Foreign Exchange, Money Markets and Derivatives

Why Attend

The global foreign exchange (FX) and money markets are the world’s largest markets and pivotal parts of the financial system. In foreign exchange alone, more than $5 trillion of transactions occur daily. These markets provide funding, trading and investment opportunities and are the conduit between all other components of the world’s capital 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 course provides a strong foundation on the instruments and activities of the international money and FX markets; and it focuses on the current profile of the markets and offers insights based on the lessons learned from the 2007-09 financial crisis as well as the latest market developments.

Moreover, the course emphasizes the integrated nature of FX, money markets and derivatives. Mastering the mechanics and usages of such instruments provides excellent opportunities for arbitrage, hedging and risk management for those engaged in corporate treasury functions, commercial banks and asset management companies. The course also analyses the liquidity characteristics and risks of different instruments and funding strategies.

Course Registration

Course Methodology This course uses a wide range of learning methods, including explanatory slides, case studies, detailed examination of Excel models in an interactive workshop style environment and others. Course Objectives By the end of the course, participants will be able to:

Develop a deep understanding of the FX market, its mechanics and major participants
Analyze the role and impact of central banks on FX and money markets
Examine the nature of money supply, open market operations and quantitative easing
Demonstrate a thorough understanding of liquidity, capital adequacy and solvency
Apply analytical skills to key financial products within global money markets
Explain the logic and uses of financial derivatives – forwards, swaps and options
Develop an understanding of key strands of financial risk management

Target Audience This course is suitable for all those working within the banking industry, including wealth managers, auditors, accountants, finance specialists, risk managers, and treasury and product control professionals. It is also suitable for those working with financial services and in corporate finance positions. Target Competencies

Exchange rate and interest rate risk best practices
Analyzing unorthodox policies
Global money, FX markets, and capital flows
Thought leadership

Interface of money markets and foreign exchange (FX)

Size of the markets
Issuance of Treasury instruments, repos, and commercial paper
Overview of the Euromarkets
Legacy issues relating to London Interbank Offered Rate (LIBOR)
Secured Overnight Financing Rate (SOFR), SONIA, ESTER
Treasury bill issuance in different jurisdictions
The mechanics of the Repo market
Forward rates for interest rate and FX
Effective yields when risk adjusted for FX exposures
Arbitrage and interest rate parity
Current market conditions
Risk premia, key money markets spreads and currency outlook

Role of central banks in the financial system

Overview of central banks
- Federal Reserve
- European Central Bank
- People’s Bank of China
- Bank of Japan
- Bank of England
Structure of a central bank balance sheet
Characteristics of central bank’s assets and liabilities
Lender of last resort
Summary of Open Market Operations
Unorthodox monetary policy including quantitative easing (QE)
Independence of central banks
Financial stability and macro-prudential policy
Forward guidance and transparency of decision making
Management of FX reserves and exchange rate policy
Nature of payments systems – real-time gross settlement systems (RTGS), net settlement, Fedwire, Target2

Monetary policy and money supply

Overview of the policy committees
- Federal Open Market Committee (FOMC)
- Monetary Policy Committee of the Bank of England (MPC of BOE)
- European Central Bank (ECB Governing Council)
- The People’s Bank of China (PBOC) governance
Overview of money supply
Monetary tools and how they impact money supply
How is money created in a modern economy
Inflation targeting
Central bank reserves
Explanation of the Taylor rule
Term structure of interest rates

Foreign exchange market characteristics

Size of market, volumes, participants, major currency pairs
Regional breakdown of where and when most FX trading takes place
Key role of London market in FX trading
Historical background to today’s FX market
Role of the International Monetary Fund (IMF) and Special Drawing Rights (SDR’s)
Global FX reserves
Review of several key historical FX rates
Price of gold and relationship to the US Dollar index

Interest rate (IR) swaps

Basic structures and terminology of swaps
Business case for using IR swaps
Contrast money market rates and IR swap rates
Notion of swap as an aggregation of forward rate agreements
Pricing the fixed leg and interpreting the swap markets
Counter party risk
Recognition that credit valuation adjustment (CVA) is integral part of trading practices and pricing of derivatives and not just a regulatory (Basel) issue
Over-The-Counter (OTC) market versus Swap Execution Facilities (SEF’s)
Collateralized OTC trades versus margin based Central Clearing Party (CCP) platforms
Netting arrangements

Credit default swaps (CDS)

Terminology – protection buyer/seller, reference entity,
Naked CDS positions
Contrast between a CDS and a financial insurance contract
Equating actual and contingent payments
Inputs to model – default probabilities, loss given default (LGD), forward curve
Sovereign and corporate markets
Single name CDS versus basket products, nth to default structures
Determination of a credit event
Recent amendments to the International Swaps and Derivatives Association (ISDA) protocols on determination of credit events
ISDA protocols

Using derivatives for general hedging purposes

Key concepts of hedging equity and fixed income risk with derivatives
Using index futures and options to hedge equity portfolio
Hedge ratio calculation for equity futures
Calculating portfolio beta
Options strategies
Using forwards to hedge forex risk
Using swaps to hedge credit risk
Using variance swaps to hedge volatility risk

Asset/liability management and the treasury function

Interest rate risks
Market risk i.e. re-valuation of bank holdings from changes in interest rates
Accounting issues related to fair value accounting
Duration gap analysis
Interest rate forecasting
Review of inflation protected securities
Estimating the Term Liquidity Premium in money markets
Funds Transfer Pricing (FTP) mechanics
Contingency buffers for liquidity risk management
Funding Value Adjustment (FVA)
Bank funding curves
Applying the correct FTP charges for strategic balance sheet management

The global regulatory framework

Overview of the Basel III framework
Key provisions of Basel III related to market risk, credit risk, liquidity risk and operational risk
Pillars 2 and 3 of Basel accords and role of central banks as supervisors
Contrast macro-prudential policy initiatives with traditional micro-prudential
Pro-cyclical and counter-cyclical risk management
Dodd Frank Act and Financial Stability Oversight Council (FSOC), Volcker rule
Regulatory investigations into market abuse
USA – the Federal Reserve, Treasury, Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC)
UK – Bank of England, Prudential Regulation Authority (PRA), Financial Conduct Authority
European Union – ECB, the European Stability Mechanism (ESM), the European Securities and Markets Authority (ESMA)
Trans national – Bank for International Settlements (BIS), Global Financial Stability Board etc.
Sarbanes-Oxley – risk disclosure, stringent accounting requirements, impact on IT policies
Volcker Rule – restrictions on activities/structure of banks

Foreign Exchange, Money Markets and Derivatives

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