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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:
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?
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 3rd and 4th 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
Accenture and blockchain: the accent on security issues
| 13-11-2017 | Carlo de Meijer |
Accenture: where do they stand?
Looking at the various blockchain alliances or consortiums, of the top three in the Juniper Research, Accenture is the most broadly focused one. Being a member of both the Ethereum Enterprise Alliance and the Hyperledger Project as well as entered into alliance with Ripple and Digital Asset. Early this year Accenture also joined the Chamber of Digital Commerce (CDC), the world’s leading blockchain trade association. The CDC, aimed to “help educate, promote and accelerate the adoption of blockchain-enabled technologies” , is also the founder of the Smart Contracts Alliance, the Blockchain Alliance, the Global Blockchain Forum amongst others.
Compared to IBM (Hyperledger Project and Digital Asset) and Microsoft (Ethereum Enterprise Alliance and Ripple) that are more outspoken in their vision, the overall goal of Accenture is to leverage DLT innovations of all sorts to make the technology viable for enterprise IT use.
“Accenture strives to be at the forefront of blockchain innovation and its practical, real world application. We provide our clients with a complete view of the blockchain-based technology landscape and its potential business implications. Our global team of experts works with each client to help build smart strategies around effective use-cases, investment and implementation.”Accenture website
“Accenture is committed to supporting these efforts by leveraging our expertise across the company – from regulation to innovation – to make blockchain a reality for our clients.” David Treat, managing director of Accenture’s financial services industry blockchain
Accenture: focus on security issues
Accenture is especially focusing on security issues. These will be critical to the widespread adoption of blockchain technology. In February this year Accenture launched its new blockchain security hardware solution and recently the company has secured a patent related to its work on Editable Blockchain technology as of late September 2017.
Blockchain Hardware solution
Last February Accenture launched its new blockchain security hardware solution. In partnership with Thales e-Security and its hardware security modules (HSMs), Accenture has developed a Hyperledger Fabric-based patent-pending solution…..
Read the full article of our expert Carlo de Meijer on LinkedIn
Carlo de Meijer
Economist and researcher
Wanted: Honours Graduation Internship in Finance, Control or Treasury
| 10-11-2017 | Nick de Wilde & Laurens Schumacher | Minor Treasury Management |
The University of Applied Sciences in Utrecht gives business economics students the opportunity to follow the minor Treasury Management. Two students that are following the programme at the moment are looking for a company where they can follow their Honours Graduation Internship.
Does your organisation have an opportunity?
Dear Treasurers,
We, Nick de Wilde and Laurens Schumacher, are looking for an internship for the period of February 5th to June 29th, 2018. We are currently in our last year of our business economics study at the University of Applied Sciences Utrecht and are following the minor Treasury Management. So far, we both have been very successful in our business economics education. Both of us are taking part in the Honours Graduation track in which we are taking on a challenging assignment as a duo. The internship consists of 60% working in the company (at the financial administration) and 40% working on the assignment. We prefer an assignment in the direction of Finance, Control or Treasury but we are open to any other suggestions.
If you are interested in facilitating us with a challenging internship, feel free to send us a message to [email protected] & [email protected] or join us on Linkedin.
Nick de Wilde – Nick on LinkedIn
Laurens Schumacher – Laurens on LinkedIn
Read also these articles about the minor Treasury Management and from other students of the minor: