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treasuryXL announces partnership with XE.com

| 12-12-2019 | treasuryXL | XE |

treasuryXL announces partnership with XE.com, The World’s Trusted Currency Authority and provider of currency data, FX Risk Management and Technology solutions for businesses

VENLO, The Netherlands, DECEMBER 12, 2019 – treasuryXL, the community platform for everyone who is active in the world of treasury, today announced the premium partnership with the world’s most trusted currency authority XE.com.

XE.com is the first major currency specialist to work with treasuryXL. As a marketplace, treasuryXL will offer XE.com market commentary and insight to her audience. Offering a continuous flow of relevant treasury content, making treasury knowledge available, results in treasuryXL being the obvious go-to platform for its’ audience. The partnership kicks off with the new ‘Treasury Topic’ environment where XE.com will have a prominent role in the FX, risk management, payments and FinTech environment.

XE.com is the world’s most popular foreign exchange website, and a leading global destination for foreign exchange rate tools and data. XE Business Solutions support companies across the world with robust responses to unpredictable currency markets; whether they rely on XE for information about currency markets, seek support when managing their FX risk, or trust them with business-critical international payments.

treasuryXL and XE.com strive for a fruitful partnership where its’ audience are top of mind making sure that (potential) clients are always up to date with the latest global currency news and benefit from a comprehensive range of currency services and products. XE Business Solutions and currency expertise provide companies with robust responses to unpredictable currency markets, so that bottom line is protected by currency risk and not impacted by it.

About treasuryXL

treasuryXL started in 2016 as a community platform for everyone who is active in the world of treasury. Their extensive and highly qualified network consists out of experienced and aspiring treasurers. treasuryXL keeps their network updated with daily news, events and the latest treasury vacancies.

treasuryXL brings the treasury function to a higher level, both for the inner circle: corporate treasurers, bankers & consultants, as well as others that might benefit: CFO’s, business owners, other people from the CFO Team and educators.

treasuryXL offers:

professionals the chance to publish their expertise, opinions, success stories, distribute these and stimulate dialogue.
a labour market platform by creating an overview of vacancies, events and treasury education.
a variety of consultancy services in collaboration with qualified treasurers.
a broad network of highly valued partners and experts.

About XE.com

XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.

Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.

Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multibillion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.

Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.

Visit XE.com

Visit XE partner page

To swap, or not to swap that is the question

30-9-2019 | Marco Lassche |

Cash management in different currencies:
The FX swap, a way to optimize your interest result

Years ago, when I made my first baby steps in the world of Treasury at Bank Mendes Gans, my old teachers Jan Loohuis and Aart-Jan Lensvelt, taught me some good lessons. One of them, that I always used in the companies that I have worked for, is this one.

What if you have temporary an overall negative position in one currency (e.g. -/- EUR 10 mio) and an overall positive position in another currency (e.g. +/+ USD 11 mio)?

Basically you have two easy ways to manage this liquidity position and optimize your interest result. Both ways lead to Rome:

Keep the balances in your bank account
You swap the balances in different currencies temporary by means of a FX-swap

Option 1: Keep the balances in your bank account
This option does not need much clarification.

For your debit balance you pay interest (basic interest +/+ margin)
For your credit balance you receive credit interest (basic interest -/- margin

Option 2: The FX swap
In a FX swap you do a trade in your FX trade portal, in which you exchange the bank balances at a spot date (at the spot rate) and you reverse it at a future date (at the forward-rate). You do the trade at the same time, so no FX risk is involved.

Forward FX-rates are being calculated directly from the spot FX-rate and are adjusted for the difference in interest rates between the two currencies.

Option 1 or option 2?
When the interest rate difference between the two currencies is more attractive in option 1, you keep your bank balances. When the interest rate difference between two currencies is more attractive in option 2, you swap.

Example
I would like to clarify it by an example in which we have a EUR balance of -/- EUR 10 mio and a
USD balance of +/+ USD 11 mio. We will swap the currencies for 1 month (30 days).

Interest results after 30 days

Option 1) Interest result by keeping balances in your bank account

Total interest proceeds in USD: EUR 2,708 * 1.1000 = USD 2,979 + USD 18,563 = USD 21,542.
Interest rate difference between USD and EUR: 2,35% (2.025% -/- 0.325%).

Option 2) Interest result by swapping balances

At the start date we buy EUR 10 mio, and sell USD 11 mio at the spot rate 1.1000.
At the end date, after 30 days, we reverse the trade as we agreed with the bank:
We sell EUR 10 mio, and buy USD 11,025,770 at the agreed forward rate 1.102577

Our total interest rate difference proceeds is USD 11,025,770 – USD 11,000,000 = USD 25,770.

Conclusion:
In this example the FX swap is USD4,200 more attractive than keeping the account balances like it is. Of course, this is not always the case, but a FX swap can be a good alternative in many cases.

* How to calculate the interest rate difference between two currencies in a FX swap
As previously said, the difference in spot and forward rates, can be explained by the interest rate difference between two currencies, We calculate the interest rate differences as follows:

Forward Rate on annual basis / Spot Rate

As interest percentages are always based on 1 year we multiply the 30 days forward points by 12 to get to 1 year forward points (EUR and USD, calculate 360 days in a year, GBP e.g. 365 days).
The forward points for 30 days: 25.77, which means for one year 12 * 25.77 = 309.24
Forward rate on annual basis: 1.130924

Spot rate: 1.1000

1.130924/1.1000 = + 2,81%

Please feel free to contact me if you need any further information.

Marco Lassche

Founder and Owner of at Bedrijfskostenexpert
Treasurer and Project Manager at Van Caem Klerks Group
treasuryXL Ambassador

The Core Benefits of Netting For Corporates

| 29-8-2019 | treasuryXL | BELLIN

Simplify intercompany commerce, minimize fees and elevate visibility

Understanding the core benefits of netting

Multinational corporations are familiar with the downsides when involved with intercompany commerce. Growing transaction fees, currency exchange risk, and lack of transparency are common facets that make it difficult for such organizations. Corporations can implement netting to mitigate those downsides and free up valuable time for treasury and accounting departments. This article will shed light on the benefits of netting and why your company needs to consider implementing it.

A brief definition of netting

Netting or “Intercompany Netting” is the process of reconciling and netting intercompany invoices between two parties, resulting in a final payment and netted cashflow. In regard to financial markets, the purpose is essentially to minimize transactions and distinguish remuneration in multiparty agreements. Netting is suitable for various situations, participants, and cycle types. For more information, check out our in-depth guide to netting here.

Bilateral Netting: Two companies reconcile invoices they may owe to each other and one company agrees to pay the other one sum.

Multilateral Netting: Three or more companies netting invoices together and a netting center is used.

Multilateral Netting vs Bilateral Netting

Further Reading: Netting: An Immersive Guide to Global Reconciliation

Macro benefits of netting

Foreign Exchange Risk Mitigation

Multinational companies often perform transactions with their own subsidiaries or with non-group companies. Because of this, companies must keep currency exchange rates in mind. Original invoices are often sent in the originating currency, which raises the need for either an external exchange service, a bank, or a netting center. With netting, the foreign exchange risk is centralized to the netting center.

It will not only keep existing invoicing procedures intact but avoid the loss of money involved with inflated currency exchange rates when using external exchanges. As mentioned, the FX risk is transferred from individual subsidiaries to the parent company, which is usually more equipped to manage it.

Floating money is wasted money

Cash-in-transit is a thorn in just about everyone’s side. Stagnant approval and processing times can create a chain reaction of risk as that cash is unable to be used. Whether it is bilateral or multilateral netting, keeping invoices to a minimum reduces the amount of money that is stuck in the limbo phase of approvals and processing times.

Increased transparency

Treasurers are able to operate at a high level when they are afforded visibility of cash flows. When subsidiaries make bulk payments, lack of liquidity or financing issues can arise and if company-wide visibility is lacking, it becomes difficult for a treasury department to act accordingly. Bulk payments backload and are concentrated in a short amount of time, cash flow is stretched thin among many of the subsidiaries. A netting system will provide daily reports and monitoring tools that provide cash flow visibility throughout the group.

Maximize operational efficiency

Naturally, one of the more prominent benefits of netting occurs on a daily basis. Treasury departments will see a drastic reduction in time spent on transactions and managing foreign exchange risk. From an operational point of view, a netting process simply saves treasurers time and establishes a company-wide process for disputes.

An example of this is with BELLIN clients, who save an average of 2 days of work per month per affiliated company. For an organization of 30 affiliated companies, that’s 60 days per month or 720 days a year. Realized savings typically range from $250,000 to +$1,000,000 on an annual basis.

Manage Disputes

When implementing a netting system, the treasury department is tasked with establishing a protocol for managing disputes. When subsidiaries fail to submit payables, a hitch in the payment process is born. What this causes is the inability for the payee to continue with their daily operation as they wait for receivables. Administrators can establish automated escalation protocols, which will elevate disputes to upper management based on pre-defined time periods. The escalation system leads to both tangible and intangible benefits as it literally resolves disputes through escalation and also provides an incentive for subsidiaries to execute their payables to avoid the unnecessary involvement of management.

BELLIN tm5: a comprehensive netting solution

BELLIN’s intuitive TMS: tm5, has a netting module that reconciles invoices and manages disputes with an ‘agreement-driven approach’.

The ‘agreement-driven approach’ is essentially a self-clearing methodology that utilizes the previously-mentioned: escalation protocol. tm5 automatically matches all receivables against payables and has an embedded dispute workflow for discrepancies. Consequently, the group company establishes group-wide agreements for disputes and will elevate them accordingly. With such an approach, all subsidiaries are involved in the entire process, disputes are mitigated and automatically escalated, and there is group-wide transparency.

BELLIN’s tm5 netting module has an intuitive interface but the key ingredient that makes it shine is that the platform has standardized functionality with the flexibility to meet the needs of all subsidiaries.

Interested in finding out more about whether netting is the right solution for you? Give BELLIN a shout or check out tm5, our intuitive treasury management system.

Florian Kolb
As a Senior Treasury Consultant and Payments Specialist, Florian Kolb is in charge of a number of implementation and process consulting projects focusing on worldwide bank connectivity. He has great experience with SWIFT/H2H connections and complex global payments projects. Before joining BELLIN in June 2016, Florian worked as a consultant in accounting for an IT systems solutions provider. He studied at Verwaltungs- und Wirtschaftsakademie (Administration and Business Academy) in Freiburg, Germany, and is a Certified SWIFT Specialist.

Webinar: Interested in how to minimize costs for FX payments?

| 20-6-2019 | TIS |

Does your firm have a global payment landscape? Are all FX payments globally and their associated costs visible to you?

If the answers are Yes and No, you don’t want to miss this 30-minute webinar chaired by Ebury, one of Europe’s fastest growing FinTechs and TIS, a global leader in corporate payment solutions.

For corporate treasurers and cash managers, FX risk management is part of the daily tasks. In this joint webinar presented by Ebury, a global finance specialist in foreign exchange, and TIS, a global leader in cloud-based corporate payment SaaS solution, the experts Thomas Fakhouri, Head of Technology Partnerships at Ebury and Nikola Hristov, Product Owner at TIS, will discuss how a fully integrated and automated payment process with add-on FX service generates enormous saving opportunities for corporates.

Register today

Wed, Jun 26, 2019
3:00 PM – 3:30 PM CEST

Vacature in the spotlight: TREASURY GENERALIST MET FX ERVARING

| 13-3-2019 | treasuryXL |

Brede corporate treasury functie met zwaartepunt op FX en derivaten. Inclusief cash management en funding. Rotterdam, €70K. Zeer dynamisch dagelijks takenpakket en doorlopende professionalisering.

TAKEN TREASURY GENERALIST

Het betreft een zeer dynamische operationele corporate treasury functie waarin het reguliere werk voortdurend wordt onderbroken voor het doen van FX en derivaten trades, vaak relatief grote tickets. Het reguliere werk omvat cash & liquidity management, IC & andere soort funding en rapportages en analyses. Van de generalist wordt verwacht dat hij bijdraagt in overnames, business development en professionalisering van de afdeling. In het kleine team kan iedereen elkaar rugdekking geven.

IDEALE TREASURY GENERALIST

De ideale kandidaat voor deze positie heeft een relevante opleiding van minimaal HBO niveau en heeft ervaren hoe de druk van werken in een (FX) front office voelt. Het is waarschijnlijk dat hij deze ervaring bij een financiële dienstverlener opdeed. Elke verdere ervaring in corporate treasury of treasury consultancy heeft waarde. Hij is toe aan zijn derde of vierde loopbaan stap. Als persoon schrikt hij niet terug voor contacten met internationale dochterbedrijven en externe partners of voor operationeel de mouwen opstropen.

ONZE OPDRACHTGEVER

Onze opdrachtgever is onderdeel van een gediversifieerd miljardenbedrijf en heeft voor haar trading activiteiten een eigen treasury team dat een groot aantal dochtermaatschappijen bedient. Deze dochtermaatschappijen hebben een redelijke autonomie, hetgeen er voor zorgt dat het treasury team klein kan blijven en zich kan richten op hoogwaardige werkzaamheden. De bedrijfscultuur kan worden beschreven met steekwoorden als informeel, resultaatgericht en hands-on.

ARBEIDSVOORWAARDEN

De indicatie van het basis vaste inkomen voor deze positie is €70K. Enige doorgroei is op termijn mogelijk, er is ruimte de functie met eigen talenten verder vorm te geven. Een on-line assessment zal deel uitmaken van de procedure. Verdere informatie voor passende en geïnteresseerde kandidaten is beschikbaar.

LOCATION

Rotterdam

Voor meer informatie ga naar de vacature sectie van onze website treasuryXL

Rising bond yields – winners and losers

| 25-04-2018 | treasuryXL |

It is the talk of the town – US 10 year Government bond yields are rising and testing the perceived psychological level of 3 per cent. At the same time the whole yield curve is flattening – the spreads are diminishing. There are growing concerns about rising inflation, along with fears of trade wars and rising oil prices. When the threat of inflation occurs, there is a selloff in bonds and their yield goes higher. At the same time as the yield curve is flattening there is talk of the yield curve becoming inverted which, historically, is seen as the precursor to a recession. Conflicting signals – what does it all mean?

The rise in bond yields is a global trend – the same is being seen in Europe and the UK. In the last week data from the EU zone showed that the economy appears to be slowing down – or increasing at a slower rate than was previously seen. However the effects of Quantitative Easing programmes in the different countries has led to a great divergence in rates.

For the period from 1999 to 2008 the average 10 year bond yields were as follows:
Germany 3%
United States 8%
United Kingdom 8%

For the period from 2008 to 2018 the average 10 year bond yields were:
Germany 7%
United States 5%
United Kingdom 5%

However at present the yields are 0.6% for Germany; 3.0% for United States; and 1.5% for United Kingdom

It is clear that the due to this large divergence the effects of rising US bond yield will have a very large impact on bond yields in other countries and the exchange rates.

Recession?

Classical economic theory states that inverted yield curves are a sign of recessions and down turns in the economy. Yield curves invert when the short term rates exceed the long term rates. However an inverted yield curve is not the cause of a recession. As the Fed has been pursuing a policy of gradual interest rate rises, it is not unrealistic to expect that to lead to a tightening over the whole curve. As investors expect short term yields to rise – leading to an eventual rise in long term rates – their area of focus changes and they position themselves by selling long dated bonds, causing a rise in long dated yields.

At the same time market analysts are saying that the global economy has reached a new departure point – there has been a significant shift in interest rate perceptions and that whilst rates can and will rise, they will not revert to the mean. However, as investors chase yield a major rise in US bond yields will impact on other bond markets. When the US bonds are yielding 400% more than their Eurozone counterparts, there are serious worries that investors will flock to the US market, unless the ECB announces the end of QE, which would lead to rising Euro yields.

There is also a possible knock on effect to the equity markets. Rising bond yields suddenly make equities less attractive. It could be that volatility is about to return and that Treasurers will need to look at their hedging policies.

Term sheets – glossary of terms

| 15-03-2018 | treasuryXL |

Whenever entering into transactions with banks, both parties need to know and understand what they are trading. A relatively simple transaction like a FX spot has few terms – you buy one currency against selling another currency at an agreed rate and an agreed settlement date. The only other major factor relates to where the settlement has to take place – on what bank account are you receiving and to what bank account do you have to pay the counter currency.

However, when entering into a loan or derivative it is always prudent to draw up a term sheet stating all the relevant criteria to enable the bank to quote a price. Once the trade is effected, then a confirmation is sent which should have the same terms and conditions as the term sheet. Here is a list of terms that are regularly used and their meaning. They mostly apply to physical products as well as to derivatives.

American Option – an option that can be exercised on any working day until the expiration date

Bermudan Option – an option that can be exercised on more than one specified date before the expiration date

European Option – an option that can only be exercised on the expiration date

Binary Option – an option whose payoff is either an agreed amount (monetary or asset) or nothing at all

Call Option – The right, but not the obligation, to purchase a specified underlying asset, at a specified price (Strike price) on a specified date in the future

Put Option – The right, but not the obligation, to sell a specified underlying asset, at a specified price (Strike price) on a specified date in the future

Cap – an option that pays out when a specified interest rate price exceeds a pre-agreed level (Strike price)

Floor – an option that pays out when a specified interest rate price falls below a pre-agreed level (Strike price)

Collar – the simultaneous purchase of a Cap and sale of a Floor on the same specified interest rate for the same nominal amount, protecting the purchaser from rate rises whilst negating the cost of the option by selling the Floor

Strike price – the price (level) at which an option holder can exercise their rights under the agreed option

Premium – the cost of buying an option

Trade date – the date when the specifications of a contract are transacted

Effective date – the start date of a contract

Termination date – the end date of a contract

Payment date – the date on which a payment is made

Fixing date – the date on which a floating rate is set/fixed

Forward start – a contract agreed on a trade date, that becomes effective on a specified future date

Tenor – the length of time that a contract is valid

Reference rate – the specified interest rate (or FX spot) index upon which future cash flows are based

Fixed rate – an agreed interest rate that cannot vary over the lifetime of the contract

Float rate – an agreed index rate that can be periodically reset over the lifetime of the contract

Derivative – a financial instrument that derives its value from the value of an underlying asset

Break clause – a clause written into the contract, that releases both parties from the contract in the event of a pre-agreed relevant event taking place

If you are interested to know what the effect of these terms can have on a contract, please contact us for more detailed information.

2018 – the black swan could be China

| 21-12-2017 | Rob Beemster |

Chinese gross domestic product (GDP) is forecasted to end 2017 at around $12 trillion, while the total debt to GDP is about 400%. The economic growth has been impressive as well is its nominal (but also relative) rise of the total debt.

The Chinese economy has grown from the start of its GATT membership in 1995 from around $750 bio to $12trl now. However, total credit grew much more, from around 100% of GDP in 2000 to more than 400% of GDP now.

Credit growth is still surging. This is one reason why the Chinese want their economy to expand at a speed of more than 10%. They need to hold this pattern for some years to come. When the Chinese government is able to put a brake on the growth of credit, GDP is allowed to decrease speed. We see comments from those in power about their wish to slow credit growth. But doing this is like changing the course of a tanker in a canal. In other words.

If Chinese GDP growth would decrease, and credit growth continues to surge, then a big disaster is to happen. The huge mountains of debt have to be financed, when this gets tougher, one can imagine that it will result in a Chinese economic slowdown.

If the credit bubble bursts, it will result in a devaluation of the yuan. This will have effect on the whole world economy. During the Asian crisis in 1997, China was a tiny economy, now it is huge. So not only mature economies like the ones of America and Europe will feel the pain but the surrounding countries and Africa will suffer heavily.

The outcome for the dollar overall, is fairly vague to me. Some economists see a Chinese devaluation as highly deflationary for the global economy and therefor a dollar bullish event. I have got doubts to the last part of that view. China has got an enormous stock of dollar bonds. It would not surprise me if they start selling these during an economic crisis.

If you are a corporation trading with China, 2018 might become an exciting year. As said, my story is about a black swan so most probably this doom story will not happen. And I hope it will not. But: hedging your currency flow is highly recommended. Even when you pay your producer in dollars or your Chinese client pays you in dollars, your risk is the CHINESE YUAN. It is NOT a dollar risk. The same must be said if you transmit your goods with Euro.

Creating a decent yuan hedge will be very important. Again, it is not a dollar or euro risk. When the yuan devaluates, the costs have to be paid somewhere. Don’t let it be you!

Barcelona valuta experts can attend you in creating a decent risk process, so your cash flow will be protected.

Rob Beemster

Owner of Barcelona valuta experts BV

The treasurer plays with fire, when hedging foreign currencies to his sole gut feelings

| 24-11-2017 | Rob Beemster |

The foreign exchange market is a highly volatile market and therefore full of surprises. For more than 20 years, I was a spot currency trader in the dealing room of a large international bank. One of the things I liked the most in being a trader was the unpredictability of the markets. Never a dull moment. The management of the bank gave us a lot of freedom, once you had proven the ability to handle this. But always we had to take care of some very important requirements, like the VAR (Value At Risk), and we had to protect our positions with stop-loss orders.

Executing a stop-loss was the worst part of my job. It proved that you had been wrong in judging a certain move of a currency. It sometimes felt like being a loser. However, executing at a stop-loss level gives you the freedom to restart a new currency position. We were never blamed by colleagues or the management for having executed a stop-loss. It was part of the risks, and by using a stop everyone knew that overall business would never be hurt. If losses taken by stops were in line with the profits taken (relatively speaking) everything would be fine, considering that a good trader makes more positive decisions then negative ones.

Now let’s consider the controller who decides on his hedges, based on his gut feelings. Most probably this is based on old nonsensical ideas like, “what goes up must go down”, and, “It will come back to old levels”. Because of my business today, I speak with finance managers about their hedging strategies. Sometimes they make me feel embarrassed because of their self-created strategies; “I like to play foreign currency strategy myself”, or; “we have had good years and less good years”. From a business economic point of view this can be very painful. Volatility in foreign currencies is a very important component of international business. But one has to realize that this component can be managed. Companies should install a risk management procedure on their foreign currency exposure/obligations, to preserve their profit margins. A proper strategy not only protects the margins and cash flow but will also create prudency within the entire company.

A currency strategy is an implemented structure, necessary for the finance department. However, others that are responsible for the flows, like sales departments, procurement or production, should be involved and be aware of the importance of the strategy as well. Our models do describe the tasks of all the departments. A communication plan is part of the currency strategy. When the implemented processes are understood by everyone within the company, then and only then the strategy will work.

Our foreign currency risk models are very useful within international operating corporations. We can help you to implement the processes that will secure cash flows. A controller, who makes decisions on FX out of the blue, is unacceptable and too dangerous for the continuity of the business, moreover, it is intolerable in modern finance departments.

Barcelona valuta experts can be of assistance to you. After precise research of the current status of your company we can implement the right models. And this will protect you against negative or unwelcome currency moves.

Rob Beemster

Owner of Barcelona valuta experts BV

How does a FX spot transaction work?

| 14-11-2017 | treasuryXL |

Every day we enter into transactions in our own domestic market. Goods are priced in our own currency and we settle purchases in our own currency. Here in the Netherlands that means everything is priced and settled in Euro’s. It is a clear and concise system – of course we might argue about the price of goods, but that is another matter. Now consider what happens when we sell our goods to a counterparty domiciled in a different country – we shall assume from the United States. We would prefer to invoice in EUR as this is our domestic currency, whilst our counterparty would prefer to settle in USD. This makes sense as in both instances neither of us would be exposed to fluctuations in the exchange rate between the EUR and USD.

There are 3 basic choices to trade with a foreign based counterparty:

Price in our currency, but run the risk that they will not trade with us
Price in their currency, win the trade but do nothing about the risk
Price in their currency, but adjust our price for the perceived FX risk and sell their currency for our currency as soon as the deal is closed

As we are keen to expand our export markets we agree to charging the buyer in USD, but what price should we charge in USD? By accepting payment in USD we are now assuming a foreign exchange risk as the value of the USD could fall in relationship to the EUR before we have sold the USD for EUR. If the fall was large it could take away all our profit from the original transaction, possibly even leading to a loss on the order.

We must therefore enter into a transaction to sell USD and to receive EUR to book our profit and to neutralize the FX risk. This leads us into the world of Foreign Exchange (FX) trading.

In FX trading quotations are always shown for a pair of currencies such as EUR/USD – but what does this mean?

The first currency – EUR – is called the base currency
The second currency – USD – is called the quoted currency
The spot rate is shown as 1.1595
This means that every unit of the base currency is equal to 1.1595 units of the quoted currency

If our order was for EUR 100.000,00 then the USD equivalent would be USD 115.950,00

In this example it is the USD price that fluctuates as it is the quoted currency, but this does not mean that fluctuations are only caused by changes in the value of USD. The value can also fluctuate because of changes in the value of EUR – even though this is the base currency.

Most major currency pairs are quoted to 4 decimal places – with the 3^rd and 4^th places being called “pips”. Pips are the expression traders use to describe their profit or their market spread.

If we traded EUR 1 million into USD, we would have an equivalent of USD 1.159.500,00

The value of 1 “pip” would be USD 100,00

When we approach a bank for a quotation in spot EUR/USD, the bank quotes a 2-way price such as 1.1592/97

The lower price – 1.1592 – represents the bank’s bid price. This is the price at which the bank buys EUR and sells USD.

The higher price – 1.1597 – represents the bank’s offer price. This is the price that at which the bank sells EUR and buys USD.

If the bank quoted this price into the market and one clients hit the bid at 1.1592 and another took the offer at 1.1597, both in EUR 1 million, then the bank would book a profit of USD 500,00 – or a profit of 5 pips on EUR 1 million.

FX is one of the largest markets in the world – daily turnover exceeds USD 5 trillion per day. That means 5 followed by 12 zeros – every working day.

With such a large daily turnover, prices are constantly changing. The market consists of price makers (who make the prices), price takers (who take the prices), intermediaries like brokers who assist the market by transmitting the prices and placing orders, and clients who place orders at specific levels. Prices are only valid for a few seconds before they change either because the market has traded on the quoted price or a new order replaces the existing price.

When you trade on the quoted price then you have entered into a binding contract with the counterparty. Settlement is normally 2 working days after the trade date. If you sell USD then you must ensure your counterparty receives the agreed USD amount on their account in 2 working days, and you receive the agreed EUR amount on your account in 2 working days.

Trade settlement is very important and means that you must have a complete operational procedure in placing to effect settlement, establish positions, agree counterparties, have trading limits etc.

Traditionally spot FX trades were done with banks. Now trades can also be transacted via electronic exchanges, electronic brokers etc. It is always important to know who your counterparty is – it could be that your internal operational control prohibits you from trading with specific counterparties.

Most major currencies can be traded against each other without restrictions such as exchange control. Therefore, currency pairings can be found everywhere such as USD/JPY and EUR/GBP and ZAR/CHF.

Spot FX transactions are not traded on listed exchanges; these trades occur “over the counter” with a clearly identifiable counterparty.

Lionel Pavey

Cash Management and Treasury Specialist