Foreign Exchange Seminar: "Myths and Mysteries of Foreign Exchange Risk Management: a Unique Pedagogical Approach"

(Approximate presentation time: one hour)

The presentation considers foreign exchange risk management from the viewpoint of a corporate treasurer.

The board of the treasurer's company must first decide the foreign exchange risk profile of the company. If the company is to be a risk taker, it must decide how much risk to take. Potentially important commercial consequences flowing from this decision are discussed.

Assuming that the subject company is totally risk averse in the foreign exchange context, the presentation uses a unique highly visual pedagogical technique that eliminates the unwarranted mystique of foreign exchange markets transactions to illustrate foreign exchange exposures and their subsequent management. In so doing, combinations of various risk-free alternatives for exposure management are synthesised.

A generalised pricing scenario incorporating the use of both domestic financial markets and Eurocurrency markets is then developed.

This scenario points to a definitive conclusion as to what should be the optimal price-effective selection for risk-free exposure management purposes. Close attention is given to the interaction of money markets and foreign exchange markets in the price determination process.

In particular, the formally correct derivation of forward foreign exchange pricing by banks is examined so as to destroy a common myth surrounding forward prices as quoted by banks.

Generalised conditions supporting opportunities for arbitrage as between money markets and foreign exchange markets are examined.

A realistic case study that applies the foregoing general principles is presented. A commercially important (but probably entirely counter-intuitive) conclusion is revealed.

This seminar has been presented internationally on numerous occasions to varied groups. Included here are professional staff of the Asian Development Bank in Manila (as the 250th "Brown Bag" seminar in September 1998), central bankers, academics, lawyers, corporate executives, and (several times) to the major international accounting firm, KPMG.

The seminar has been enthusiastically received due to its ability to illuminate and clarify, in a short time period, the essential simplicity of functioning of international financial markets - something all to often shrouded in totally unwarranted mystique!

Foreign Exchange Seminar: “Non-deliverable forward contracts: managing currency risk in countries with exchange controls”

(Approximate presentation time: one hour)

The presentation delivers a comprehensive analysis of non-deliverable forward (NDF) contracts, a foreign exchange market instrument having an existence and development often dependent upon the existence of exchange controls around a specific domestic market. In such a situation, the government and/or central bank exercising control in that market attempts (with varying degrees of success) to insulate it from international financial markets.

Starting from an overview of the rationale for exchange controls, NDF forwards are defined and their technical characteristics carefully delineated. In particular, generalised conditions for the use and settlement of NDFs are developed where, contrary to an often assumed settlement practice, it is shown why NDFs may not always be settled in United States dollars (USD).

Two realistic case studies are examined that demonstrate how NDFs can be used to “lock in” a forward rate in the absence of a developed deliverable forward foreign exchange market. Moreover, it is demonstrated, in the context of Asian NDF markets, how an identical NDF rate can be “locked in” regardless of the whether the NDF settlement currency is USD or another Asian currency having an associated NDF market.

The major Asian NDF markets are discussed. This discussion draws on a recent comprehensive Bank for International Settlements (BIS) survey of the defining empirical technical characteristics of the six major Asian NDF markets.

Given the absence of both deliverable forward markets and NDFs, some means are examined by which exposures to a currency lacking any form of forward market can be managed or avoided.

An abridged version of this seminar was an invited presentation at the Frontier in Knowledge International Currency Risk Management conference in Kuala Lumpur, Malaysia in July 2004.

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