A Brief History of the FX Market’s Evolution
Foreign Exchange Markets
Predicting FX Movement
Basic FX Instruments
Trading Floor Dynamics
FX Options: An Intuitive Approach
Famous Formulas, Fame and Fortune
Getting to the Formula and the Correct Probability Distribution
The Greeks – A Practical Approach
Portfolio Management and Second-order Greeks
FX Options Trading Book & Risk Measurement
Hedging FX Risk at Corporations
You Have Options
Situations Gone Mad, From the Most Complex to the Simplest
Speculators and Hedge Funds: How Do Portfolio Managers Make Money?
Speculating and Hedging: The Fundamental Differences
There are two broad intertwining paths in any asset class: the core, or underlying instrument, and the derivative path. By definition, the derivative is a derivation of the underlying, so it cannot exist without the core. With that in mind, this chapter will build some foundations in core FX so we can later move onto the derivative part.
Four related instruments will be discussed:
- FX spot market;
- forward market;
- non-deliverable forward (NDF) market; and
- cross-currency swap as it relates to the cross-currency basis.
It can be argued that the forward market is nothing more than spot for delayed delivery, that an NDF is an artificial, virtual forward and that a cross-currency swap is a series of forwards. Why examine them separately? The reason is that there are many differences in application and effectiveness that make them very interesting and critical to understand, especially if we want to advance to more complex derivatives. To get some context, we begin with the desks on a typical bank trading floor that trades and sells these products.
Although we will be looking at the mechanics of the market, it is critical to appreciate changes