Foreign Exchange (FX) & Money Markets

Euromoney Learning Solutions

How long?

  • 4 days
  • in person

What are the topics?

Euromoney Learning Solutions


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Who should attend

  • Treasury managers in banks and non-financial institutions non-financial institutions
  • Sales staff employed by banks selling treasury products to corporate clients
  • Support staff, including those involved in back and middle office functions
  • Internal and external auditors
  • Risk managers/analysts
  • Finance directors
  • Finance managers
  • Legal staff
  • Accountants and auditors

About the course

The money market has witnessed significant change over recent years, the most notable one being in the inter-bank borrowing and lending sphere with the replacement of ‘ibor based reference rates with new, IOSCO compliant, near risk-free reference rates, such as SOFR in the US and €ster in the eurozone. The introduction of these new rates has significant implications for money market derivative instruments, notably forward rate agreements (FRAs) and short-term interest rate (STIR) futures, ang longer-dated swap instruments, as well as for cash market instruments, such as floating rate notes and loans, that are referenced to inter-bank rates. The FX market has also been affected, as FX forward rates by and large derive their value from interbank rates.

The foreign exchange and money markets are worth trillions of dollars and are the pivot of the financial markets, providing funding, investment opportunities and the conduit between all other financial markets. In recent years, the importance of the money markets has become even greater as financial institutions focus more closely on the management and diversification of their sources of liquidity, apply greater discipline to their funding and examine the attractions of short term investment and trading strategies.

This course focuses on the current profile of the markets and offers up-to-date developments and their implications. The course emphasises the integrated nature of the markets - in particular, how different instruments perform the same or similar functions and the opportunities this provides for arbitrage and hedging. It also analyses the liquidity characteristics and risks of different instruments and funding strategies.

Summary of course content

  • The FX and money markets and its participants
  • The role of Central Banks
  • Money market instruments
  • The development of inter-back rates: From ‘ibor rates to near risk-free benchmark rates
  • Securitised borrowing and lending: The repo market explained
  • How FRAs and STIR futures are structured to enable market participants to lock-in forward borrow and lend rates
  • Next generation STIR futures referencing the new risk-free benchmark rates
  • Impact of the new risk-free benchmark rates on the interest rate and currency swap markets
  • How changes to inter-bank rates and IRS market are impacting the FX forward markets


Day One: The Cash Money Market & Recent Developments

Session One: Overview

The money market is an integral part of the financial market in which financial instruments with high liquidity and very short maturities are traded, enabling borrowers to access funds for periods of up to one-year and providing investors with a (potentially) safe-haven for excess funds.

Following the 2007/08 financial crisis, the inter-bank borrowing and lending market has witnessed considerable change. This session describes how regulators have tackled the dual problem of market manipulation of ‘ibor rates and falling liquidity in these term rates, and introduces the next generation of risk-free benchmark rates and its implications on the loan and debt capital markets

  • What the money market does: liquidity and risk management
  • Distinguishing the money and capital markets
  • Primary & secondary characteristics
  • What drives rates of return
  • The role of the Central Bank and monetary policy
  • Inter-bank rates
    • Why they are important in the banking system
    • Libor rates
      • How is Libor calculated
      • Initial reforms in the light of the 2007/08 Financial Crisis and market manipulation
      • The IOSCO Principles for Financial Benchmarks, July 2013
      • Further reform of Libor by ICE Benchmark Administration: Making Libor IOSCO compliant
      • The end of Libor
    • Euribor reform
  • Transition to Alternative (Near) Risk-Free Reference Rates
    • Alternative approaches
    • UK, US and EU approaches compared, and the new rates introduced in the major currencies
    • Impact of the new rates on the loan and debt capital markets
      • Managing an FRN issue:
      • Lookback v observation shift methodologies explained
      • Issues with legacy instruments referenced to Libor
      • Fallback provisions explained
      • Example: GlaxoSmithKline plc USD & GBP loan facilities, September 2020

Session Two: Traditional Cash Instruments

This session introduces the various securities used by both financial and non-financial participants in the money market, explaining the characteristics of each instrument, and how they are used by both borrower and lender. The focus will be on the instruments issued by financial institutions, the attraction of such instruments for the bank and the risks that result, together with a review as to how the regulatory framework for these instruments have changed following the Financial Crisis.

  • Types of instruments:
    • Discount v interest bearing
    • The quoted discount rate v the true effective rate
    • Credit, liquidity and other drivers
  • The concept of “marketable” securities
  • The Treasury Bill Market
    • T-Bills as a source of government funding and monetary policy
    • Quotation of US & UK T-Bills
  • The Certificate of Deposit (CD) market
    • Who issues and why?
    • Understanding the cash flows
    • Calculating a holding period return
    • Market regulation following the Financial Crisis
  • The Commercial Paper (CP) market

Day Two: Securitised Funding

Session One: Repo

Secured borrowing and lending is an important part of the money market and can take different legal forms. This session describes the different forms it takes and the risks associated with such products and how they can be managed.

  • The fundamentals of repo markets
  • Importance of the market following the financial crisis
  • What collateral is eligible?
    • General (GC) and specific (SC) collateral; rights of substitution
  • The mechanics of repo agreements
    • Cash v security driven transactions
    • Repo v reverse repo
  • Comparison of alternative repo mechanisms
    • Classic repo v buy/sell-back
    • Securities lending
    • Basic repo mathematics: Price and interest calculations
  • The new US risk-free benchmark rate: SOFR explained
  • Identifying and managing the risks in repo transactions:
    • Credit & liquidity exposure on repo
    • Collateral management
      • Margin ‘haircut ’ agreements
      • Custody of collateral: Bilateral, hold in custody (HIC), tri-party repo structures

Session Two: Uses & Applications of Repo

This session discusses some of the applications of repo and securities borrowing and lending, including trading applications and the facilitation of short selling.

  • Funding trading positions with repo; advantages and constraints
  • Short selling
    • Understanding the motivation
    • Overview of the trade mechanics
    • (Regulatory) Concerns over short selling and how different jurisdictions manage this
  • Matched book trading
  • Yield enhancement trades:
    • Riding the yield curve
    • “Figuring the tail”
    • Understanding the “bet”   Day Three: Money Market Derivative Instruments

Session One: Forward Rate Market Instruments: FRAs and STIR Futures

This session describes traditional FRAs and STIR futures contacts referenced three-month ‘ibor rates, before discussing in detail the impact that the new risk-free benchmark interest rates are having on the short-term interest rate derivatives market, detailing the next generation of STIR futures that have been listed by the major global derivative exchanges.

  • OTC forward rates: Forward rate agreements (FRAs)
    • FRA terms explained
    • Locking-in a forward rate
    • Credit risks and how they have been addressed post-crisis
    • FRAs post Libor:
      • Is the end of the FRA nye?
      • What are Single Period Swaps (SPSs) and are they the solution?
  • Short-term interest Rate (STIR) futures contracts in the ‘ibor world
    • The three-month tenor contract specifications explained
    • From futures price to forward rate: Locking-in a forward rate
    • Managing the credit risks:
      • Central clearing
      • Margin explained
    • Traditional contracts linked to an overnight rate: Fed Funds futures
  • Short-term interest (STIR) futures contracts in the post-Libor world
    • The next generation of futures referenced to Alternative Risk-Free Reference Rates:
      • Sonia futures
      • SOFR futures
      • One Month Euro Overnight Rate Index Future
      • Differences in contract design explained: one-month v three-month

Session Two: The OTC Interest Rate Market

The interest rate swap market, where a fixed rate is exchanged for a floating reference rate, is another market which has undergone significant reform following the Financial Crisis and which is also affected by changes in the introduction of the new risk-free benchmark interest rates. This session discusses the impact of market developments following the crisis, notably the impact of collateralisation on the marking-to-market of IRS, and the various issues surrounding the transition from ‘ibor rates to the new risk-free benchmark rates, notably the rise of the overnight index swap (OIS) market and its growing importance, and the impact on the cross-currency basis swap market.

  • Introduction to the interest rate swap market
  • Current market conventions
  • Market developments since the financial crisis
    • Introduction of collateralisation and central clearing through CCPs and their implications
    • Marking-to-market IRS in the new environment
    • Benchmarking issues:
      • Why we need a benchmark rate
      • The end of ISDA Fix
      • The new regime
    • Market development following the introduction of the new risk-free benchmark rates
      • Transitioning from IRS to OIS
      • Overnight index swap (OIS) mechanics explained
      • The relationship between the OIS and term Libor rates pre- and post- the financial crisis
      • Implications for forward rates and interest rate swap instruments
  • Basis swaps explained
    • Understanding the increasing importance of the OIS – Libor basis swap
    • Why is “fair value” no longer “fair value”?
    • The cross-currency basis swap
      • What is the “fair” exchange
  • The new risk-free benchmark rates revisited: Creating a term rate from overnight rates
  • Swap futures contracts

Day Four: The FX Market

Session One: The Spot FX Market

The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies, and in terms of volumes traded, it is by far the largest market in the world. The foreign exchange market operates primarily through financial institutions (dealers), and trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars.

The primary raison d’etre of the foreign exchange market is to assist international trade and investments. For example, it permits a business in the United States to import goods from the European Union member states, especially Eurozone members, and pay Euros, even though its income is in United States dollars. However, it also supports direct speculation in the relative value of currencies, and indeed, this activity greatly exceeds transactions based on trade flows.

This session explores how the FX market functions, including the market conventions for quoting rates. In addition, the dealers’ perspective is discussed, and describes how they manage their positions.

  • Market organization
  • Quoting s pot FX rates
    • Indirect v direct quotes
    • Market conventions
    • Reciprocal rates
  • Calculating the cross rate
  • Managing and monitoring the FX spot book: Position keeping

Session Two: Linking Money Market Instruments and the FX Market

The forward FX and FX swap markets are inextricably linked to the short-term interest rate market, and the introduction of the new risk-free benchmark rates has had a material effect on the FX market. This session introduces forward FX and FX swaps, before discussing in detail the inter-relationship between FX swaps and currency swaps, and, in particular, the cross-currency swap introduced on Day Two.

  • Forward value dates: Alignment with money market instruments
  • Using the interest rate parity argument to derive the forward FX rate
    • Quoting forward points
    • Which rates to use?
    • Libor v OIS
  • The FX swap market and how swap rates are calculated
    • Cash flows in a matched FX Swap
    • Why banks use forward swaps rather than outright forwards: hedging outright forward transactions
    • Swaps as funding rates
    • Understanding the sensitivity of FX swaps to changes in rates
      • Managing the risk: Mis-matched FX swaps
  • Understanding the relationship between FX swaps and currency swaps
    • The role of cross-currency swaps revisited
    • Long-dated forward FX rate quotes
  • Using FX swaps for funding purposes
  • Short date forwards
    • Introducing the terms
    • Calculating an FX swap over today and tom
    • Calculations


Paul Kitching

The Course Director was the Strategic Development Manager at the London International Financial Futures Exchange (LIFFE), where he was responsible for the research and definition of new specialist swap and risk transfer contracts. Prior to this, he was Head of Interest Rate Product Development wi...

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Foreign Exchange (FX) & Money Markets at Euromoney Learning Solutions

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