effect of market holidays on settlement dates for different currency pairs
Examples of customer transactions. Example 1
Example 2
2. Forward outright
Forward outright quote – example 1
Table 6.4 – GBP/USD forward outright quote
Forward outright quote – example 2
How to calculate and interpret forward/swap points
Example 1 – GBP/USD forward points
Table 6.5 – Example of GBP/USD forward points
Example 2 – USD/NOK forward points
Table 6.6 – Example of USD/NOK forward points
Alternative method of creating a forward contract
Table 6.7 – Trade details for an alternative method of forward
Table 6.8 – Breakdown of the alternative forward trade
Value date option forwards
Example of a value date option forward
Table 6.9 – The prices for the value date option
3. Broken date contracts
Table 6.10 – Calculating forward points for broken date contracts
Short dates
Table 6.11 – Terminology for short foreign exchange contract periods
Example – GBP/USD. Table 6.12 – Applying points to spot for short foreign exchange contract periods
Dealing end/end
Example 1
Example 2
4. Non-deliverable forward (NDF)
Example
Possible outcomes
5. Swap
Advantages of a swap
Uses of a swap
How a swap is quoted
Table 6.13 – Customer view of a swap
Example of a customer swap transaction
Swap transactions – worked examples. Example 1 – GBP/USD
Table 6.14 – Swap transactions year by year
Example 2
Example 3a – improving yield using the swap, fully hedged
Table 6.15 – A six-month swap used to improve the pound deposit rate
Example 3b – capital growth scenario
Example 4
Table 6.16 – EUR/USD swap used to earn a better interest rate
Option 1
Option 2 (summarised in Table 6.16)
Example 5 – saving the financial system
Example 6a – late receipts
Example 6b – early receipts
Table 6.17 – Cash flow for ABC
Example 7 – trading forwards/swaps
Table 6.18 – Cover trade examples. GBP/USD is 1.5582. Date 9/11/2002
How a bank covers a position
Table 6.19 – Bank’s trades in three months’ time
Table 6.20 – Solution using the money market
Bank positions – long and short
6. Forward/forward
Table 6.21 – A dealer’s overall position equating to zero, despite settlement differences
Forward/forward quotes
Example
Forward/swap mismatches
Forwards and the carry trade
Example of using a forward with a carry trade
Table 6.22 – Using a forward with a carry trade
Hedging. Single Farm Payments (SFPs)
SFP receipts in GBP
SFP receipts in EUR
Summary
7. Algorithmic trading
8. Options
Currency options – the basics
Calls and puts
Strike price
Settlement of an option
Important dates
Different styles of option
The value of an option
Intrinsic value
Time value
Figure 6.1 – Time value decay as the expiry date of an option approaches
Premium
Figure 6.2 – Profit and loss graph three months before expiration
Simple call and put options at expiry
Long call
Figure 6.3 – Illustration of a long call option
Short call
Figure 6.4 – Illustration of a short call option
Long put
Figure 6.5 – Illustration of a long put option
Short put
Figure 6.6 – Illustration of a short put option
Combining options to create a synthetic forward put/call parity. Figure 6.7 – Illustration of a synthetic forward put/call option
The Greeks
1. Delta (hedge ratio)
Example: an option to sell GBP 5m at 1.65 (GBP/USD)
Delta hedge
Figure 6.8 – A delta hedge
Examples of the delta hedge
2. Gamma
3. Vega
4. Theta
5. Rho
Volatility (vol)
Impact of volatility on the Greeks
Volatility and pricing
Figure 6.9 – The volatility smile
Figure 6.10 – The volatility skew
How options are priced
Making an option transaction
Basic option strategies. Bull (call) spread
Figure 6.11 – The bull (call) spread
Collar, risk reversal, range forward. Figure 6.12 – Collar, risk reversal, range forward
Long straddle. Figure 6.13 – Long straddle
Strangle. Figure 6.14 – Strangle
Covered call or dual currency strategy
Example of a covered call option. Table 6.23 – Summary of terms for a dual currency deposit (covered call option)
Figure 6.15 – Redemption profile of a covered call option
Exotic options
Barrier options
Digital/binary
Options in practice. 1. Hedging a contingent exposure
2. Hedging a known exposure
Table 6.24 – Strike strategy: three different rates for USD put/GBP call, spot reference price 1.4244
Table 6.25 – Zero cost collar strategy
Table 6.26 – Forward contract strategy
Options summary. When to use options
Advantages
Disadvantages
7. Predicting the Future: Technical Analysis and FX Forecasting. Technical analysis and the foreign exchange markets
In favour of technical analysis
Flaws of technical analysis
Forecasting the foreign exchange markets
8. Psychology and Foreign Exchange
Group behaviour
Overconfidence
Optimism
Overreaction
Attitude to risk
Attitude to rules
Endnote
9. Influences on Foreign Exchange Markets
Economic data
Impact of central bank intervention
Breach of technical levels
Seasonal price patterns
Dramatic events
Figure 9.1 – Impact of 9/11 attack on CHF
Market intelligence
10. A Blueprint for Trading
Before, during and after the trade
Before the trade
Timing a trade
Correlations
Once the trade has been placed
After the trade has been closed out
Managing losses
Investment vs. Speculation
Endnote
11. Liquidity
Assessing liquidity
When liquidity disappears
The carry trade and Torschlusspanik (door shut panic)
Figure 11.1 – The rise and rise of the carry trade 2001-2007
Figure 11.2 – The end of the game 2007-09
12. Hedging Currency Exposure. Overview of hedging
Sources of exposure
Transaction examples
Translation examples
The hedging process
Define exposures
Define objectives
Impact of hedging
Currency overlay. What is currency overlay?
Optimal hedging approaches for overlay/portfolio managers
Arguments against currency overlay
Arguments for currency overlay
Choosing currency overlay managers
Conclusion
13. The Management of Dealing
Risks. Counterparty and settlement risk
Transfer risk
Operational risk
Liquidity risk
Fraud
Dealing limits at banks
Types of limits
Monitoring forward foreign exchange exposure. Original exposure methodology
Mark-to-market methodology
Value at risk (VAR)
14. Dealing with Banks and Financial Institutions
The provider should be financially strong
The provider should be operationally strong
Check the bank can supply the product and service you require
Dealing mandate
Foreign exchange limits
Understanding what is on offer
Agreements
Banks dealing with customers
Afterword
Endnote
Appendices. Appendix 1. Foreign exchange solutions in brief. Example 1
Example 2
Example 3
Example 4
Example 5
Example 6
Appendix 2. A simple guide to technical analysis. Introduction
Support and resistance
Figure A1 – Example of peaks and troughs on a price chart, showing support and resistance
Fibonacci retracement levels
Chart patterns
1. Reversal patterns
Head and shoulders
Figure A2 – Example head and shoulders pattern
Figure A3 – A head and shoulders example from GBP/JPY
Inverse head and shoulders
Figure A4 – An inverse head and shoulders pattern
Double top (M top)
Figure A5 – A double top pattern
Figure A6 – An example of a double top reversal from EUR/USD
Double bottom (W bottom)
Figure A7 – A double bottom pattern
2. Continuation patterns
Triangles
Figure A8 – A symmetrical triangle pattern
Figure A9 – An expanding triangle pattern
Figure A10 – An expanding triangle seen in EUR/GBP
Figure A11 – An ascending triangle pattern
Flags and pennants
Figure A12 – A bull flag pattern
Figure A13 – A bear flag in EUR/USD
Figure A14 – A bullish pennant
Wedges
Figure A15 – A bullish wedge
Figure A16 – A bearish wedge
Simple trend lines and channels
Figure A17 – Trend lines and a channel
Figure A18 – A channel drawn onto a GBP/JPY price chart
Key period reversals – outside days
Figure A19 – A bullish outside day
Gaps
Moving averages
Types of moving average. Simple
Linear weighted
Exponential
Summary
Momentum
Relative Strength Index (RSI)
Moving average convergence/divergence (MACD)
Bollinger Bands
Figure A20 – Bollinger Bands drawn onto a GBP/CHF chart
Final thoughts on momentum
Technical trading
Footnote
Glossary
Bibliography
