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Banking Essentials - Part I

This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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+1,000 expert presented, on-demand video modules

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Gain CPD / CPE credits and professional certification

Managed learning

Build, scale and manage your organisation’s learning

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Tackling the Cost of Living Crisis

In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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FX Options Case Study

FX Options Case Study

Lindsey Matthews

30 years: Risk management & derivatives trading

In this video, Lindsey explains how to price a EUR put - USD call and GBP call - CHF put.

In this video, Lindsey explains how to price a EUR put - USD call and GBP call - CHF put.

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FX Options Case Study

10 mins 59 secs

Key learning objectives:

  • Understand how to price a EUR put - USD call

  • Understand how to price a GBP call - CHF put

Overview:

FX forwards and options are trades where a currency pair is exchanged in the future, at a price agreed on today. The calculation of the forward price is similar to calculating the forward price on an equity option, however, the costs will be in one of the currencies and the benefits will be in the other. Run through the case studies in this video for a deeper understanding.

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Summary

How would you price a EUR put - USD call?

If we were to buy 10 million of the 3-month $1.35 strike EUR put - USD call, what would we have bought? 

It is an option on the euro dollar, so the euro is the currency that we are buying and selling, i.e. €10m. The option is a put, so it is an option to sell €10m at a strike price of $1.35.  

At expiration, if EUR-USD ends up below $1.35, we would exercise the option and receive $13.5 million in exchange for the €10 million.

Now we understand what the option is, we can value it.

Assume the 3-month forward on EUR-USD is 1.3485, and EUR-USD volatility is 7%. We can build the distribution using Lindsey’s simple option pricing model and calculate the value at expiry as shown in the diagram: 

Given this is an option on EUR - USD, the prices are in dollar terms. 

How would you price a GBP call - CHF put?

This example is from interest rates were much higher. 

In July 2001, GBP/CHF was trading at 2.4603, the GBP 2-year rate was 5.64% and the 2-year CHF rate was 3.07%. The 2-year forward was 1190 pips lower at 2.3413 and volatility is at 8.4%. 

Let’s say we want to value the at-the-money options. We can calculate this using the simple model for ATMF options using the approximation Lindsey outlined in an earlier video: 

0.4 x 2.3413 x 8.4% x sqt(2) = 0.11411

Discounting this back using the Swiss rate of 3.07% gives: 

0.1111 / 1.0307^2 = 0.1047 or 1047 pips

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Lindsey Matthews

Lindsey Matthews

Lindsey runs Perfordiant, an investment risk and performance consulting firm. He has worked in financial markets since 1992. Lindsey became an MD in fixed income and equities, ran a Risk function, and was on the management team of an Asset Management fintech business. Lindsey is now a Visiting Fellow at the Henley Business School, and resides on the board of CFA UK.

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