Download Factors which influence spot and forward rates

Summer 2014
Lesson 1 and 2
1. Wrap up of the winter course
i. Key products of the financial system for non-financial
customers
2. Deep dive into Foreign exchange market and Money Market
i. Spot, Forward, Futures, Options
ii. Deposits, corporate desk
---------------------------Wrap up - T E S T
---------------------------Commercial banking services for non
financial customers
A "commercial bank" is what is commonly referred to as simply a "bank". The term
"commercial" is used to distinguish it from an "investment bank," a type of financial
services entity which, instead of lending money directly to a business, helps
businesses raise money from other firms in the form of bonds (debt) or stock (equity).
The primary operations of banks include:
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Keeping money safe while also allowing withdrawals when needed
Issuance of chequebooks so that bills can be paid and other kinds of
payments can be delivered by post
Provide personal loans, commercial loans, and mortgage loans (typically
loans to purchase a home, property or business)
Issuance of credit cards and processing of credit card transactions and
billing
Issuance of debit cards for use as a substitute for checks
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Allow financial transactions at branches or by using Automatic Teller
Machines (ATMs)
Provide wire transfers of funds and Electronic fund transfers between
banks
Facilitation of standing orders and direct debits, so payments for bills can
be made automatically
Provide overdraft agreements for the temporary advancement of the
Bank's own money to meet monthly spending commitments of a
customer in their current account.
Provide internet banking system to facilitate the customers to view and
operate their respective accounts through internet.
Provide Charge card advances of the Bank's own money for customers
wishing to settle credit advances monthly.
Provide a check guaranteed by the Bank itself and prepaid by the
customer, such as a cashier's check or certified check.
Notary service for financial and other documents
Accepting the deposits from customer and provide the credit facilities to
them.
Sell Investment products like Mutual funds etc.
Investment banking services
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Capital markets services - underwriting debt and equity, assist company
deals (advisory services, underwriting, mergers and acquisitions and
advisory fees), and restructure debt into structured finance products.
Private banking - Private banks provide banking services exclusively to
high-net-worth individuals. Many financial services firms require a
person or family to have a certain minimum net worth to qualify for
private banking services. Private banks often provide more personal
services, such as wealth management and tax planning, than normal retail
banks.
Brokerage services - facilitating the buying and selling of financial
securities between a buyer and a seller.
Foreign exchange services
Foreign exchange services are provided by many banks and specialist foreign
exchange brokers around the world. Foreign exchange services include:
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Currency exchange - where clients can purchase and sell foreign currency
banknotes.
Wire transfer - where clients can send funds to international banks
abroad.
Remittance - where client that are migrant workers send money back to
their home country.
Investment services
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Asset management - the term usually given to describe companies which
run collective investment funds. Also refers to services provided by
others, generally registered with the Securities and Exchange Commission
as Registered Investment Advisors. Investment banking financial services
focus on creating capital through client investments.
Hedge fund management - Hedge funds often employ the services of
"prime brokerage" divisions at major investment banks to execute their
trades.
Custody services - the safe-keeping and processing of the world's
securities trades and servicing the associated portfolios. Assets under
custody in the world are approximately US$100 trillion.
Insurance
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Insurance brokerage - Insurance brokers shop for insurance (generally
corporate property and casualty insurance) on behalf of customers.
Recently a number of websites have been created to give consumers basic
price comparisons for services such as insurance, causing controversy
within the industry.
Insurance underwriting - Personal lines insurance underwriters actually
underwrite insurance for individuals, a service still offered primarily
through agents, insurance brokers, and stock brokers. Underwriters may
also offer similar commercial lines of coverage for businesses. Activities
include insurance and annuities, life insurance, retirement insurance,
health insurance, and property & casualty insurance.
Reinsurance - Reinsurance is insurance sold to insurers themselves, to
protect them from catastrophic losses.
Other financial services
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Bank cards - include both credit cards and debit cards. Bank Of America is
the largest issuer of bank cards
Credit card machine services and networks - Companies which provide
credit card machine and payment networks call themselves "merchant
card providers".
Intermediation or advisory services - These services involve stock
brokers (private client services) and discount brokers. Stock brokers
assist investors in buying or selling shares. Primarily internet-based
companies are often referred to as discount brokerages, although many
now have branch offices to assist clients. These brokerages primarily
target individual investors. Full service and private client firms primarily
assist and execute trades for clients with large amounts of capital to
invest, such as large companies, wealthy individuals, and investment
management funds.
Private equity - Private equity funds are typically closed-end funds, which
usually take controlling equity stakes in businesses that are either
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private, or taken private once acquired. Private equity funds often use
leveraged buyouts (LBOs) to acquire the firms in which they invest. The
most successful private equity funds can generate returns significantly
higher than provided by the equity markets
Venture capital is a type of private equity capital typically provided by
professional, outside investors to new, high-potential-growth companies
in the interest of taking the company to an IPO or trade sale of the
business.
Angel investment - An angel investor or angel (known as a business angel
or informal investor in Europe), is an affluent individual who provides
capital for a business start-up, usually in exchange for convertible debt or
ownership equity. A small but increasing number of angel investors
organize themselves into angel groups or angel networks to share
research and pool their investment capital.
Conglomerates - A financial services company such as a universal bank
that is active in more than one sector of the financial services market e.g.
life insurance, general insurance, health insurance, asset management,
retail banking, wholesale banking, investment banking, etc. A key
rationale for the existence of such businesses is the existence of
diversification benefits that are present when different types of
businesses are aggregated i.e. bad things don't always happen at the same
time. As a consequence, economic capital for a conglomerate is usually
substantially less than economic capital is for the sum of its parts.
Financial market utilities - Organisations that are part of the
infrastructure of financial services, such as stock exchanges, clearing
houses, derivative and commodity exchanges and payment systems such
as real-time gross settlement systems or interbank networks.
Debt resolution is a consumer service that assists individuals that have
too much debt to pay off as requested, but do not want to file bankruptcy
and wish to pay off their debts owed. This debt can be accrued in various
ways including but not limited to personal loans, credit cards or in some
cases merchant accounts.
Deep dive into Foreign and Money
Market
Just to remind.....
FOREIGN EXCHANGE MARKET
Spot
A spot transaction is a two-day delivery transaction (except in the case of trades
between the US Dollar, Canadian Dollar, Turkish Lira, Euro and Russian Ruble,
which settle the next business day), as opposed to the futures contracts, which are
usually three months. This trade represents a “direct exchange” between two
currencies, has the shortest time frame, involves cash rather than a contract; and
interest is not included in the agreed-upon transaction.
Forward
One way to deal with the foreign exchange risk is to engage in a forward transaction.
In this transaction, money does not actually change hands until some agreed upon
future date.
Swap
The most common type of forward transaction is the foreign exchange swap. In a
swap, two parties exchange currencies for a certain length of time and agree to reverse
the transaction at a later date. These are not standardized contracts and are not traded
through an exchange.
Future
Futures are standardized forward contracts and are usually traded on an exchange
created for this purpose. The average contract length is roughly 3 months
Currency futures contracts are contracts specifying a standard volume of a particular
currency to be exchanged on a specific settlement date.
Option
A foreign exchange option (commonly shortened to just FX option) is a derivative
where the owner has the right but not the obligation to exchange money denominated
in one currency into another currency at a pre-agreed exchange rate on a specified
date.
Speculation
Currency speculation is considered a highly suspect activity in many countries. While
investment in traditional financial instruments like bonds or stocks often is considered
to contribute positively to economic growth by providing capital, currency
speculation does not; according to this view, it is simply gambling that often
interferes with economic policy.
MONEY MARKET
As money became a commodity, the money market became a component of the
financial markets for assets involved in short-term borrowing, lending, buying
and selling with original maturities of one year or less.
The money market developed because there are parties that had surplus funds, while
others needed cash.
Participants
The money market consists of financial institutions and dealers in money or credit
who wish to either borrow or lend. Participants borrow and lend for short periods of
time, typically up to thirteen months. Money market trades in short-term financial
instruments commonly called "paper." This contrasts with the capital market for
longer-term funding, which is supplied by bonds and equity.
Functions of the money market
The money market functions are:
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Transfer of large sums of money
Transfer from parties with surplus funds to parties with a deficit
Allow governments to raise funds
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Help to implement monetary policy
Determine short-term interest rates
Corporate desk
- key access point for large corporated into the interbank market
Factors which influence spot and forward rates
- international interest rate differentials
- multinational companies
- political and economic trends
- central bank actions
- formal agreements
Case study
- company has domicil in CZ /accounting in CZK/
- company just got the capital in amount 26 mio USD
- your monthly cash flow is :
- income in 0,5 mio USD
- costs are mainly in CZK /20 mio CZK/
- monthly you need 200k GBP
- with 80% probability you will acquire another
company in 2 years /costs +- 5 mio USD/
- for first year the stability of exchange rate
USD/CZK at level 20 CZK is expected
- 3 months depo rate on USD is 0,2, CZK is 1,5%
- position has to hedged at min. for 6 months
ahead
- your credit line with bank is "unlimited"
- other market data are "real-ones"