Parties And The Risks Involved

Two parties are involved in foreign exchange options the option buyer and the option seller (writer), and Figure 14.3 outlines a risk profile for each. The option buyer has the right to demand fulfilment of the option contract. The owner can exercise the option. The option buyer pays a premium for that right. The option seller (writer) grants the right and receives a premium for accepting the obligation to fulfil the option contract, if the buyer demands. As in spot and forward foreign exchange...

Currency Swaps

A currency swap is an agreement between two counterparties to exchange future cash flows. There are two fundamental types the cross-currency swap and the interest rate single-currency swap. A cross-currency swap involves the exchange of cash flows in one currency for those in another with an agreement to reverse that transaction at a future date. An interest rate swap changes the basis on which income streams or liabilities are received or paid on a specified principal amount. From a foreign...

Fixing Methodology

When a NDF deal is contracted, a fixing methodology is agreed. It specifies how a fixing spot rate is determined on the fixing date, which is normally two working days before settlement, to reflect the spot value. Generally, the fixing spot rate is based on a reference page on either Reuters or Telerate with a back up of calling between three and five market banks. Settlement is made in the major currency, paid to or by the client, and reflects the differential between the agreed upon...

Spot And Reciprocal Rates

The rate used in a spot deal is the spot rate and is the price at which one currency can be bought or sold, expressed in terms of the other currency, for delivery on the spot value date. The ratio at which one currency is exchanged for another for settlement in two business days value date is called the spot exchange rate. The spot exchange rate can be expressed in either currency, thus this price has two parts, the base currency and the equivalent number of units of the other currency. For...

The Gold Standard

Gold was officially made the standard value in England in the nineteenth century. The value of paper money was tied directly to gold reserves in America. Foreign exchange, as we know it today, has its roots in the Gold Standard, which was introduced in 1880. The main features were a system of fixed exchange rates in relation to gold and the absence of any exchange controls. Under the Gold Standard, a country with a balance of payments deficit had to surrender gold, thus reducing the volume of...