FX & Money Markets

Course Description The foreign exchange and money markets are worth trillions and are the pivot of the financial markets, providing funding, investment opportunities and the conduit between all other financial markets. In recent years, the importance of the money markets has become even greater as financial institutions focus more closely on the management and diversification of their sources of liquidity, apply greater discipline to their funding and examine the attractions of short-term investment and trading strategies. This Euromoney Training course provides a firm grounding in the instruments and activities of the international money and FX markets, sweeping away the confusion that can be created by the scale, speed and apparent diversity of the markets. The course focuses on the current profile of the markets and offers up-to-date insights. It also emphasises the integrated nature of the market - in particular, how different instruments perform the same or similar functions and the opportunities this provides for arbitrage and hedging. It also analyses the liquidity characteristics and risks of different instruments and funding strategies. How will this course assist you? This interactive 4 day training course will provide delegates with the skills to: Understand all FX & money market instruments (including short-term interest rate products) Learn how and why the FX markets fluctuate and the impact of central banks Manage interest rate and currency risk using money market instruments Design hedging strategies using swaps, FRAs, futures and options Identify arbitrage opportunities Understand the liquidity and capital implications of different funding sources for both liquidity desks or in your treasury division Who Should Attend? Managers Corporate Money Market Treasury Executives Relationship Officers Foreign Exchange Executives Accountants and Auditors Finance Executives
Day 1 Overview What the money market does: liquidity and risk management Primary & secondary characteristics Cash v forwards v derivatives The Euromarkets Distinguishing the money and capital markets The interface between the FX and the money markets Money market discount rates What drives rates of return Bid/off spreads Exercise: Valuing a short-term & multi-year certificate of deposit (CD) Traditional Cash Instruments Comparison of functions; origins, structures, pricing and other calculations; method of quotation and other conventions; spreads, negotiability and marketability, security, underwriting, liquidity, terms and type of return Deposits and deposit indices: LIBOR, EURIBOR, Fed funds, overnight indices (eg EONIA) Traditional money market securities: treasury bills and bank bills Modern money market securities: CD, CP Relative yield spreads in the money market Credit, liquidity and other drivers The impact of the crisis Exercise: Calculating nominal and effective rates on transactions rolled over. Day 2 Repo The mechanics of a repo Collateral management including margining Legal vs. economic character: how repo works Credit & liquidity exposure on repo Custody of collateral: delivery, HIC or tri-party GC repo and specials GC repo rate and spreads to other money markets Specials and links to securities lending Types of repo: repurchase agreements; sell/buy-backs Interest Rate Risk Management in the Money Market What is interest rate risk? Asset/liability characterisation Quantifying interest rate risk by calculating breakeven rates Forward rate arithmetic Forward rates and forward curves Market expectations, the wedge Trading Interest Rate Risk Forward-forward loans and deposits The disadvantages of on-balance sheet risk management Inventing off-balance sheet instruments and derivative instruments Using forward-forward instruments to synthesise longer-term interest rate exposures More forward rate arithmetic Why synthetic instruments can provide cheaper funds and higher returns Case study: Maximising returns using synthetic investments as alternatives to cash investments. Day 3 Money Market Derivatives: FRA Origin, evolution from forwards Definition Contract specifications including P/L calculation Hedging with FRAs, hedged rates, imperfections Synthetic loans & deposits Case study: Hedging cash exposures with FRAs and calculating hedged costs of borrowing or lending. Money Market Swaps Definition & mechanics The function of interest rate swaps Hedging swaps: warehouses Pricing swaps Links to other money market instruments including repo Types of swap including basis swaps Structured swaps: LIBOR-in-arrears OIS: definition, function, use Case study: Pricing and valuing an interest rate swap. Money Market Futures Definition Contrast with OTC markets The structure and operation of exchangesThe role of the clearing house Initial margins and variation margins Method of price quotation Specifications of the main contracts Calculating profit/loss using ticks Using the money market on interest rate changes; spread trading Using the money market on interest rate changes for borrowers and investors Hedge ratios Simple hedging strategies: stack and strip hedges; interpolative and extrapolative hedging The problem of basis risk Types of basis, convergence Hedging basis risk with spread trades The problem of convexity bias against OTC Day 4 Foreign Exchange Basic exchange rate conventions Forward FX and currency risk Hedging and pricing a forward FX transactionForward FX arithmetic Interest parity theorem and covered interest Arbitrage Methods of forward FX quotation Covered interest arbitrage calculations for borrowers and lenders The arbitrage square. Implying interest rates from forward foreign exchange rates Exercise: Identifying and quantifying a covered interest arbitrage opportunity from market prices. The Foreign Exchange Swap The origins of and rationale for the FX swap The mechanics of the swap Swaps vs. outrights FX swap terminology Using swaps in hedging and liquidity management Overnight and tom/next swaps Rolling over spot positions Hedging early currency deliveries Extending swap positions Historic rate swaps Trading swaps Forward-Forward Swaps Pricing forward-forward swaps Taking interest rate risk with FX swaps Currency swaps including cross-currency basis swaps NDFs Hedging and pricing synthetic FRAs Course summary and close