Currency Risk Management Notes
Week 1 – Introduction / Kick-Off Training
Learning objectives are key! Use them to read the sentences. Five question with sub questions and
calculations!! Only one sub-question is theory.
Two important definition to know by hart:
1. Risk aversion: Generally people are risk averse. This means that people don’t like taking risks
so they are usually betting “betting on a save horse”.
2. Supply & Demand: fixed amount of currency in the world. When people want more of the
currency of the US Dollar it rise. When people want less of the currency they “dump it” and
the US Dollar drops.
Currency risks → COVID19, Brexit. Unforeseen events.
Foreign Exchange Markets (FOREX)
A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of
one currency will be delivered for some other currency at a specified rate. The FOREX Markets
provide the physical and institutional structure through which:
- The money of one country (currency) is exchanged for that of another country
- The rate of exchange between currencies is determined
- Foreign exchange transaction are “physically” completed
Main characteristics of FOREX markets:
1. Geographic extent
The geographic extent on worldwide base is 24hrs a day (business days).
2. The daily transaction volume
The size of the FOREX Markets is measured in transaction volume.
3. The functions of FOREX markets
The FOREX Markets provide the mechanism by which participants can transfer purchasing
power between countries, obtain or provides credit for international trade transactions and or
minimize exposure to exchange rate risk. The FOREX markets consist of two levels:
a. The interbank or wholesale market → individual
b. The client- or retail market (“over the counter”) → bigger market such as banks
4. The market’s participations
, 5. Types of transactions including spot, forward and swaps
Transactions within this market can be executed on a spot, forward or swap basis:
- A spot transaction requires almost immediate delivery of foreign exchange.
- A forward transactions requires delivery of foreign exchange at some future date.
- A swap transaction is the simultaneous exchange of one foreign currency for another for two
different value dates (a temporarily exchange). A swap is basically a reverse payment. This
way you don’t use the bank so you don’t pay interest or experience a bad exchange rate.
- (Outright) Forward Transaction → This transaction required delivery at a future value date
of a specified amount of one currency for another. The exchange rate is established at the time
of the agreement, but payment and delivery are not required until maturity. Forward rates are
contracts quote for value dates of one, two, three, six, nine and twelve months.
Free Floating currencies → no state intervention on FOREX markets: exchange rate reflect
supply and demand conditions.
Fixed exchange rates → Central Bank buys or sells its currency at a fixed price in order to
stabilize the value to another currency.
Managed Floating Exchange Rates → an exchange rate systems that allows a nation’s
central bank to intervene regularly in foreign exchange markets to change the direction of the
currency’s float.
6. Methods of stating exchange rates, quotations, and changes in exchange rates
A foreign exchange quote is a statement of willingness to buy or sell at an announced rate. In
the retail markets (newspapers and exchange-‘shops’) quotes are often given as the home
currency price of the foreign currency. Quotes – professional dealers or brokers may state
quotes in these ways:
- The foreign currency price of the unit one dollar: SFR1.6000/$, reads as ‘I have to pay 1.600
Swiss francs for one dollar”
- The dollar price of a unit of foreign currency: $0.6250/SFR, reads as ‘I have to pay 0.625
dollars per Swiss Franc’
How to calculate the opposite exchange rate?
Euro 0. USD → 1 EURO / 0.8214 = 1.2174 USD
A direct quote is a home currency price of a unit of a foreign currency. → EURO
0.8214/USD1.00 is a direct quote (on the dollar) in Europe
An indirect quote is a foreign currency price in a unit of the home currency → USD
1.2174/EUR1.00 is a direct quote in the us and an indirect quote in Europe.
Interbank quote are given as bas and ask currencies. The bid is the price at which a dealer will
buy another currency. The ask or offer is the price at which a dealer will sell another
currency.
Week 1 – Introduction / Kick-Off Training
Learning objectives are key! Use them to read the sentences. Five question with sub questions and
calculations!! Only one sub-question is theory.
Two important definition to know by hart:
1. Risk aversion: Generally people are risk averse. This means that people don’t like taking risks
so they are usually betting “betting on a save horse”.
2. Supply & Demand: fixed amount of currency in the world. When people want more of the
currency of the US Dollar it rise. When people want less of the currency they “dump it” and
the US Dollar drops.
Currency risks → COVID19, Brexit. Unforeseen events.
Foreign Exchange Markets (FOREX)
A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of
one currency will be delivered for some other currency at a specified rate. The FOREX Markets
provide the physical and institutional structure through which:
- The money of one country (currency) is exchanged for that of another country
- The rate of exchange between currencies is determined
- Foreign exchange transaction are “physically” completed
Main characteristics of FOREX markets:
1. Geographic extent
The geographic extent on worldwide base is 24hrs a day (business days).
2. The daily transaction volume
The size of the FOREX Markets is measured in transaction volume.
3. The functions of FOREX markets
The FOREX Markets provide the mechanism by which participants can transfer purchasing
power between countries, obtain or provides credit for international trade transactions and or
minimize exposure to exchange rate risk. The FOREX markets consist of two levels:
a. The interbank or wholesale market → individual
b. The client- or retail market (“over the counter”) → bigger market such as banks
4. The market’s participations
, 5. Types of transactions including spot, forward and swaps
Transactions within this market can be executed on a spot, forward or swap basis:
- A spot transaction requires almost immediate delivery of foreign exchange.
- A forward transactions requires delivery of foreign exchange at some future date.
- A swap transaction is the simultaneous exchange of one foreign currency for another for two
different value dates (a temporarily exchange). A swap is basically a reverse payment. This
way you don’t use the bank so you don’t pay interest or experience a bad exchange rate.
- (Outright) Forward Transaction → This transaction required delivery at a future value date
of a specified amount of one currency for another. The exchange rate is established at the time
of the agreement, but payment and delivery are not required until maturity. Forward rates are
contracts quote for value dates of one, two, three, six, nine and twelve months.
Free Floating currencies → no state intervention on FOREX markets: exchange rate reflect
supply and demand conditions.
Fixed exchange rates → Central Bank buys or sells its currency at a fixed price in order to
stabilize the value to another currency.
Managed Floating Exchange Rates → an exchange rate systems that allows a nation’s
central bank to intervene regularly in foreign exchange markets to change the direction of the
currency’s float.
6. Methods of stating exchange rates, quotations, and changes in exchange rates
A foreign exchange quote is a statement of willingness to buy or sell at an announced rate. In
the retail markets (newspapers and exchange-‘shops’) quotes are often given as the home
currency price of the foreign currency. Quotes – professional dealers or brokers may state
quotes in these ways:
- The foreign currency price of the unit one dollar: SFR1.6000/$, reads as ‘I have to pay 1.600
Swiss francs for one dollar”
- The dollar price of a unit of foreign currency: $0.6250/SFR, reads as ‘I have to pay 0.625
dollars per Swiss Franc’
How to calculate the opposite exchange rate?
Euro 0. USD → 1 EURO / 0.8214 = 1.2174 USD
A direct quote is a home currency price of a unit of a foreign currency. → EURO
0.8214/USD1.00 is a direct quote (on the dollar) in Europe
An indirect quote is a foreign currency price in a unit of the home currency → USD
1.2174/EUR1.00 is a direct quote in the us and an indirect quote in Europe.
Interbank quote are given as bas and ask currencies. The bid is the price at which a dealer will
buy another currency. The ask or offer is the price at which a dealer will sell another
currency.
