Currency is a store of value that helps to facilitate trade and investment
The value of currency is inherently equal to the goods and services that you can buy with it
This value is also implied in the rate at which the currency of one nation can be exchanged for the currencies of other nations
Purchasing Power Parity (PPP) theory
The FX market unites a variety of players, including corporations, institutions, banks and governments
A brief history of how the FX markets have developed over the millennia
Different types of FX transactions: FX spots, forwards, swaps and options
Capital flows: while PPP determines exchange rate trends in the long term, short-term movements are influenced much more by capital flows and government interventions
Political and economic factors affect the FX market
Different market analyses: the Plaza Accord, the Tequila Sunset, the Big Bear and the Asian Contagion
Spot FX Markets
Spot foreign exchange transactions settle two business days from the trade date
The exchange rates of freely convertible currencies are quoted as two way prices (usually against the US dollar)
Forex dealers usually quote the exchange rates of various currencies against the US dollar
Forex transactions that do not involve USD are called cross trades, which are derived from the exchange rates against USD
Over-the-counter foreign exchange trading is concentrated in a few financial centres, led by London and New York
FX Forwards and Swaps
An FX forward is a contract in which two parties agree to conduct a foreign exchange on a future date
What forward points are and when points are added or subtracted
When we pay or earn points
IRPT and its mathematical representation
The bid offer spread on FX forward rates is wider than that of spot rates
The inter-bank FX forward market functions under similar conventions to the spot FX market
Long-dated FX forwards
An FX swap is a combination of a spot and a forward foreign exchange contract
The swaps are defined as buy/sell or sell/buy depending on whether we buy the base currency now and sell it back later or vice versa
Swaps are traded in the market on the basis of swaps points
The mechanics of forward-FX forward contracts and their application
SAFEs are standardised, non-deliverable forward contracts, which come in two flavours: the ERA and the FXA
Use of the IRPT to calculate implied interest rates
FX Futures and Options
Futures are contracts that oblige counter-parties to perform a trade on an underlying security on a future date
The features of a futures contract
Currency futures are FX forward contracts that are traded on a derivatives exchange
The cost of carry is the difference between the futures price and spot price
Derivatives exchanges require buyers and sellers of futures contracts to maintain a margin account with the clearinghouse
Currency futures versus FX forwards
A foreign exchange option is a contract that gives its owner the right to undertake a currency exchange on a future date
The difference between a call option on a currency and a put option
Call and put strategies: buying a call option and selling a call option
A call and a put struck at the same exchange rate constitute a straddle
What buying and selling a straddle involves
Range forwards and their application
What a zero premium option is
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