Money and Exchange Dealing in International Banking PDF
Preview Money and Exchange Dealing in International Banking
MONEY AND EXCHANGE DEALING IN INTERNA TIONAL BANKING INTERNATIONAL BANKING SERIES General Editor: Steven I. Davis Published THE MANAGEMENT OF INTERNATIONAL BANKS, Steven I. Davis LENDING IN INTERNATIONAL COMMERCIAL BANKING, T. H. Donaldson MONEY AND EXCHANGE DEALINGS IN INTERNATIONAL BANKING, Nigel R. L. Hudson Money and Exchange Dealing in International Banking Nigel R. L. Hudson M © Nigel R.L.Hudson 1979 Softcover reprint of the hardcover 1st edition 1979978-0-333-25968-9 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this pUblication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended). Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First edition 1979 Reprinted 1981, 1983, 1984,1986 Published by MACMILLAN PUBLISHERS LTD (Journals Division) and distributed by Globe Book Services Ltd Brunei Road, Houndmills Basingstoke, Hampshire RG212XS England British Library Cataloguing in Publication Data Hudson, Nigel R. L. Money and exchange dealing in international banking - (International banking series) 1. Foreign exchange 2. Banks and banking, International 3. Bank deposits I. Title II. Series 332.4'5 HG3821 ISBN 978-1-349-04468-9 ISBN 978-1-349-04466-5 (eBook) DOl 10.1007/978-1-349-04466-5 Contents Editor's Foreword Vll Preface IX List of Abbreviations XI 1 History 1 2 The Dealing Theory of Foreign Exchange 12 3 The Dealing Theory of Deposits 24 4 Objectives, Organisation and Operation of a Dealing Department 31 5 Practice of the Dealing Function 40 Part A. Foreign Exchange 40 Part B. Deposits 61 6 Dealing Risks 77 7 Management of the Foreign Exchange and Deposit Dealing Functions 83 8 Profitability 93 9 The Dealer 101 10 Particular Customers 105 11 Characteristics of Various Money Markets 114 12 Conclusion and Outlook 122 ~~~~ 1~ G /ossary 125 Index 133 v Editor's Foreword The internationalisation of banking in the 1970s has been one of the most intriguing trends in the financial industry since the Second World War. Whether one measures it by the volume of overseas lending, the modification of traditional banking tenets or changes in physical structures, it is a truly revolutionary development-<::omparable, for example, to the appearance of international merchant banking in the Renaissance period and the nineteenth-century growth of commercial banks financing trade with the developing countries of the time. This phenomenon has not, however, been matched by a comparable development in banking literature. While a variety of books have described the theory and structures of the new Euro markets and the function of the traditional foreign exchange markets, relatively few books have been written about how bankers actually manage their new international responsibilities. Even more exceptional are volumes written by experienced, practising bankers about how they deal with the problems and issues they face. The purpose of the International Banking Series is to fill at least a portion of this gap. While not specifically designed as a series of textbooks, in that it is oriented towards the management issues of international banking, the series does explain how the basic international banking functions are performed, both in theory and in practice. It will hopefully, therefore, serve as a useful reference point for students of banking, individuals who are entering the field of international banking, and outside observers such as customers and academics who would like to know more about how bankers run their international business. The money-dealing function has justifiably attracted the attention both of outside observers and bankers themselves because of such factors as the vast sums which have been earned-and lost-in deposit and foreign exchange trading in recent years, the vital importance to international banks of funding in the wholesale money markets, and the highly specialist vii Editor's Foreword VIII nature of the dealing function, which is accompanied by a unique jargon and set of operating practices. Mr Hudson's book, therefore, aims at dissipating some of the mystery which has surrounded this vital function by explaining for the uninitiated how, both in theory and practice, a dealer performs his essential tasks of bidding for deposits, running a deposit mismatch book, meeting customer requirements for foreign exchange, and operating a spot and forward foreign exchange book for the bank's own account. A unique contri bution is represented by the analysis of the interaction of swap differentials and interest rates, as well as of other dynamic relationships which influence the profitability and liquidity of the dealer's positions. A particular focus is placed on the problems of controlling these critical activities from a management stand point, evaluating the profit performance of the dealing function, and analysing the issues which are faced by management in operating a world-wide position in foreign exchange and Euro currency deposits. Nigel Hudson's experience in international banking gives him unusually appropriate qualifications for writing this particular volume. An Englishman who has as a dealer experience of the London, Swiss and American markets, in 1970 he joined the London branch of the First National Bank in Dallas, one of the most successful of the American regional banks. During his subsequent career with that bank, he not only moved up the ranks to become chief dealer in London, but also was posted to Paris, where as General Manager he established the bank's Paris branch in 1974, and then returned to London where he took over responsibility for the London branch as Senior Vice-President and General Manager. Such a relatively unusual career, there fore, gives him a particularly interes.ting perspective on the international markets not only as a practising dealer, but also as a senior manager responsible for the dealing function in major operating units. As general editor of the series, I am particularly indebted to Nigel Hudson for his effort and commitment as reflected in this book. Another volume in the series, The Management Function in International Banking, deals with some of the dealing-related issues as perceived by senior management. STEVEN I. DAVIS London 1978 Preface In recent years there has been a rapid growth in money dealing as a result of the increase in international trade, the development of the multinational company, the volatility of the foreign exchange markets and the large and changing surpluses and deficits of countries. This has led to the writing of many books concerned with trade finance, foreign exchange operations and the develop ment of the Euro-currency market. The purpose of this book is to fill a gap which is believed to exist in the literature concerned with international money dealing. It is intended to be read by those who may wish to become involved with international money dealing but who have not yet acquired the specific skills, as well as by those who are already involved and who wish to obtain another opinion. It has also been written in an attempt to remove some of the mystique which surrounds the subject. It should be remembered that no two banks or customers react in exactly the same way or have necessarily the same interests. The book also concerns itself with the dealing practices and money markets of major countries and currencies. Consequently, it may be that, in the process of trying to explain and simplify, certain very specialised practices have been excluded. Within the book there are examples to illustrate particular points. It should be recognised that the rates used may not be the actual rates of exchange or interest rates of a particular day since they are merely examples to assist in the understanding of the subject. Throughout the book, 'US$' means the currency of the United States of America. When the term 'billion' is used, it is to be understood in the United States sense, i.e. to express one thousand million. All the views and ideas expressed in this book are those of the author and are not necessarily representative of those of the First National Bank in Dallas. NIGEL HUDSON September 1978 ix
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