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Advanced Foreign

Exchange Derivatives
This in-house course can also be presented face to face in-house or via live on-
line webinar for your company

The Banking and Corporate Finance Training Specialist


Course Objectives

The broad objectives of the programme are:

◼ To provide a complete understanding of the properties and risk profiles of FX derivative


products.
◼ To provide participants with a thorough understanding of the applications of FX
derivatives so that they have the ability to advise their clients on strategies that may
be used to meet specific hedging, trading and structuring requirements.
◼ To provide Course Overview
participants with a thorough understanding of pricing techniques used in FX
derivatives. This will give participants a good understanding of whether prices quoted
are fair.
◼ To provide participants with a thorough understanding of the risk management
processes and techniques used in FX derivatives. This will allow participants to explain
risk reward expectations to investors and users and better manage risks in their own
portfolios.
◼ To provide participants with a thorough understanding of the trading, hedging and
investment strategies and techniques used in FX derivatives. This will allow participants
to match products to their market expectations and risk profiles.
◼ To explain to participants how collateral management works through the process of
VaR, marking positions to market and margin management. This will give prime
brokers a better understanding of the role of collateral in risk reduction. It will also
allow fund managers to plan for future cash flow movements in their funds and keep
liquidity requirements to a minimum.

Course Content

Day 1
A short recap of the properties and risk/reward profiles of FX derivative
products?
◼ Derivative Products
• Futures
▪ Outright Forward Contracts
▪ Non Deliverable Forwards
▪ Currency Futures
• Options
▪ Conventional Currency Options
▪ Barrier Options
▪ Warrants
• Swaps
▪ FX Swaps
▪ Currency Swaps

Exercise for Module 1


Participants will be asked to explain the properties and risk reward profiles of a
series of FX derivative products.
Who might use FX derivatives and why? This module examines the uses of the
products by both corporations, traditional fund managers and hedge funds and
high net worth individuals.
◼ Derivative Products
• Currency Futures and Outright Forwards
▪ Used by corporations to hedge translation and transaction FX exposure
▪ Used by traditional fund managers to hedge FX risk in portfolios and change
currency asset allocation
▪ Used by macro hedge funds to speculate on future value of the currency pairs
• Currency Options and Barrier Options
▪ Used by corporations, traditional fund managers, and hedge funds for:
▪ Directional trading
▪ Hedging of risk
▪ Placing risk into a collar
▪ Yield enhancement
▪ Volatility trading
• FX swaps
▪ Used by banks and corporations for:
▪ Asset allocation
▪ Financing mismatched loan and deposit books
• Currency swaps
▪ Used by high grade issuers in a bond and swap structure

Exercise for Module 2


Participants will be provided with a series of market expectations and trade
criteria and be asked to choose an FX derivative product to use, giving their
reasons and expected outcomes over a range of spot prices at maturity.

How are FX derivatives priced? This module examines pricing of the products.
◼ Futures and Outright Forward contracts by a combination of
• Buying the base/pricing currency and selling the pricing/base currency
• Financing the position with currency repo
• Deriving the fair forward price by the maturity cash flows (interest rate parity)
• By using swap points that are traded in the market as a product in their own right
◼ Options using a variant of Black-Scholes Pricing model which requires inputs for:
• FX spot rate
• Two sets of interest rates
• Implied volatility
◼ Currency Swaps by decomposing into:
• An exchange of principal
• Two interest rate swaps
• A basis swap

Exercise for Module 3


Participants will be provided with a set of spot prices, interest rates, volatilities
and will be asked to price various products. For this exercise participants will
be given a pricing model for options but will be expected to build their own
pricing model for the Delta 1 products.
Day 2
How are FX derivatives risk managed?
◼ FX Delta 1 instruments
• VaR
◼ Options
• Delta and gamma silos for underlying FX price risk
• Vega ladders for volatility risk
• Phi and rho for interest rate risk
• Theta for the impact of time decay
• Second order Greeks for portfolio management
▪ Vanna, vomma, charm, vera and DvegaDtime
• Special risks associated with barrier options
▪ Inverting volatility
▪ Pin risk

Exercise for Module 4
Participants will be provided with a set of spot prices, interest rates,
volatilities and market expectations and will be asked to project the expected
profit or loss (risk) for various products as a result of changes in market
conditions. For this exercise participants will be given a risk analytics
programme for options. For Delta 1 products they will expand the model that
they built in Module 3 to incorporate “what if” scenario analysis.

Trading Strategies. This module discusses how to choose a strategy to fit a


market expectation.
◼ FX delta 1 products
• Directional strategies
◼ Options
• Directional trading
• Volatility trading
• Spread trading
• Income enhancement

Exercise for Module 5


Participants will be provided with a series of market expectations and trade
criteria and be asked to choose a strategy to use, giving their reasons and
expected outcomes over a range of spot prices at maturity.

Life cycle of a trade and collateral management including examples of mark to


market. This module provides an in-depth analysis of risk and collateral
management to ensure that participants understand how risk is reduced.
◼ Trade execution
• Request for quote from the buy-side
• Price construction from the sell-side
◼ Mark to market for futures, outrights and FX swaps
• Changes in spot price
• Financing cost (carry)
• Changes in interest rates
• Passage of time
◼ Options
• Change in spot price
• Changes in volatility
• Changes in interest rates
• The passage of time
Exercise for Module 6arket and manage the collateral over these two marks. One
of the marks will be for a profitable market movement and the other for a losing
market movement. They will then close the trade out and calculate the final
profit or loss and manage the close out of the strategy and the return of the
collateral.

Course Summary

This programme has been designed to provide a thorough overview of FX derivatives


products, pricing, risk management and applications. We will use real life case study
examples to illustrate the techniques and strategies that are used by both “buy side” and
“sell side”.

Participants will require laptops with MS Excel for the exercises and case
studies.

Redcliffe has provided in-house training for the following companies:

http://redcliffetraining.com enquiries@redcliffetraining.co.uk +44 (0)20 7387 4484


Tailored Learning
All of our training courses can be tailored to suit your company’s exact training needs.

We will work closely with you to help develop a training programme with content that is
unique for your organisation.

Please email us on enquiries@redcliffetraining.co.uk for more information

E-Learning
This course can also be presented as a bespoke e-learning programme created by you to fit
your exact requirements.