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Foreign Exchange Operations: Master Trading Agreements, Settlement, and Collateral

Book Description

The ultimate nuts-and-bolts guide to foreign exchange operations

The foreign exchange landscape is particularly risky since so much of the world is unregulated and takes place over the counter (off exchange). Brilliant traders and money managers who are profitable may find themselves underperforming, or worse, losing, simply because they failed to establish strong operations. In this book, David DeRosa provides industry players with everything they need for strong operational functions from all the types of trades to execution, master trading agreements, documentation, settlement, margin and collateral, and prime brokerage services.

  • Contains vital work flow solutions for trading in the volatile foreign exchange marketplace

  • Offers information for mastering the operational aspect of foreign exchange trading to help determine best partners such as prime brokers and others

  • Written by David DeRosa a leading foreign exchange expert who has consulted to hundreds of financial institutions

Foreign Exchange Operations helps traders mitigate risks and offers a guide to all aspects of trading operations from mastering trading agreements to margin documentation.

Table of Contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Dedication
  6. Preface
  7. Acknowledgments
  8. Chapter 1: Introduction to Foreign Exchange
    1. DEFINING MONEY
    2. PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET
    3. IDENTIFYING CURRENCIES AND EXCHANGE RATES
    4. QUOTATION CONVENTIONS
    5. THE FOREIGN EXCHANGE MARKET
    6. FOREIGN EXCHANGE REGIMES
    7. EXCHANGE RATE CONTROLS
    8. THE STRUCTURE OF THE FOREIGN EXCHANGE MARKET
    9. BANKS' IDENTIFICATION CODES
    10. THE AUTHORITIES
    11. SPOT FOREIGN EXCHANGE DEALS
    12. PROFIT AND LOSS ON A SIMPLE TRADE
    13. VALUE DATES
    14. FORWARD FOREIGN EXCHANGE AND COVERED INTEREST PARITY
    15. FORWARD SWAPS
    16. NON-DELIVERABLE FORWARDS
    17. SUMMARY
    18. APPENDIX 1.1: ISO CURRENCY CODES
    19. REFERENCES
  9. Chapter 2: Options on Foreign Exchange
    1. OPTION BASICS
    2. PUT–CALL PARITY
    3. THE IMPORTANCE OF OPTION MODELS
    4. RISK PARAMETERS
    5. THE MINOR GREEKS
    6. MORE ON DELTA
    7. PORTFOLIOS OF OPTIONS
    8. AMERICAN EXERCISE MODELS
    9. VOLATILITY
    10. IMPORTANT OPTION STRATEGIES
    11. OPTION MARKET MAKING
    12. NON-DELIVERABLE OPTIONS
    13. BARRIER OPTIONS
    14. BINARY OPTIONS
    15. BARRIER DETERMINATION AGENCY
    16. OTHER EXOTIC OPTIONS
    17. MORE ON OPTION-RELATED RISKS
    18. SUMMARY
    19. APPENDIX 2.1: FURTHER COMMENTS ON PUT–CALL PARITY
    20. APPENDIX 2.2: BLACK-SCHOLES-MERTON MODEL
    21. APPENDIX 2.3: BARRIER AND BINARY OPTIONS
    22. REFERENCES
  10. Chapter 3: How Trades Are Executed and Confirmed
    1. SPOT FOREIGN EXCHANGE DEALS
    2. FORWARD OUTRIGHT DEALS
    3. FORWARD SWAP DEALS
    4. OPTION TRADES
    5. HOW FOREIGN EXCHANGE TRADES ARE EXECUTED
    6. CONCENTRATION IN MARKET MAKING
    7. EXAMPLE OF AN ELECTRONIC TRADING PLATFORM: FXALL
    8. TRADE DOCUMENTATION CYCLE
    9. INTERNAL OPERATIONS AND REPORTS FOR DEALERS
    10. SUMMARY
    11. APPENDIX 3.1: TRANSACTIONS AT DAILY FIXINGS
    12. REFERENCES
  11. Chapter 4: Foreign Exchange Settlement
    1. SETTLEMENT INSTRUCTIONS FOR AN INDIVIDUAL SPOT FOREIGN EXCHANGE DEAL
    2. OVERVIEW OF THE SETTLEMENT PROCESS
    3. THE BRETTON WOODS–SMITHSONIAN PERIOD
    4. THE HERSTATT LEGACY
    5. SETTLEMENT RISK
    6. NETTING
    7. HOW THE MODERN SETTLEMENT SYSTEMS DEVELOPED
    8. LARGE-VALUE TRANSFERS
    9. CENTRAL BANK INVOLVEMENT
    10. CORRESPONDENT BANKING
    11. PAYMENT SYSTEMS
    12. DESIGNATED-TIME NET SETTLEMENT (DTNS)
    13. REAL-TIME GROSS SETTLEMENT (RTGS)
    14. EXAMPLES OF MODERN PAYMENT SYSTEMS
    15. CLS BANK
    16. INTERNAL CONTROLS
    17. SUMMARY
    18. REFERENCES
  12. Chapter 5: Master Agreements
    1. MOTIVATION
    2. THE ARCHITECTURE
    3. THE FXC MASTER AGREEMENT FORMS
    4. THE ISDA MASTER AGREEMENT FORMS
    5. SINGLE AGREEMENT
    6. NON-RELIANCE: PARTIES TO RELY ON THEIR OWN EXPERTISE
    7. NETTING: PAYMENT OR SETTLEMENT NETTING AND NOVATION NETTING
    8. EVENTS OF DEFAULT
    9. TERMINATION EVENTS
    10. ADDITIONAL TERMINATION EVENTS
    11. CLOSE-OUT NETTING
    12. SAFE HARBORS
    13. EARLY TERMINATION
    14. PAYMENTS UPON TERMINATION AND CLOSE-OUT AMOUNTS
    15. CLOSE-OUT AMOUNT: 2002 ISDA
    16. SET-OFF PROVISIONS
    17. SPECIAL FEATURES FOR OPTIONS: ICOM AND FEOMA
    18. SPECIAL FEATURES FOR NON-DELIVERABLE FORWARDS
    19. MISCELLANEOUS ISSUES
    20. MORE ON DEEDS OF ADHERENCE AND SCHEDULES
    21. SUMMARY
    22. APPENDIX 5.1: IFXCO TERMS
    23. ANNEX 1
    24. ANNEX 2A
    25. ANNEX 2B
    26. ANNEX 3
    27. APPENDIX 5.2: IFXCO ADHERENCE AGREEMENT
    28. REFERENCES
  13. Chapter 6: Margin and Collateral
    1. CREDIT AGREEMENTS
    2. FRAMEWORK FOR THE ISDA CREDIT SUPPORT DEED AND THE FXC COLLATERAL ANNEX
    3. FRAMEWORK FOR THE ISDA CREDIT SUPPORT ANNEXES
    4. ENFORCEMENT RIGHTS OF THE SECURED PARTY
    5. SOME ADDITIONAL FEATURES COMMONLY FOUND IN CREDIT SUPPORT DOCUMENTS
    6. THE VALUE-AT-RISK CONCEPT
    7. VaR FOR SPOT, FORWARD, AND VANILLA OPTIONS
    8. PORTFOLIO VALUE-AT-RISK
    9. SAMPLE CUSTOMER CREDIT SNAPSHOT
    10. LIMITATIONS OF VaR
    11. LIMITATIONS OF COLLATERALIZED AGREEMENTS
    12. SUMMARY
    13. APPENDIX 6.1: THE 1999 COLLATERAL ANNEX TO FEOMA, IFEMA, OR ICOM MASTER AGREEMENT
    14. REFERENCES
  14. Chapter 7: Foreign Exchange Prime Brokerage
    1. OVERVIEW OF FX PRIME BROKERAGE
    2. PROS AND CONS OF FX PRIME BROKERAGE
    3. EXECUTION AND CONFIRMATION IN AN FX PRIME BROKERAGE ENVIRONMENT
    4. THE LEGAL ARCHITECTURE OF FX PRIME BROKERAGE
    5. THE FX PRIME BROKER AND THE EXECUTING DEALER
    6. THE MASTER FX GIVE-UP AGREEMENT
    7. OTHER ELEMENTS OF THE MASTER FX GIVE-UP AGREEMENT
    8. THE FX PRIME BROKER AND THE DESIGNATED PARTY
    9. THE EXECUTING DEALER AND THE DESIGNATED PARTY
    10. REVERSE GIVE-UP RELATIONSHIPS
    11. SUMMARY
    12. APPENDIX 7.1: MASTER FX GIVE-UP AGREEMENT
    13. REFERENCES
  15. About the Author
  16. Index