13/02/2023
AN GIANG UNIVERSITY
FACULTY OF ECONOMICS AND
BUSINESS ADMINISTRATION
INTERNATIONAL PAYMENT
FOREX TRADING
Course Coordinator
Dr Dang Hung Vu
Head of Accounting and Finance Department
Email: dhvu@agu.edu.vn
Tel: 090 369 3384
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an exchange of currencies at the prevailing
market rate: Spot rate
For most currencies, a spot
transaction consists of
a transaction intended to settle in two
business days;
but for the Canadian dollar (CAD) and
Mexican peso (MXN) a spot transaction is
often settled in one business day
Religion date: United Arab Emirates
weekend on Friday & Saturday
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a forward contract or simply a forward is
a non-standardized contract between two
parties to buy or to sell an asset at a
specified future time at a price agreed
upon today (forward rate),
making it a type of derivative instrument.
1 Id K Rf: Forward rate
Rf Rs
1 Iu K Rs: Spot rate
Id: Interest of pricing currency
𝑁 Iu: Interest of quoted currency
𝑅𝑓 = 𝑅𝑠 + 𝑅𝑠 (𝐼 − 𝐼𝑢 )
365 𝑑
K=N/365
N: Number of days
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Bid vs. Ask rate
1 Id K
Rf Rs
1 Iu K
composed of two transactions with the
same amounts, different value dates and
in different ways
Forex swap transaction consists of two
legs:
◦ a foreign exchange spot transaction and
◦ a foreign exchange forward transaction.
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In the interbank market, the swap rate does not
carry plus or minus signs, but you can know
whether the forward rate is at a discount or a
premium by comparing the ask and the bid.
If the forward ask rate is higher than the forward
bid rate (77 - 79) the forward rate is at a
premium.
If the forward ask rate is lower than the bid (79 -
77), the forward rate is at a discount.
Suppose that the Japanese yen sells at $
0.008058, whereas 180-day forward yen
are priced at $ 0.008135. Thus the swap
rate for the 180 day forward yen is quoted
at 77-point premium (a point refers to the
last digit quoted)
A swap rate can be converted into an
outright rate by adding the premium to, or
subtracting the discount from, the spot rate.
The spot rate is JPY 100 = USD 0.8056 - 58.
The 90 day yen swap rate is 77 - 79
Thus, the 90 day forward rate is :
JPY 100 = USD 0.8133 - 37
If the 90 day yen swap rate was 79 - 77 :
Then, the 90 day forward rate would be :
JPY 100 = USD 0.7977 - 81.
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The main impediment of forward market is
that forward contracts (or OTC options)
are tailor-made, and thus difficult to sell
Thus, markets have developed financial
products, called futures, similar to forward
contracts but standardized in terms of
notional amount and term delivery
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Forward contracts are private deals
between 2 individual who can sign any
type of contract they agree on (for
example, a contract for EUR 30,000 in 16
months to be paid in VND)
Future contracts are standardized
contracts that trade on organized futures
markets for specific dates only.
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With only a few standardized contracts
traded, the trading volume in available
contracts is higher, leading to superior
liquidity, smaller price fluctuations, and
lower transaction costs
The clearing house eliminates default risk
of trading
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Currency futures
contracts available for : ◦ Euro
◦ Japanese yen ◦ British Pound
◦ Swiss Franc
◦ Canadian dollar
◦ Russian Ruble
◦ Australian dollar ◦ Czech koruna
◦ New Zealand dollar ◦ Hungarian forint
◦ Brazilian real ◦ Norwegian krone
◦ Mexican peso ◦ Polish zloty
◦ South African Rand ◦ Swedish krona
Currency Euro British Japanese Swiss Franc Canadian
Pound Yen Dollar
Symbol EC BP JY SF CD
Contract size € 100,000 £ 62,500 Y 12,500,000 SFr 125,000 C$ 100,000
Initial deposit $ 2,700 $ 1,755 $ 2353 $ 2,295 $ 1,485
hedge/member $ 2,000 $ 1,300 $ 1,750 $ 1,700 $1,100
Maintenance
Tick $0.0001 $0.0002 $0.000001 $0.0001 $0.0001
Value of 1 $10.00 $6.25 $12.5 $12.5 $10.00
point
Forward and futures contracts protect the
holder against the risk of adverse
movements in exchange rates…
… But they eliminate the possibility of
gaining from favorable movements.
That’s probably why commercial banks
started to offer currency options to their
customers.
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An option is a contract that gives the holder the right
- but not the obligation - to buy (if the option is a call)
or to sell (if the option is a put) another financial
instrument (or a certain quantity of oil, soya beans,
cocoa, coffee…) at a set price and date.
An European option can be exercised only at
maturity, while an American option can be exercised
at any time up to maturity.
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An option has 5 characteristics :
◦ its type : loại hợp đồng
Call / put, American / European
◦ its underlying: nội dung lựa chọn
Quyền chọn mua/ bán cái gi?
◦ its strike price/ exercise price: giá thực hiện
Mức giá mua/ bán
◦ its expiration date: ngày hết hạn
Ngày hiện quyền (American)
Chính là ngày có thể thực hiện quyền (European)
◦ its premium: phí quyền chọn
Mức giá phải trả để có được quyền
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max(0 ; S-X)
S = spot price
X = strike price
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Ngày đáo hạn, có 2 trường hợp:
spot price < call strike price
◦ Không thực hiện quyền chọn mua
◦ Giá trị thực chất của hợp đồng Call = 0
spot price > call strike price
◦ Thực hiện quyền chọn
◦ Mua ở mức giá thấp hơn giá thị trường
◦ Giá trị thực chất của hợp đồng Call S - X.
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intrinsic
value of the
call
S-X
Spot price of
the underlying
S
Strike price X
Option “out of the money” Option “in the money”
Option “at the money”
max(0 ; X-S)
S = underlying spot price
X = option strike price
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Ngày đáo hạn có 2 trường hợp:
spot price < put strike price
◦ Thực hiện quyền
◦ Bán ở mức giá cao hơn giá thị trường
◦ Giá trị thực chất của HĐ put = X - S
spot price > put strike price
◦ Không thực hiện quyền
◦ Giá trị thực chất của HĐ put = 0
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intrinsic
value of the
put
X-S
Spot price of
the underlying
S
Strike price X
Option “in the money” Option “out of the money”
Option “at the money”
Giá giao ngay thời điểm
đáo hạn
X
Underlying spot
price at maturity
-P
Breakeven point/
Điểm hòa vốn: X + P
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Underlying spot
price at maturity
X
-P
Breakeven
point : X - P
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The seller of an option wins exactly what
the buyer loses.
At most, she can earn the premium. The
amount of the potential loss is unlimited in
case of a high variation of the underlying
◦ Why do anybody accept to sell an option ?
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Put bought
call bought
Call sold
Put sold
Underlying spot
price at maturity
X
-P1
-P2
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If you think that the spot price at maturity
will be close to the exercise price (more or
less the premium)
or if you are hedged (for example, you can
sell a call dollar/euro if you are “long” in
dollars, you can sell a put dollar/euro if
you are “short” in dollars)
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In order to hedge against a fall of the Euro, GE
could buy a put, maturity 6 months.
Let’s suppose that GE buys a European put strike
$0.9975/EUR, notional value EUR 10 million,
premium 0.12 cents/EUR.
The immediate cost of this option is $12,000.
On June 30, different situations must be
considered.
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a forex strategy in which
a currency trader takes advantage of
different spreads offered by brokers for a
particular currency pair by making
trades
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Example :
in Paris : USD/EUR = 0.8996 – 0.8997
in New York: EUR/USD = 1.1124 – 1.1126
Suppose you have (or can borrow)
€1,000,000. What can you do ?
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Example :
◦ In New York : GBP/USD = 1.5422 - 25
◦ in Frankfurt : EUR/USD = 0.9249-51
◦ in London : GBP/EUR = 1.6648-50.
Tại FF & LD: GBP/USD = 1,5398-1,5403
Suppose you have (or can borrow)
US$1,000,000. What can you do ?
Mua GBP ở London (1,5403) bán tại NewYork (1,5422)
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NEW YORK
GBP USD
EUR
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Sell USD for EUR at Frankfurt
Sell EUR for GBP at London
Sell GBP for USD at New York
Such arbitrages will tend to cause:
◦ The euro to appreciate against the dollar in
Frankfurt
◦ The euro to fall against the £ in London
◦ The £ to fall against the dollar in New York
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