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Foreign Exchange in Practice : The New Environment, Third Edition - S. Anthony

Foreign Exchange in Practice

The New Environment, Third Edition

Hardcover Published: 28th October 2002
ISBN: 9781403901743
Number Of Pages: 392

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Foreign Exchange in Practice , now in its 3rd edition, is the single reference to the forex market any financial practitioner needs to have. It explains the concepts involved in foreign exchange and their application to real-life situations. Numerous examples are given. The book was originally developed as a textbook for the Citibank Bourse Course, an intensive course available to clients and staff of Citibank to improve their mastery of these markets. Examples in this edition have been updated to reflect current rates and include the Euro rather than the former European national currencies. The 3rd edition contains a substantial amount of new content particularly with regard to financial mathematics, interest rate swaps, option pricing and applications of option derivatives and Value at Risk.

Prefacep. xiii
Exchange Ratesp. 1
Commodity Currency and Terms Currencyp. 1
Reciprocal Ratesp. 2
Price Changesp. 3
Price and Volume Quotationsp. 3
Cross Ratesp. 5
Chain Rulep. 5
Pointsp. 7
Calculating Exchange Profits and Lossesp. 8
Realized and Unrealized Profits and Lossesp. 8
History of Exchange Rate Determinationp. 9
Practice Problemsp. 11
Interest Ratesp. 12
Nominal and Effective Interest Ratesp. 12
Basis Pointsp. 12
Day Count Conventionsp. 13
Simple Interestp. 13
Variable Interestp. 15
Compound Interestp. 16
Semi-Annual Interestp. 17
Floating Interest Ratesp. 18
Equivalent Interest Ratesp. 19
Index Algebrap. 19
Logarithmsp. 20
Continuously Compounding Ratesp. 20
Forward Interest Ratesp. 22
Present Valuep. 24
Discount Factorsp. 25
Bondsp. 25
Practice Problemsp. 27
Cash Flows and Value Datesp. 29
Specifications of Cash Flowsp. 29
Positive and Negative Cash Flowsp. 29
T-Accountsp. 29
Spot Value Datesp. 31
Nostro Accountsp. 32
Forward Value Datesp. 32
Short Datesp. 33
Net Cash Flow Positionp. 33
Net Exchange Positionp. 33
Distinction Between Net Exchange Position and Net Cash Flow Positionp. 35
Net Exchange Position Sheetp. 38
Blotterp. 38
NPV Methodp. 39
Practice Problemsp. 40
Yield Curves and Gapping in the Money Marketp. 41
The Yield Curvep. 41
Reasons for the Normal Yield Curvep. 42
Impact of Interest Rate Expectationsp. 43
Yield Curves in Practicep. 45
Spreads for Credit and Liquidity Riskp. 46
Yield Curve Movementsp. 47
Traditional Banking Strategy: Riding the Yield Curvep. 48
Gapping in the Money Market: How to Profit from Expected Changes in Interest Ratesp. 49
Opening a Negative Gapp. 50
Closing a Negative Gapp. 51
Gapping with a Normal Yield Curvep. 52
Opening a Positive Gapp. 54
Closing a Positive Gapp. 55
Break-Even Ratesp. 55
Early Closure of a Gapp. 56
Extending a Gapp. 57
Practice Problemsp. 58
Bid and Offer Ratesp. 61
Quoting Bank and Calling Bankp. 61
Price Maker and Price Takerp. 61
Bid and Offer Rates in the Money Marketp. 62
Bid and Offer Rates in the Foreign Exchange Marketp. 62
Bid Offer Spreadsp. 64
Brokersp. 67
Electronic Dealing Systemsp. 67
Market Jargonp. 68
Trending Ratesp. 68
Covering a Spot Exchange Position at Market Ratesp. 70
Covering a Spot Exchange Position at Own Rates: Jobbingp. 70
Market Makingp. 71
Arbitragep. 72
Cross Ratesp. 72
Arbitraging Cross Ratesp. 74
Practice Problemsp. 75
Forward Exchange Ratesp. 78
Calculation of Forward Exchange Ratesp. 78
Calculation of Forward Marginsp. 80
Forward Discountsp. 80
Forward Premiumsp. 81
Compensation Argumentp. 82
Forward Rate Formulap. 82
Role of Price Expectationsp. 83
Bid and Offer Ratesp. 84
Forward Cross Ratesp. 88
Currency Futuresp. 89
Long-Term Foreign Exchange (LTFX)p. 89
Zero Coupon Discount Factorsp. 90
NPV Accountingp. 92
Short Datesp. 95
Short Date Marginsp. 97
Practice Problemsp. 98
Applications of Forward Exchangep. 101
Foreign Exchange Riskp. 101
Hedgingp. 102
Partial Hedgingp. 104
Hedging Export Receivablesp. 105
Effective Exchange Ratesp. 108
Benefits and Costs of Premiums and Discountsp. 108
Hedging Foreign Currency Borrowingsp. 109
Effective Cost of Hedged Foreign Currency Borrowingsp. 111
Break-Even Ratesp. 112
Cost of Hedging Foreign Currency Borrowingsp. 114
Effective Cost of Unhedged Foreign Currency Borrowingsp. 115
Unhedged Foreign Currency Investmentsp. 117
Effective Yield on Hedged Foreign Currency Investmentsp. 120
Effective Yield on Unhedged Foreign Currency Investmentsp. 121
Par Forwardsp. 124
Practice Problemsp. 126
Swapsp. 130
Types of Currency Swapp. 131
Swap Ratesp. 131
Outright Forwards Ratesp. 131
Determining the Spot Rate in a Swapp. 133
Pure Swaps and Engineered Swapsp. 133
Short Dated Swapsp. 135
Applications of Currency Swapsp. 136
Covering Outright Forward Exchange Positionsp. 137
Rolling a Foreign Exchange Positionp. 140
Historic Rate Rolloversp. 144
Early Take-Upsp. 145
Simulated Foreign Currency Loansp. 147
Simulated Foreign Currency Investmentsp. 151
Covered Interest Arbitragep. 153
Central Bank Swapsp. 156
Forward Rate Agreements (FRAs)p. 157
Calculating the Settlement for an FRAp. 157
Forward Yield Curvesp. 157
Interest Rate Swapsp. 158
Pricing Interest Rate Swapsp. 160
General Formula for Pricing Swapsp. 162
Cross Currency Swapsp. 164
Varying Market Conventionsp. 165
Practice Problemsp. 166
The FX Swaps Curve and Gapping in the Foreign Exchange Marketp. 169
The FX Swaps Curvep. 169
Gapping in the Foreign Exchange Market: How to Profit from Expected Changes in Interest Rate Differentialsp. 173
Riding the Swaps Curvep. 176
Cash Flow Implications of Spot Rate Changesp. 177
Break-Even Swap Ratep. 179
Practice Problemp. 180
Currency Options - Pricingp. 181
Calculating Option Premiumsp. 183
Profit Profiles: Naked Optionsp. 184
Option Pricingp. 192
Combinations and Probabilitiesp. 194
Probability Distributionp. 195
Relationship Between the Strike Price and Market Ratep. 198
Time to Expiryp. 199
Volatilityp. 201
Risk-Free Interest Ratep. 206
Put-Call Parityp. 206
Put-Call Arbitragep. 207
Reverse Binomial Methodp. 209
American Versus European Optionsp. 210
Geometric Binomial Modelp. 210
Black-Scholes Modelp. 213
Interest Rate Differentialsp. 215
Currency Optionsp. 215
Proof of Put-Call Parityp. 215
Interpreting the Adapted Black-Scholes Formulap. 217
Black's Modelp. 219
Practice Problemsp. 220
Applications of Currency Optionsp. 222
Applications Using Options When There is an Underlying Exposurep. 222
Effective Exchange Ratep. 228
Foreign Currency Borrowerp. 229
Foreign Exchange Traderp. 232
Foreign Currency Investorp. 234
Varying the Strike Pricep. 236
Collarsp. 237
Zero Premium Collarp. 237
Ill-Fitting Collarp. 240
Debit Collarp. 240
Credit Collarp. 241
Participating Optionsp. 242
Participating Collarsp. 244
Practice Problemsp. 245
Option Derivativesp. 248
Digital Optionsp. 248
Pricing an At-Expiry Digitalp. 249
Reverse Binomial Pricing Methodp. 250
Pricing One-Touch Digitalsp. 251
Closed Form Pricing Formulap. 252
Applications of Digital Optionsp. 252
Barrier Optionsp. 255
Pricing Knock-Outsp. 257
Pricing Knock-Insp. 258
Closed Form Solutionsp. 259
Applications of Barrier Optionsp. 261
Knock-Out Forwardsp. 262
Combinationsp. 264
Other Path-Dependent Optionsp. 264
Other Non-Path-Dependent Optionsp. 267
Correlationp. 270
Cross Rate Volatilityp. 271
Basket Optionsp. 272
Hybridsp. 275
Summaryp. 277
Practice Problemsp. 278
Factors Affecting Exchange Ratesp. 280
Theories of Exchange Rate Determinationp. 280
Factors Affecting Interest Ratesp. 285
Interrelationship Between Interest Rates and Exchange Ratesp. 286
Time Horizonp. 287
Long-Term Outlookp. 287
Short-Term Factorsp. 288
Summaryp. 290
Value at Riskp. 291
Market Price Riskp. 291
Factor Sensitivitiesp. 291
Durationp. 292
Using Distribution Theoryp. 293
Multiple Factorsp. 299
Thetap. 301
Deltap. 304
Gammap. 307
Vegap. 309
Rhop. 310
Value at Risk Limitsp. 311
The Problem with Stop-Loss Limitsp. 312
Portfolio Value at Riskp. 313
Stress Testsp. 314
Credit Riskp. 314
NPV Methodp. 317
Potential Exposurep. 317
Credit Risk Factorsp. 319
Pre-Settlement Risk Limitsp. 321
Techniques to Reduce PSRp. 321
Liquidity Riskp. 324
Managing Funding Liquidity Riskp. 325
Other Types of Financial Riskp. 327
Practice Problemsp. 328
Solutions to Practice Problemsp. 330
Cumulative Standard Normal Distribution ([mu] = 0, [sigma] = 1)p. 375
Glossary of Termsp. 378
Indexp. 387
Table of Contents provided by Ingram. All Rights Reserved.

ISBN: 9781403901743
ISBN-10: 1403901740
Series: Finance and Capital Markets
Audience: General
Format: Hardcover
Language: English
Number Of Pages: 392
Published: 28th October 2002
Publisher: Palgrave USA
Country of Publication: GB
Dimensions (cm): 23.11 x 17.22  x 2.54
Weight (kg): 0.74
Edition Number: 3
Edition Type: Revised

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