Managing FX Risk Using Derivatives

Day One

Overview

• Background and global view
• Impact of political and economic events on FX markets

The Foreign Exchange Spot Market

• Mechanism of FX spot trades
• Market conventions for quotation and settlement
• Currency triangles and the chain rule
• Bid offer spreads, liquidity and depth
• Electronic trading platforms
• Managed and restricted currencies: pegged exchange rates, onshore/offshore markets

FX Forwards and Futures

• FX market risk and the concept of hedging
• Forward contracts: strike calculation, settlement and market quotation conventions
• Mathematical formulae for the fair forward rate, with worked examples
• Electronic trading platforms
• How futures contracts work
• Trading on an exchange, margin treatment
• Payoff scenario analysis

Workshop: Manage FX Risk using a Forward Contract Work through the lifecycle of an FX forward contract: calculate the fair forward rate; set the strike; specify the OTC contract; re value your position through its life; settle the contract with the counterparty

Currency Swaps

• Managing FX risk over extended time periods
• The structure of a currency swap and its use as a hedging/re structuring tool
• Relationship with bonds and FX forwards

Introduction to Vanilla Options

• The concept of optionality
• Specification and mechanism of vanilla options

Workshop: Manage FX Risk using a Dual Currency Deposit (DCD) Explore the FX risk in a deposit under multiple currency views. Demonstrate how vanilla options can be used to manage the risk. Structure a Dual Currency Deposit. Analyze different outcome scenarios

Day Two

Properties of Vanilla Options

• Put Call parity and other risk relationships
• Properties of vanilla options: premium, P&L, time value, intrinsic value, moneyness
• Market conventions for quotation – the 6 quotation styles and how to convert between them
• Variation of premium with market and contract parameters
• Electronic trading platforms

Vanilla Options Structures

• Spreads, straddles, strangles, risk reversals, and other structures
• The risk characteristics of different structures and their relative merits for hedging or speculation
• Scenario analysis

Workshop: Manage FX Risk using a Risk Reversal (I) Assess an FX risk position. Devise and explain a vanilla structure hedge. Specify the parameters of the structure. Perform scenario analysis

FX Exotic Options

• Variations on the vanilla: cash settlement, late delivery, European digitals, quanto options
• Barrier options
• Volatility swaps

Further topics in FX Risk Management

• Non deliverable forwards
• The Dual Currency Deposit (DCD)
• Currency overlay

Measuring and Reporting FX Market Risk

• Introduction to the option “Greeks”
• Spot ladders and other risk reports
• Handling multiple currency pairs

Workshop: Manage FX Risk using a Risk Reversal (II) Assess an FX risk position. Consider various barrier options as hedges. Choose the most suitable option type. Specify the terms of the contract. Calculate the size of hedge needed. Perform scenario analysis