Foreign Exchange in Practice: The New Environment PDF
Preview Foreign Exchange in Practice: The New Environment
FOREIGN EXCHANGE IN PRACTICE Foreign Exchange in Practice The New Environment T H I R D E D I T I O N STEVE ANTHONY ©SteveAnthony2003 Softcover reprint of the hardcover 3rd edition 2003 978-1-4039-0174-3 Allrightsreserved.Noreproduction,copyortransmissionof thispublicationmaybemadewithoutwrittenpermission. Noparagraphofthispublicationmaybereproduced,copiedor transmittedsavewithwrittenpermissionorinaccordancewith theprovisionsoftheCopyright,DesignsandPatentsAct1988, orunderthetermsofanylicencepermittinglimitedcopying issuedbytheCopyrightLicensingAgency,90TottenhamCourt Road,LondonW1T4LP. Anypersonwhodoesanyunauthorisedactinrelationtothis publicationmaybeliabletocriminalprosecutionandcivil claimsfordamages. Theauthorhasassertedhisrighttobeidentified astheauthorofthisworkinaccordancewiththe Copyright,DesignsandPatentsAct1988. Firstpublished1989byLawBookCompany. Secondedition1997publishedbyLBCPublishing. Thiseditionpublished2003by PALGRAVEMACMILLAN Houndmills,Basingstoke,HampshireRG216XSand 175FifthAvenue,NewYork,N.Y.10010 Companiesandrepresentativesthroughouttheworld PALGRAVEMACMILLANistheglobalacademicimprintofthePalgrave MacmillandivisionofSt.Martin’sPress,LLCandofPalgraveMacmillanLtd. Macmillan®isaregisteredtrademarkintheUnitedStates,UnitedKingdom andothercountries.PalgraveisaregisteredtrademarkintheEuropean Unionandothercountries. ISBN 978-1-349-50788-7 ISBN 978-1-4039-1455-2 (eBook) DOI 10.1057/9781403914552 Thisbookisprintedonpapersuitableforrecyclingandmadefromfully managedandsustainedforestsources. AcataloguerecordforthisbookisavailablefromtheBritishLibrary. 10 9 8 7 6 5 4 3 2 1 12 11 10 09 08 07 06 05 04 03 Contents Preface xiii 1 Exchange Rates 1 CommodityCurrencyandTermsCurrency 1 ReciprocalRates 2 PriceChanges 3 PriceandVolumeQuotations 3 CrossRates 5 ChainRule 5 Points 7 CalculatingExchangeProfitsandLosses 8 RealizedandUnrealizedProfitsandLosses 8 HistoryofExchangeRateDetermination 9 PracticeProblems 11 2 Interest Rates 12 NominalandEffectiveInterestRates 12 BasisPoints 12 DayCountConventions 13 SimpleInterest 13 VariableInterest 15 CompoundInterest 16 Semi-AnnualInterest 17 FloatingInterestRates 18 EquivalentInterestRates 19 IndexAlgebra 19 Logarithms 20 ContinuouslyCompoundingRates 20 ForwardInterestRates 22 PresentValue 24 DiscountFactors 25 Bonds 25 v vi CONTENTS PracticeProblems 27 3 Cash Flows and Value Dates 29 SpecificationsofCashFlows 29 PositiveandNegativeCashFlows 29 T-Accounts 29 SpotValueDates 31 NostroAccounts 32 ForwardValueDates 32 ShortDates 33 NetCashFlowPosition 33 NetExchangePosition 33 DistinctionBetweenNetExchangePositionand NetCashFlowPosition 35 NetExchangePositionSheet 38 Blotter 38 NPVMethod 39 PracticeProblems 40 4 Yield Curves and Gapping in the Money Market 41 TheYieldCurve 41 ReasonsfortheNormalYieldCurve 42 ImpactofInterestRateExpectations 43 YieldCurvesinPractice 45 SpreadsforCreditandLiquidityRisk 46 YieldCurveMovements 47 TraditionalBankingStrategy:RidingtheYieldCurve 48 GappingintheMoneyMarket:HowtoProfitfrom ExpectedChangesinInterestRates 49 OpeningaNegativeGap 50 ClosingaNegativeGap 51 GappingwithaNormalYieldCurve 52 OpeningaPositiveGap 54 ClosingaPositiveGap 55 Break-EvenRates 55 EarlyClosureofaGap 56 ExtendingaGap 57 PracticeProblems 58 5 Bid and Offer Rates 61 QuotingBankandCallingBank 61 PriceMakerandPriceTaker 61 BidandOfferRatesintheMoneyMarket 62 BidandOfferRatesintheForeignExchangeMarket 62 CONTENTS vii BidOfferSpreads 64 Brokers 67 ElectronicDealingSystems 67 MarketJargon 68 TrendingRates 68 CoveringaSpotExchangePositionatMarketRates 70 CoveringaSpotExchangePositionatOwnRates:Jobbing 70 MarketMaking 71 Arbitrage 72 CrossRates 72 ArbitragingCrossRates 74 PracticeProblems 75 6 Forward Exchange Rates 78 CalculationofForwardExchangeRates 78 CalculationofForwardMargins 80 ForwardDiscounts 80 ForwardPremiums 81 CompensationArgument 82 ForwardRateFormula 82 RoleofPriceExpectations 83 BidandOfferRates 84 ForwardCrossRates 88 CurrencyFutures 89 Long-TermForeignExchange(LTFX) 89 ZeroCouponDiscountFactors 90 NPVAccounting 92 ShortDates 95 ShortDateMargins 97 PracticeProblems 98 7 Applications of Forward Exchange 101 ForeignExchangeRisk 101 Hedging 102 PartialHedging 104 HedgingExportReceivables 105 EffectiveExchangeRates 108 BenefitsandCostsofPremiumsandDiscounts 108 HedgingForeignCurrencyBorrowings 109 EffectiveCostofHedgedForeignCurrencyBorrowings 111 Break-EvenRates 112 CostofHedgingForeignCurrencyBorrowings 114 EffectiveCostofUnhedgedForeignCurrencyBorrowings 115 UnhedgedForeignCurrencyInvestments 117 viii CONTENTS EffectiveYieldonHedgedForeignCurrencyInvestments 120 EffectiveYieldonUnhedgedForeignCurrencyInvestments 121 ParForwards 124 PracticeProblems 126 8 Swaps 130 TypesofCurrencySwap 131 SwapRates 131 OutrightForwardsRates 131 DeterminingtheSpotRateinaSwap 133 PureSwapsandEngineeredSwaps 133 ShortDatedSwaps 135 ApplicationsofCurrencySwaps 136 CoveringOutrightForwardExchangePositions 137 RollingaForeignExchangePosition 140 HistoricRateRollovers 144 EarlyTake-Ups 145 SimulatedForeignCurrencyLoans 147 SimulatedForeignCurrencyInvestments 151 CoveredInterestArbitrage 153 CentralBankSwaps 156 ForwardRateAgreements(FRAs) 157 CalculatingtheSettlementforanFRA 157 ForwardYieldCurves 157 InterestRateSwaps 158 PricingInterestRateSwaps 160 GeneralFormulaforPricingSwaps 162 CrossCurrencySwaps 164 VaryingMarketConventions 165 PracticeProblems 166 9 The FX Swaps Curve and Gapping in the Foreign Exchange Market 169 TheFXSwapsCurve 169 GappingintheForeignExchangeMarket:HowtoProfitfrom ExpectedChangesinInterestRateDifferentials 173 RidingtheSwapsCurve 176 CashFlowImplicationsofSpotRateChanges 177 Break-EvenSwapRate 179 PracticeProblem 180 10 Currency Options – Pricing 181 CalculatingOptionPremiums 183 ProfitProfiles:NakedOptions 184 CONTENTS ix OptionPricing 192 CombinationsandProbabilities 194 ProbabilityDistribution 195 RelationshipBetweentheStrikePriceandMarketRate 198 TimetoExpiry 199 Volatility 201 Risk-FreeInterestRate 206 Put–CallParity 206 Put–CallArbitrage 207 ReverseBinomialMethod 209 AmericanVersusEuropeanOptions 210 GeometricBinomialModel 210 Black–ScholesModel 213 InterestRateDifferentials 215 CurrencyOptions 215 ProofofPut–CallParity 215 InterpretingtheAdaptedBlack–ScholesFormula 217 Black’sModel 219 PracticeProblems 220 11 Applications of Currency Options 222 ApplicationsUsingOptionsWhenThereisan UnderlyingExposure 222 EffectiveExchangeRate 228 ForeignCurrencyBorrower 229 ForeignExchangeTrader 232 ForeignCurrencyInvestor 234 VaryingtheStrikePrice 236 Collars 237 ZeroPremiumCollar 237 Ill-FittingCollar 240 DebitCollar 240 CreditCollar 241 ParticipatingOptions 242 ParticipatingCollars 244 PracticeProblems 245 12 Option Derivatives 248 DigitalOptions 248 PricinganAt-ExpiryDigital 249 ReverseBinomialPricingMethod 250 PricingOne-TouchDigitals 251 ClosedFormPricingFormula 252 ApplicationsofDigitalOptions 252
The list of books you might like
