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Foreign Exchange: A Practical Guide to the FX Markets

Book Description

Praise for Foreign Exchange

"Tim Weithers starts by telling the reader that foreign exchange is not difficult, just confusing, but Foreign Exchange: A Practical Guide to the FX Markets proves that money is much more exciting than anything it buys. This useful book is a whirlwind tour of the world's largest market, and the tour guide is an expert storyteller, inserting numerous fascinating insights and quirky facts throughout the book."

-John R. Taylor, Chairman, CEO and CIO, FX Concepts

"The book reflects the author's doctorate from the University of Chicago, several years' experience as an economics professor, and, most recently, a very successful decade as an executive at a huge international bank. These fundamental ingredients are seasoned with bits of wisdom and experience. What results is a very tasty intellectual stew."

-Professor Jack Clark Francis, PhD, Professor of Economics and Finance, Bernard Baruch College

"In this book, Tim Weithers clearly explains a very complicated subject. Foreign Exchange is full of jargon and conventions that make it very hard for non-professionals to gain a good understanding. Weither's book is a must for any student or professional who wants to learn the secrets of FX."

-Niels O. Nygaard, Director of Financial Mathematics, The University of Chicago

"An excellent text for students and practitioners who want to become acquainted with the arcane world of the foreign exchange market."

-David DeRosa, PhD, founder, DeRosa Research and Trading, Inc., and Adjunct Professor of Finance, Yale School of Management

"Tim Weithers provides a superb introduction to the arcana of foreign exchange markets. While primarily intended for practitioners, the book would be a valuable introduction for students with some knowledge of economics. The text is exceptionally clear with numeric examples and exercises that reinforce concepts. Frequent references are made to the economic theory behind the trading practices."

-John F. O'Connell, Professor of Economics, College of the Holy Cross

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication
  4. Preface
  5. Acknowledgments
  6. CHAPTER 1 - Trading Money
    1. INTRODUCTION
    2. TRADING MONEY
    3. THE ROLES MONEY PLAYS
    4. THE MAJOR CURRENCIES
    5. SOME INTERESTING QUESTIONS
    6. APPENDIX: Countries, Currencies, and ISO Codes
  7. CHAPTER 2 - Markets, Prices, and Marketmaking
    1. WHAT IS A “MARKET”?
    2. WHAT IS A “PRICE”?
    3. BUYERS AND SELLERS
    4. MARKETMAKING
    5. SUMMARY
  8. CHAPTER 3 - Interest Rates
    1. WHAT ARE “INTEREST RATES”?
    2. INFLATION
    3. DAY COUNT OR DAY BASIS
    4. COMPOUNDING
    5. DISCOUNTING
    6. TYPES OF INTEREST RATES
    7. INTEREST RATES IN THE REAL WORLD
  9. CHAPTER 4 - Brief History of Foreign Exchange
    1. HISTORICAL BACKGROUND
    2. THE FX MARKETS TODAY
    3. THE REGULATORY ENVIRONMENT AND CENTRAL BANK INTERVENTION
    4. SUMMARY
  10. CHAPTER 5 - The Foreign Exchange Spot Market
    1. THE SPOT MARKET
    2. SPOT FX QUOTING CONVENTIONS
    3. ECONOMIC INTERPRETATION
    4. PURCHASING POWER PARITY
    5. CROSS RATES AND TRIANGULAR ARBITRAGE IN THE SPOT MARKET
    6. THE BID-ASK SPREAD IN FOREIGN EXCHANGE
    7. TIMING
    8. SETTLEMENT
    9. MARKET JARGON
    10. “THE BEST ARBITRAGE AROUND!”
  11. CHAPTER 6 - Foreign Exchange Forwards
    1. INTRODUCTION TO FORWARDS AND FORWARD PRICING
    2. FOREIGN EXCHANGE FORWARDS AND FORWARD PRICING
    3. INTEREST RATE PARITY (COVERED INTEREST ARBITRAGE)
    4. FX SPOT-FORWARD ARBITRAGE
    5. FX FORWARD PRICE QUOTES AND FORWARD POINTS
    6. TIMING
    7. OFF-MARKET FORWARDS
    8. FOREIGN EXCHANGE FORWARDS IN THE REAL WORLD
  12. CHAPTER 7 - Foreign Exchange Futures
    1. BACKGROUND
    2. FUTURES VERSUS FORWARDS
    3. FOREIGN EXCHANGE FUTURES CONTRACT SPECIFICATIONS
    4. MARGIN
    5. WHY USE FUTURES?
    6. OPTIONS ON FX FUTURES
    7. SUMMARY
  13. CHAPTER 8 - Foreign Exchange Swaps or Cross-Currency Swaps or Cross-Currency Interest Rate Swaps or . . .
    1. INTRODUCTION
    2. FX SPOT-FORWARD SWAPS
    3. CROSS-CURRENCY SWAPS OR FX CROSS-CURRENCY INTEREST RATE SWAPS OR FX BOND SWAPS
    4. SUMMARY
  14. CHAPTER 9 - Foreign Exchange Options
    1. OPTION BASICS
    2. EQUITY OPTIONS
    3. PUT-CALL PARITY WITH EQUITY OPTIONS
    4. IN-THE-MONEY, AT-THE-MONEY, AND OUT-OF-THE-MONEY
    5. THEORETICAL OPTION VALUE AND OPTION RISK MEASURES (“THE GREEKS”)
    6. FOREIGN EXCHANGE OPTIONS
    7. PUT-CALL PARITY IN FOREIGN EXCHANGE
    8. PERSPECTIVE MATTERS
    9. FX OPTION PREMIUM
    10. VOLATILITY
    11. USES AND STRATEGIES
    12. APPENDIX: Theoretical Option Valuation
    13. THE BINOMIAL MODEL
    14. THE BLACK-SCHOLES/GARMAN-KOHLHAGEN MODEL
    15. THE GARMAN-KOHLHAGEN OPTION RISK MEASURES OR “GREEKS”
  15. CHAPTER 10 - Exotic Options and Structured Products
    1. WHAT IS AN EXOTIC OPTION?
    2. NONSTANDARD OPTIONS
    3. DIGITAL OR BINARY OPTIONS
    4. BARRIER OPTIONS
    5. OTHER EXOTIC OPTIONS
    6. FX-LINKED NOTES
  16. CHAPTER 11 - The Economics of Exchange Rates and International Trade
    1. MONEY VERSUS CURRENCY
    2. TYPES OF FX EXPOSURES
    3. FIXED VERSUS FLOATING EXCHANGE RATES
    4. IMPLICATIONS OF MONETARY POLICY
    5. TRADE DEFICITS: A CURSE OR A BLESSING
    6. POLITICS AND ECONOMICS
  17. CHAPTER 12 - Currency Crises
    1. THE END OF BRETTON WOODS
    2. BANKHAUS HERSTATT
    3. THE ERM CRISIS OF 1992
    4. THE ASIAN CRISIS OF 1997
    5. THE RUSSIAN CRISIS OF 1998
    6. THE TURKISH LIRA CRISIS OF 2001
    7. THE ARGENTINEAN PESO CRISIS OF 2002
    8. SUMMARY
  18. CHAPTER 13 - Technical Analysis
    1. INTRODUCTION
    2. WHAT IS TECHNICAL ANALYSIS?
    3. METHODS OF TECHNICAL ANALYSIS
    4. TECHNICAL ANALYSIS IN FOREIGN EXCHANGE
    5. TECHNICAL ANALYSISTODAY
    6. SUMMARY
  19. CHAPTER 14 - Where Do We Go from Here?
  20. CHAPTER 15 - Conclusion
  21. APPENDIX - Precious Metals
  22. Answers to the Chapter Exercises
  23. Notes
  24. References
  25. About the Author
  26. Index