TABLE OF CONTENTS
CONTENTS .................................................. .................................................. ................................... PAGE
FOREIGN EXCHANGE SPOT: INTRODUCTION .................................................. .................... 1
FXSPOT:
AN INTRODUCTION TO FOREIGN EXCHANGE SPOT TRANSACTIONS ........... 2
INTRODUCTION .................................................. .................................................. .................. 2
WJ-IAT IS AN OUTRIGHT? .................................................. .................................................. . 3
VALUE DATES .................................................. .................................................. ....................... 4
CREDIT AND SETTLEMENT RISKS .................................................. ................................ 6
EXCHANGE RATE QUOTATION TERMS .................................................. .................... 7
RECIPROCAL QUOTATION TERMS (RATES) .................................................. ........... 10
EXCHANGE RATE MOVEMENTS .................................................. ................................. 11
SHORTCUT .................................................. .................................................. ............................ 14
BIDS AND OFFERS .................................................. .................................................. ............. 16
THE RULE OF THE LEFT BID -RIGHT OFFER .................................................. ...... 17
CROSS RATES .................................................. .................................................. ....................... 22
BID-OFFER FOR THE CROSS RATES OF CURRENCIES
ON SAME TERMS .................................................. .................................................. ............. 25
EXCHANGE RATE MOVEMENT REVISITED FOR CROSSES .............................. 26
BID-OFFER FOR CROSS RATES OF CURRENCIES ON
DIFFERENT TERMS .................................................. .................................................. ........ 27
SUMMARY .................................................. .................................................. .............................. 28
SHORTCUTS .................................................. .................................................. .......................... 31
TRADING CONVENTIONS AMONG MARKET MAKERS ...................................... 32
SUMMARY .................................................. .................................................. .............................. 33
REVIEW PROBLEMS .................................................. .................................................. .......... 35
FOREIGN EXCHANGE FORWARDS: INTRODUCTION .................................................. .... 38
FXFORWARDS:
AN INTRODUCTION TO FOREIGN EXCHANGE FORWARDS ............................... 39
INTRODUCTION .................................................. .................................................. ................ 39
WJ-IAT ARE FORWARDS? .................................................. .................................................. . 39
CALCULATING THE FORWARD RATE .................................................. ....................... 40
HOW DO YOU CALCULATE FORWARD POINTS? .................................................. . 43
PAY AND EARN POINTS .................................................. .................................................. . 43
SUMMARY .................................................. .................................................. .............................. 46
SAMPLE PROBLEMS .................................................. .................................................. .......... 46
PREMIUM VS. DISCOUNT POINTS .................................................. ................................ 51
(r)
Confidential Treatment Requested By Lehman Brothers Holdings, Inc. LBEX-LL 3356481
CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE
TABLE OF CONTENTS
(continued)
CONTENTS .................................................. .................................................. ................................... PAGE
SAMPLE PROBLEMS .................................................. .................................................. .......... 52
FORWARD RATE CONVENTIONS .................................................. ................................ 54
SAMPLE PROBLEMS .................................................. .................................................. .......... 55
CALCULATING ODD DATES .................................................. .......................................... 53
TYPES OF TRANSACTIONS .................................................. .............................................. 59
HOW DO THE FORWARD POINTS CHANGE? .................................................. ......... 59
WHICH SIDE OF THE MARKET? .................................................. ................................... 60
CURRENCY FUTURES .................................................. .................................................. ....... 61
FUNDING .................................................. .................................................. .............................. 62
TRADE IDEAS AND HOW THEY ARE FORMED .................................................. .... 62
TRADING EURODOLLAR FUTURES .................................................. ............................ 64
TRADING SPREADS INVOLVES ANALYZING YIELD CURVES ......................... 65
EXAMPLE OF A POSITIVE CARRY TRADE .................................................. ............... 66
FORWARDS REVIEWPROBLEMS .................................................. .................................. 67
FOREIGN EXCHANGE SWAPS: INTRODUCTION .................................................. ............... 69
WHAT IS A SWAP .................................................. .................................................. ........................ 70
VALUE DATES .................................................. .................................................. ..................... 71
BID-OFFER SPREADS .................................................. .................................................. ....... 77
CALCULATING SWAP POINTS .................................................. ....................................... 82
RULES OF THUMB .................................................. .................................................. ............. 84
PAY OR EARN THE POINTS .................................................. ............................................ 86
THE RATIONALE BEHIND THE CHART .................................................. ................... 88
LEARNING POINTS .................................................. .................................................. ........... 92
SUMMARY .................................................. .................................................. .............................. 92
FOREIGN EXCHANGE OPTIONS: INTRODUCTION .................................................. ......... 94
FXOPTIONS:
AN INTRODUCTION TO FOREIGN EXCHANGE DERIVATIVES .......................... 95
INTRODUCTION .................................................. .................................................. ................ 95
VANILLA OPTIONS .................................................. .................................................. ........... 95
PAYOFF OF A LONG AND SHORT CALL OPTION .................................................. 96
PAYOFF OF A LONG AND SHORT PUT OPTION .................................................. ... 96
THE GREEKS .................................................. .................................................. ........................ 97
DELTA RANGES FROM 0% (DEEP OTlvf) TO 100% (DEEP ITlvf) ......................... 99
TRADING GAMMA ON A LEHMAN CALL OPTION .............................................. 102
P&L ON GAMMA HEDGING EXAMPLE .................................................. ................... 103
(rr)
Confidential Treatment Requested By Lehman Brothers Holdings, Inc. LBEX-LL 3356482
CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE
TABLE OF CONTENTS
(continued)
CONTENTS .................................................. .................................................. ................................... PAGE
SECOND ORDER GREEKS .................................................. ............................................. 106
FACTORS AND THEIR EFFECTS ON OPTION VALUE ........................................ 107
EXOTIC OPTIONS .................................................. .................................................. ............ 107
TRADING CONVENTIONS .................................................. ............................................ 110
TRADING STRATEGIES .................................................. .................................................. . 111
GLOSSARY .................................................. .................................................. ........................... 123
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