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Currency Markets - Trading, Investing and Hedging

Duration: 3 days
  • Currency Markets and Instruments
  • Fundamental Analysis of Exchange Rates
  • Technical Analysis of Exchange Rates
  • Investing in Currencies
  • Currency Trading Strategies
  • Hedging Currency Risk of Investment Portfolios
  • Hedging Currency Risk in Treasury
The objective of this seminar is to give you a good and practical understanding of currency markets and instruments and of techniques, tools and strategies for currency investing, trading and hedging.

We start with a general introduction to currency markets. We give an overview of instruments traded, including spot, forwards, forward-forwards, long and short term swaps, futures and options. We also explain how global currency markets function, including practical issues such as quoting conventions, execution, clearing and settlement of currency transactions.

We then explain the economic, political and psychological factors that influence exchange rates. Economic factors include government budget deficits or surpluses; balance of trade levels and trends; inflation levels and trends; purchasing power parity. We explain what impact local, regional and international political conditions may have on currency markets, and we discuss possible causes for “psychological” market reactions such as changing risk aversion, “flight to quality”, carry trade reversal etc. We also look at technical considerations related to exchange rates and we explain approaches to forecasting currency movements and how technical analysis is used to spot trends, resistance levels etc.

Further, we explain how investors can invest in currencies as a separate asset class, we present a range of currency trading strategies and we discuss how strategies such as directional and volatility bets, risk reversals and numerous other strategies can be executed using forwards, futures and options. We explain the trading process and stress the importance of a disciplined approach to risk-taking.

Finally, we explain how currency risk can be managed in financial institutions and in the corporate treasury function. We explain how economic, translation, transaction and contingent exposures can be identified and measured, and we explain and demonstrate how these exposures can be hedged using forwards, swaps, futures and options. We also discuss the accounting, regulatory and other practical issues related to currency risk management.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Currency Markets and Instruments

  • General Introduction to Currency and Currency Markets
  • A History of Currency Markets and Exchange Rates
  • Exchange Rate Regimes
  • Currency Instruments
    • Spot
    • Forwards and futures
    • Swaps
    • Options
    • Exotics
  • The Functioning of Currency Markets
    • The links between money markets and FX markets
    • Order routing and execution
    • Clearing and settlement

12.00 - 13.00 Lunch

13.00 - 16.30 Analysis of Exchange Rates

  • Determinants of FX Rates
    • Commercial demand/supply
    • Foreign Direct Investments
    • Portfolio investments and speculative transactions (Carry Trades)
  • Fundamental Analysis of Exchange Rates
    • Purchasing Power Parity
    • Interest Rate Parity/Fisher Open
    • Net investment position
    • Fundamental Equilibrium Exchange Rate (FEER)
  • Technical Analysis of Exchange Rates
    • Indicators, charts, sentiment…
  • Forecasting FX Volatility
    • Moving averages and GARCH modelling
  • Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Currency Investing

  • Currencies as a Separate Asset Class
  • Ways of Investing in Currencies
    • Spot
    • Foreign bonds
    • Structured currency products
    • Currency overlays
  • Exercise

Currency Trading Strategies

  • The Trading Process
    • Formulating currency views
    • Establishing risk-return objectives
    • Choosing strategy and instrument(s)
    • Choosing stop-loss and profit-take levels
    • Implementation and follow-up

12.00 - 13.00 Lunch

13.00 - 16.30 Currency Trading Strategies (Cont’d)

  • Cash Instruments or Derivatives?
  • Pricing Models
    • Currency forwards
    • Currency options
  • Directional Trading Strategies
  • Spread Trading
    • Bull and bear spreads
    • Ratio spreads
    • Calendar spreads
    • Risk reversals
  • Volatility Trading
    • Straddles and strangles
    • Butterflies
    • Condors
  • Follow-up Strategies
  • Exercises and Workshop

Day Three

09.00 - 09.15 Recap

09.15 - 12.00 Hedging Currency Risk in Bank and Corporate Treasury

  • Sources of Currency Risk
  • Types of FX Exposures
    • Transaction risk
    • Translation exposure
    • Economic exposure
  • The Hedging Process
  • Measuring FX Exposure
    • “GAP” and NPV approach
  • Hedging Transaction Risk
    • Using forwards
    • Using “protective puts”
    • Using “covered calls”
    • Using swaps
  • Hedging Economic and Contingent Exposures
  • Using Exotic Options for Hedging Currency Risk
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.00 Hedging Currency Risk in Investment Portfolios

  • Sources of Return on Foreign Currency Hedged Portfolios
    • Yield differential
    • Expected currency returns
    • Unexpected currency returns
  • Hedging NPV (Fair Value) Risk with “Rolling” Hedge
  • “Quanto” Hedges
  • Hedging Cash Flow Risk
  • Creating a Currency Overlay
  • Using Cross Hedges and Proxy Hedges
  • Workshop: Hedging Portfolio of Foreign Bonds/Stocks

Summary, Evaluation and Termination of the Seminar