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 this course will 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

Supported by:

Day 1

Registration commences at 8:30
Programme runs from 9:00 - 5:00 daily

Overview

• What the money market does: liquidity and risk management
• Who are the major market players?
• The Euromarkets
• Distinguishing the money and capital markets
• The interface between the FX and the money markets

 

Brief review of money market arithmetic
Introducing nominal and effective rates; the concepts of nominal payment and effective value

Exercise: valuing a certificate of deposit (CD); expressing the yield in alternative conventions; restructuring the CD as a discount-paying instrument.

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
• Special determinants and dynamics

Case study: selecting cash money market instruments for liquidity management by analysing the credit and liquidity components of spreads.

Repo

• The mechanics of a repo, terminology, valuation of collateral
• Margining
• Legal vs. economic character
• Credit exposures on repo
• Types of collateral; rights of substitution
• Custody of collateral: delivery, HIC or tri-party
• GC repo and specials
• GC repo rate and spreads to other money markets
• Types of repo: classic repo; sell / buy-backs
• Using repo: borrowing cash; lending securities; lending cash; borrowing securities; trading repo; information
• Specialised use of repo in the derivatives market
• Documentation

Case study: mobilising a portfolio of collateral in the repo market to achieve a balance between maximum and cheapest funding.

 

Day 2

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

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.

Money market derivatives: FRA

• Definition
• Contrast with OTC markets
• The structure and operation of exchanges
• The role of the clearing house
• Initial margins and variation margins
• Method of price quotation
• Specifications of the main contracts
• Calculating profit / loss using ticks

Case study: hedging cash exposures with FRAs and calculating hedged costs of borrowing or lending.

Money market futures

• Definition

• Contrast with OTC markets
• The structure and operation of exchanges
• The role of the clearing house
• Initial margins and variation margins
• Method of price quotation
• Specifications of the main contracts
• Calculating profit / loss using ticks

 

Day 3

 

Money market futures (continued)

• 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, backwardation and contango
• Hedging basis risk with spread trades
• Cash-bucketing / mapping cashflows

Case study: constructing a rolling interpolative hedge with basis hedge for a future liability.

Money market swaps

• Mechanics; settlement; hedging; pricing
• Standard money market swaps
• IMM swaps
• Structured swaps (eg LIBOR-in-arrears)
• OIS
• Definition and mechanics
• Swap strategies
• The problem of convexity bias against futures

Case study: hedging funding with OIS.

Interest rate options

• Options: mechanics, terminology, pricing and valuation
• Relationship to cash instruments
• Use options: comparisons with non-optional instruments
• Caps and floors
• Basic option strategies to reduce premium or tailor directional and volatility exposures

Case study: constructing an option hedging strategy from generic option contracts to express a view on the direction of prices.

Analysing the money markets and the role of the central banks

• Market structure
• Yield curves: construction, theory and practice
• Why central banks intervene in money markets
• The role of central banks in interest rate determination
• How central banks intervene: targets and instruments
• What central banks can do in a crisis
• Comparison of Fed, ECB and Bank of England
• Central bank watching: forecasting and reading intervention

Case study: forecasting euro interest rates in a ‘factional’ scenario selectively reconstructed from past episodes in the history of the ECB.

 

Day 4

 

Foreign exchange

• Basic exchange rate conventions
• The structure of the FX market
• Forward FX and currency risk
• Hedging and pricing a forward FX transaction
• Forward 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 tomorrow day / next swaps
• Rolling over spot positions
• Hedging early currency deliveries
• Extending swap positions
• Historic rate swaps
• Trading swaps

Case study: managing the cashflows on forward currency transactions with customers using FX swaps.

Forward-forward swaps

• Pricing forward-forward swaps
• Taking interest rate risk with FX swaps
• Calculating the P&L
• CFDs; NDFs
• Hedging and pricing synthetic FRAs

Case study: synthesising (hedging and pricing) an emerging market FRA from FX swaps.

Currency options

• Additional considerations
• Structured and exotic currency options
• Currency option trading strategies

Case study: trading currency volatility by constructing a strategy from generic options.

Course summary and close

 

• Richard Comotto

  Richard Comotto is a Visiting Fellow at the ICMA Centre, University of Reading, England and is responsible for the modules on short-term financial markets (FX, money markets and securities financing) and risk management and control in the Centre’s MSc programmes.
  
  He served for 10 years in the Bank of England, including the Bank’s Foreign Exchange Division and on secondment to the International Monetary Fund in Washington DC. He is a course director for the ICMA/ACI annual Professional Repo Market Course, lecturer on ICMA’s Operations Certification Programmes and director of the ICMA semi-annual survey of the European repo market. His special interests include electronic trading in OTC markets.
  
  

FX & Money Markets

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

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