Foreign Exchange, Money Markets and Derivatives

Course overview

Course outline

1. 1Day 1: Interface of money markets and foreign exchange (FX)

   • Size of the markets
   • Issuance of Treasury instruments, repos, and commercial paper
   • Overview of the Euromarkets
   • Legacy issues relating to London Interbank Offered Rate (LIBOR)
   • Secured Overnight Financing Rate (SOFR), SONIA, ESTER
   • Treasury bill issuance in different jurisdictions
   • The mechanics of the Repo market
   • Forward rates for interest rate and FX
   • Effective yields when risk adjusted for FX exposures
   • Arbitrage and interest rate parity
   • Current market conditions
   • Risk premia, key money markets spreads and currency outlook
2. 2Day 2: Role of central banks in the financial system

   • Overview of central banks
   • Federal Reserve
   • European Central Bank
   • People’s Bank of China
   • Bank of Japan
   • Bank of England
   • Structure of a central bank balance sheet
   • Characteristics of central bank’s assets and liabilities
   • Lender of last resort
   • Summary of Open Market Operations
   • Unorthodox monetary policy including quantitative easing (QE)
   • Independence of central banks
   • Financial stability and macro-prudential policy
   • Forward guidance and transparency of decision making
   • Management of FX reserves and exchange rate policy
   • Nature of payments systems – real-time gross settlement systems (RTGS), net settlement, Fedwire, Target2
3. 3Day 3: Monetary policy and money supply & Foreign exchange market characteristics

   • Monetary policy and money supply
   • Overview of the policy committees
   • Federal Open Market Committee (FOMC)
   • Monetary Policy Committee of the Bank of England (MPC of BOE)
   • European Central Bank (ECB Governing Council)
   • The People’s Bank of China (PBOC) governance
   • Overview of money supply
   • Monetary tools and how they impact money supply
   • How is money created in a modern economy
   • Inflation targeting
   • Central bank reserves
   • Explanation of the Taylor rule
   • Term structure of interest rates
   • Foreign exchange market characteristics
   • Size of market, volumes, participants, major currency pairs
   • Regional breakdown of where and when most FX trading takes place
   • Key role of London market in FX trading
   • Historical background to today’s FX market
   • Role of the International Monetary Fund (IMF) and Special Drawing Rights (SDR’s)
   • Global FX reserves
   • Review of several key historical FX rates
   • Price of gold and relationship to the US Dollar index
4. 4Day 4: Interest rate (IR) swaps & Credit default swaps (CDS) and more

   • Interest rate (IR) swaps
   • Basic structures and terminology of swaps
   • Business case for using IR swaps
   • Contrast money market rates and IR swap rates
   • Notion of swap as an aggregation of forward rate agreements
   • Pricing the fixed leg and interpreting the swap markets
   • Counter party risk
   • Recognition that credit valuation adjustment (CVA) is integral part of trading practices and pricing of derivatives and not just a regulatory (Basel) issue
   • Over-The-Counter (OTC) market versus Swap Execution Facilities (SEF’s)
   • Collateralized OTC trades versus margin based Central Clearing Party (CCP) platforms
   • Netting arrangements
   • Credit default swaps (CDS)
   • Terminology – protection buyer/seller, reference entity,
   • Naked CDS positions
   • Contrast between a CDS and a financial insurance contract
   • Equating actual and contingent payments
   • Inputs to model - default probabilities, loss given default (LGD), forward curve
   • Sovereign and corporate markets
   • Single name CDS versus basket products, nth to default structures
   • Determination of a credit event
   • Recent amendments to the International Swaps and Derivatives Association (ISDA) protocols on determination of credit events
   • ISDA protocols
   • Using derivatives for general hedging purposes
   • Key concepts of hedging equity and fixed income risk with derivatives
   • Using index futures and options to hedge equity portfolio
   • Hedge ratio calculation for equity futures
   • Calculating portfolio beta
   • Options strategies
   • Using forwards to hedge forex risk
   • Using swaps to hedge credit risk
   • Using variance swaps to hedge volatility risk
5. 5Day 5: Asset/liability management and the treasury function & The global regulatory framework

   • Asset/liability management and the treasury function
   • Interest rate risks
   • Market risk i.e. re-valuation of bank holdings from changes in interest rates
   • Accounting issues related to fair value accounting
   • Duration gap analysis
   • Interest rate forecasting
   • Review of inflation protected securities
   • Estimating the Term Liquidity Premium in money markets
   • Funds Transfer Pricing (FTP) mechanics
   • Contingency buffers for liquidity risk management
   • Funding Value Adjustment (FVA)
   • Bank funding curves
   • Applying the correct FTP charges for strategic balance sheet management
   • The global regulatory framework
   • Overview of the Basel III framework
   • Key provisions of Basel III related to market risk, credit risk, liquidity risk and operational risk
   • Pillars 2 and 3 of Basel accords and role of central banks as supervisors
   • Contrast macro-prudential policy initiatives with traditional micro-prudential
   • Pro-cyclical and counter-cyclical risk management
   • Dodd Frank Act and Financial Stability Oversight Council (FSOC), Volcker rule
   • Regulatory investigations into market abuse
   • USA - the Federal Reserve, Treasury, Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC)
   • UK - Bank of England, Prudential Regulation Authority (PRA), Financial Conduct Authority
   • European Union – ECB, the European Stability Mechanism (ESM), the European Securities and Markets Authority (ESMA)
   • Trans national – Bank for International Settlements (BIS), Global Financial Stability Board etc.
   • Sarbanes-Oxley – risk disclosure, stringent accounting requirements, impact on IT policies
   • Volcker Rule – restrictions on activities/structure of banks