FOREIGN EXCHANGE MARKET

LYSSA C. LEJARDE
 LEARNING OBJECTIVES
01
Foreign Exchange
Market
❑ Participants
❑ Price Determination

02
Foreign Exchange
Realized & Unrealized
2
Gain / Losses
 FOREIGN
EXCHANGE
MARKET
3
 FOREIGN EXCHANGE MARKET
✓ also known as forex, FX, or the
currencies market.
✓ it is an over-the-counter (OTC)
global marketplace that
determines the exchange rate for
currencies around the world.
✓ Participants in these markets can
buy, sell, exchange, and speculate Currency Pairs:
on the relative exchange rates of • USD/PHP
various currency pairs. • EUR/USD
• AUD/YEN
4
 FOREIGN EXCHANGE MARKET
✓ Foreign exchange markets are
made up of:

❑ Banks
❑ Forex dealers
❑ Commercial companies
❑ Central banks
❑ Investment management firms
and Hedge funds
❑ Retail Forex Dealers and Investors
5
 FOREIGN EXCHANGE MARKET
(PHILIPPINES)
✓ Buying of currencies is allowed only under
certain conditions set by the BSP to
discourage/control entering the transactions
for speculative purposes.

✓ Individuals are only allowed to buy USD up to

10,000.

✓ Excess will be allowed with proof of tuition fee

of the nominee in the US, US hospital bills, and
procurement of machinery (importation).

✓ Any misdeclaration will be subjected to AMLAC

6 investigation.
PARTICIPANTS
IN
FOREIGN
EXCHANGE
MARKET
7
PARTICIPANTS IN FOREIGN EXCHANGE MARKET

• tourist, importers, exporters, investors

Traditional Users and the other users and suppliers of
foreign currencies.

Commercial / • intermediaries between users and

Universal Banks sources of fund.

Interbank • Interbank or whole market

(Brokers & transactions between brokers and
Dealers) dealers.

8
 PRICE
DETERMINATION

9
 PRICE DETERMINATION
✓ The market is maintained under a floating
exchange rate system where market
forces primarily determine the exchange
rate
( supply and demand price).
• As we enter the bank premise,
✓ Two-way price quote ( Bid/Offer): banks we notice the
provide two-way quotes and are • USD buy (bid) - 50.00
committed to dealing at these prices unless • USD sell (offer) - 50.10
• ( .10 spread) display on bank
changed or canceled prior to dealing.
counter already marked up.
• Buys lower, sells higher to
10 protect from currency
fluctuations.
 FOREIGN EXCHANGE QUOTE

Bid • the rate at which the dealer is willing to

buy the commodity/base currency.

Rate
• The party availing of the rate will be
selling the given currency.

Offer • the rate at which the dealer is willing to

sell the commodity /base currency.

Rate
• The party availing of the rate will be
buying the given currency.

11
 FOREIGN EXCHANGE RATE
✓ It is the price of one currency in terms of
another currency.
✓ Example:
USD/JPY 107.955
EUR/USD 1.21003
AUD/PHP 36.00

Consists of two currencies:

✓ Commodity (base) currency being priced;
fixed number - e.g. 1, 100
✓ Terms (counter) currency the “other”
currency; variable number - e.g. 107, 40
12
 FOREIGN
EXCHANGE
REALIZED /
UNREALIZED
GAIN / LOSSES
13
 FOREIGN EXCHANGE
REALIZED / UNREALIZED GAINS OR LOSSES

• are the gains or losses on

Realized transactions that have been completed.
Gains / • It means that the customer has already
settled the invoice prior to the close of the
Losses accounting period.

• are the gains or losses that the seller

expects to earn when the invoice is
settled, but the customer has failed to
Unrealized pay the invoice by the close of the
Gains / accounting period.
• The seller calculates the gain or loss that
Losses would have been sustained if the
customer paid the invoice at the end of
14 the accounting period.
THANKS!
References:

https://www.investopedia.com/terms/forex/f/foreign-exchange-markets.asp
https://corporatefinanceinstitute.com/resources/knowledge/accounting/foreign-exchange-gain-loss/
FOREIGN EXCHANGE CONTRACTS

LYSSA C. LEJARDE
 LEARNING OBJECTIVES

01 03
Foreign Exchange Forward Contracts
Contracts

02 04
Spot Contracts Swaps Contract

2
 FOREIGN
EXCHANGE
CONTRACTS
3
 FOREIGN EXCHANGE CONTRACTS

✓It is a bilateral agreement to buy or sell

one currency against another at an
agreed price and at a specific value
date.

✓The foreign exchange market is the most

liquid financial market in the world.

4
 COMPONENTS OF FOREIGN
EXCHANGE CONTRACTS
✓ Contract date
✓ Value date
✓ Currency (either bought or sold)
✓ Exchange rate
✓ Settlement instructions (receive or
pay)

5
 FOREIGN EXCHANGE CONTRACTS
✓ Currencies are traded against one another in pairs.

Consists of two currencies:

✓ Commodity (base) currency - quoted relative to the

second currency; being priced; fixed number - e.g. 1, 100
✓ Terms (counter) currency – counter currency; the
“other” currency; variable number - e.g. 107, 40

For example:

1.) EUR/USD 1.6545 is the price of the euro expressed in

dollars. Meaning 1 Euro = 1.6545 dollars

2.)USD/Php
6 53.20 is the price of USD expressed in peso.
Meaning 1 USD = 53.20 pesos.
 FOREIGN EXCHANGE CONTRACTS

Spot Forward
Swaps
Contracts Contracts

7
 SPOT
CONTRACTS

8
 FOREIGN EXCHANGE CONTRACTS
✓ A spot trade/ spot transaction.
✓ It refers to the purchase or sale of a foreign
currency, financial instrument , or commodity
for physical delivery of the currency on a
specified spot date commodity or
instrument.
Spot ✓ In a foreign exchange spot trade, the
exchange rate on which the transaction is
Contracts based is referred to as the spot exchange rate.
✓ Trade date plus two days
• (MAY 2: USD 1MM/Php spot traded today,
Settlement date is on MAY 4)

9
 SPOT CONTRACTS

10
 FORWARD
CONTRACTS

11
 FOREIGN EXCHANGE CONTRACTS
✓ A forward contract is an agreement
between two parties to buy or sell an
asset at a specified price at a fixed date
in the future.

Forward ✓ The buyer and seller agree to buy or sell

Contracts an underlying asset at a price they both
agree on at an established future date.

✓ This investing strategy is a bit more

complex and may not be used by the
12 everyday investor.
 FOREIGN EXCHANGE CONTRACTS

✓ Forward price: the price of the purchase

and sale agreed between the forward
purchaser and seller at the time of entry
into the forward contract.
Forward
✓ Forward or Maturity or Settlement
Contracts Date: the maturity or expiry date of the
forward contract on which the forward
contract must be physically or cash-
settled.
13
 FOREIGN EXCHANGE CONTRACTS
✓ A forward contract is a type of derivative.
- an investment contract between two or
more parties whose value is tied to an
underlying asset or set of assets.
Forward ✓ It can be changes in:
Contracts
a. an interest rates
b. financial instrument prices
c. commodity prices
d. foreign exchange rates
14
e. credit risk
 FOREIGN EXCHANGE CONTRACTS
✓ You have 300,000 mangoes ready for sale
in two months. You can enter a forward
contract and lock in a set price as a seller.
(50.00 / kilo)
Forward ✓ On the maturity date, if the spot price
Contracts increases (50.00 to 52.00), the seller will
incur a loss but on the other hand, if the
spot price decreases (50.00 to 48.00), the
buyer will incur a loss.
15
 FOREIGN EXCHANGE CONTRACTS
✓ On both sides of the transaction, the goal is to create
a hedge against volatility and maintain same
pricing for the customers.
✓ This makes forward contracts highly speculative since
Forward there’s no way to predict which way prices for an asset
Contracts will move over the duration of the contract.
✓ This is also why forward contracts are most often used
in connection with assets that have wide pricing
swings, like vegetables, meat, and fish when climate

16 changes so abruptly.
 FORWARD CONTRACTS
✓ In a forward contract, the buyer takes a long position
while the seller takes a short position.

✓ The idea behind forward contracts is that the parties

involved can use them to manage volatility by locking in
pricing for the underlying assets.

✓ In that sense, a forward contract is a way to hedge

against market uncertainty.

17
 FORWARD CONTRACTS

18
 SWAPS
CONTRACT

19
 FOREIGN EXCHANGE CONTRACTS

✓ A swap is a derivative contract through which

two parties exchange the cash flows or
liabilities from two different financial
instruments.
Swaps
Contract ✓ It is a combination of 2 foreign exchange
transactions; spot FX and forward FX
transactions.

20
 FOREIGN EXCHANGE CONTRACTS
• Company A is Canadian and needs EUR.
• Company B is European and needs CAD.
• The parties enter a foreign exchange swap today with
a maturity of six months.
• They agree to swap 1,000,000 EUR, or equivalently
1,500,000 CAD at the spot rate of 1.5 EUR/CAD.
Swaps • They also agree on a forward rate of 1.6 EUR/CAD
Contract because they expect the Canadian Dollar to
depreciate relative to the Euro.
• Today, Company A receives 1,000,000 Euros and gives
1,500,000 Canadian Dollars to Company B.
• In six months’, time, Company A returns 1,000,000 EUR
and receives (1,000,000 EUR * 1.6 EUR/CAD = 1,600,000
CAD) from Company B, ending the foreign exchange
21
swap.
 FOREIGN EXCHANGE CONTRACTS
BASIC PRINCIPLES

1. Buy/Sell Swap – USD/PHP

• (SPOT) – Buy USD, sell Php @ spot rate
• (FORWARD) – Sell USD, buy Php @ forward
Swaps rate
Contract 2. Sell/Buy Swap – USD/Php
• (SPOT) – Sell USD, buy Php @ spot rate
• (FORWARD) – Buy USD, sell Php @ forward
rate.

22
INTERNATIONAL
CURRENCY
CODES

23
 INTERNATIONAL CURRENCY CODES
✓ In many countries around the world, the Euro and the US Dollar are the
preferred foreign currencies.

✓ Other major trading currencies are:

Japanese Yen (JPY)
British Pound Sterling (GBP)
Australian Dollar (AUD)
Canadian Dollar (CAD)
Swiss Franc (CHF)
Chinese Yuan (Renminbi; CNY)
Swedish Krona (SEK)
New Zealand Dollar (NZD)
24 and the Mexican Peso (MXN).
 INTERNATIONAL CURRENCY CODES
INTERNATIONAL CURRENCY CODES

US Dollar USD

Singapore Dollar SGD

Australian Dollar AUD

Japanese Yen JPY

Chinese New Yuan CNY

British Pound GBP

Philippine Peso PHP

25
 In foreign exchange transactions in the world:

USD is involved in 87%, followed by Euro with 33%

and the Japanese Yen with 23%.

26
THANKS!
References:

https://www.investopedia.com/terms/f/forward-exchange-contract.asp
https://www.fxstreet.com/analysis/what-is-a-foreign-exchange-swap-and-how-does-it-work-202006190858
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/foreign-currency-swap/
FUNCTIONAL RESPONSIBILITY

LYSSA C. LEJARDE
 LEARNING OBJECTIVES

01 03
Functional Interest Rate Gaps
Responsibility

02
Liquidity
Management

2
 FUNCTIONAL
RESPONSIBILITY

3
 FUNCTIONAL RESPONSIBILITY
✓deals with a distinctive competence in
a functional area in order to maximize
resource productivity.

✓ensures that all current and projected

cash inflows and outflows must be
monitored to ensure that there is
sufficient cash to fund company
operations, as well as to ensure that
excess cash is properly invested.
4
 CASH FLOW

✓It is the increase or decrease in the

amount of money a business, institution,
or individual has.

✓Cash Flow has many uses in operating a

business and performing financial
analysis.

5
 LIQUIDITY
MANAGEMENT

6
 LIQUIDITY MANAGEMENT
✓ It is the ability to meet financial
obligations in a very timely manner, like;

a. Funding liquidity - ability to meet all

funds commitments when they are due.
b. Trading Liquidity – in a non-funding
sense, where liquidity is an indicator of how
readily we can sell off or close a position
without creating a significant change in
market prices.
7
 LIQUIDITY RISK
✓ One of an Organization’s key balance sheet
management objectives is to maintain the
highest possible degree of liquidity
because the cost of being illiquid is
being out of business.

✓ Funding liquidity risks can be:

a. Day to Day (short term)

b. Balance Sheet Liquidity

8
 A. DAY TO DAY (SHORT-TERM)
✓ cash flows should be within the funding
capacity in the marketplace to meet
maturing obligations. It includes:

a. Company maintaining and monitoring a

cash account from which to settle
obligations like food, water, and electric bills,
credit card payments, online purchases, etc;
b. Ensures that there are enough funds to pay
maturing obligations, and;
c. Know how to cover up if there are fund
shortfalls.
9
 HOW TO MONITOR?
DAY TO DAY (SHORT-TERM)

✓ Cash flow blotter/report: tracks all the movement of cash

(inflow/outflow) arising from maturing Asset and Liability
contracts as well as current-day transactions. It is usually done for
major currencies.

✓ Reflects start of day balance in the relevant cash account and

adjusted with current day treasury transactions as they occur.

✓ Transactions affecting the cash flow arising from other units

are also incorporated in the report, eg. loan payment, large
deposits, import/export negotiations.
10
 HOW TO MANAGE?
DAY TO DAY (SHORT-TERM)

✓ At the end of each banking day, the interim balance taken from
the cash flow report will either show an excess or shortfall in the
cash position.
✓ This excess or shortfall will be invested or covered in the
interbank market. This is to ensure optimal use of excess funds
and funding of shortfall or over drawings.

✓ At the start of the day, the interim balance will be compared

against the cash position in the relevant cash account. Any
major discrepancies will be promptly investigated.
11
 B. BALANCE SHEET LIQUIDITY
✓ results from mismatch maturities of
assets and liabilities, also known as
“Tenor Gaps”

Example: 1 year loan funded by a one-

month deposit.

✓ composed of Asset and Liabilities on and

off-book.

12
 BALANCE SHEET LIQUIDITY
✓ The real risk, therefore, is that you could
end up with a balance sheet where all
the assets are long-term and all the
liabilities are short-term.

How to monitor?
Balance Sheet Liquidity :
Maximum Cumulative Outflow Report.

13
 BALANCE SHEET LIQUIDITY
On balance Sheet Accounts

✓ Asset: booking date = outflow, maturity date = inflow

✓ Liability: booking date = inflow, maturity date = outflow

EXAMPLE OF TRANSACTIONS IMPACT ON LIQUIDITY

Effect on the cash flow of the following transactions;
✓ 1MM borrowing @ 4.00% for 30 days (int. 3,333,33)
✓ 20MM lending or placement @3.00 to mature in 5 days
✓ (int. 8,333.33)
✓ Purchase of USD 1MM vs 50MM value spot
✓ Pre-termination of loan Php 52MM
14
INTEREST RATE
GAP

15
 INTEREST RATE GAP
✓ It measures a firm's exposure to interest rate
risk.
✓ The gap is the distance between assets and
liabilities.
✓ The most seen examples of an interest rate gap
are in the banking industry.

✓ A bank borrows funds at one rate and loans the

money out at a higher rate. The gap, or
difference, between the two rates represents
the bank's profit.
16
THANKS!
References:

https://corporatefinanceinstitute.com/resources/knowledge/finance/cash-flow/
https://www.investopedia.com/terms/i/interest-rate-gap.asp
CORRESPONDENT BANKING

LYSSA C. LEJARDE
 LEARNING OBJECTIVES

01 03
Correspondent Banks Offshore Banks

02
Foreign Banks

2
CORRESPONDENT
BANKING

3
 CORRESPONDENT BANKING
✓are banks in a country that are set up to
provide services for another bank or
financial institution in a foreign country.

✓The services provided by a correspondent

bank include:
❑ money transfers
❑ currency exchange
❑ trade documentation
❑ business transactions
4
 CORRESPONDENT BANKING
✓Correspondent banks are based on the
underlying bilateral agreement connect
financial institutions, enabling domestic
and cross-border money movement and
related services.

✓Communication between these banks

frequently entails the transmission of
messages for conducting transactions.

5
 CORRESPONDENT BANKING
✓A correspondent bank can conduct
business transactions, accept deposits,
and gather documents on behalf of the
other financial institution.

✓Correspondent banks are used by

domestic banks in order to service
transactions originating in foreign
countries and act as a domestic bank's
agent abroad.
6
 CORRESPONDENT BANKING

A corporate
customer of a bank
in one country wants
to pay for products
purchased from
foreign suppliers.

7
 LARGE PHILIPPINE BANKS AND
CORRESPONDENT BANKS
✓USD – Citibank Manila, Citibank NY, Bank of Cal ( Meryll Lynch),
Wells Fargo NY, Bank of America Cal
✓JPY - Mizuho Bank., Mitsubishi UFJ Bank, Mitsui Sumitomo Bank,
Tokai Bank Tokyo
✓EURO - BNP Paribas, Enskilda Banken, Societe Generale, Banco
Santander, Deutsche Bank, Credit Suisse, Midland Bank Ldn
✓GBP – Barclays Bank, Ldn, Natwest Bank Ldn, Standard
Chartered
✓HKD – Hongkong and Shanghai Bank, Bank of China
✓SGD – United Overseas Bank of Sing., DBS
✓AUD – Australia and New Zealand Bank, NZ
8
 LARGE PHILIPPINE BANKS AND
CORRESPONDENT BANKS

✓Citibank Manila (USD vs PHP transaction), Hongkong and

Shanghai Bank, and other banks built local offices in
different countries to facilitate financial transactions
affected by time zone differences and to cater to their
local international transactions.

9
 SWIFT

10
 SWIFT
(Transfer of funds)
✓SWIFT stands for the Society for Worldwide
Interbank Financial Telecommunication.

✓It is a global network that processes payments

between different countries.

✓It is a messaging system that runs on a network

of financial institutions globally.

✓It is a member-owned cooperative used by

thousands of banks worldwide to communicate
information on financial transactions in a secure
11
and standardized way.
 SWIFT
(Transfer of funds)
✓SWIFT is a cooperative, meaning it is not
controlled by any one country.

✓It is governed by a 25-person board of directors

and overseen by the G-10 country central banks
(Bank of Canada, Deutsche Bundesbank,
European Central Bank, Banque de France, Banca
d’Italia, Bank of Japan, De Nederlandsche Bank,
Sveriges Riksbank, Swiss National Bank, Bank of
England, USA Federal Reserve System), the
European Central Bank, and the National Bank of
Belgium.
12
 SWIFT
(Transfer of funds)

✓SWIFT acts a neutral utility, so it doesn't make any

decisions on sanctions.

✓However, because SWIFT operates under Belgian

law, it must comply with any EU regulations,
including sanctions.

✓The last occurrence was in 2012, when EU

Regulation 267/2012 placed restrictions on Iran.

13
 SWIFT
(Transfer of funds)
✓ Instructions and advice must be accurate in all
aspects like the:
❑ Bank SWIFT Code
❑ Transaction type
❑ Currency type
❑ Amount
❑ Date
❑ Source of correspondent bank funding
❑ Time bound execution (different cut-offs for
different currency transactions)
❑ Appropriately approved and authorized
❑ Correct intended recipient - the most delicate
part of the execution.
14
 Example: Importation of goods and raw materials:
A Philippine beer co. importing malt from a European Company.

▪ VIA SWIFT MT 202

❑ Beer Co., instructs BOC to debit its account
for the amount paid to MALTEUROP.
❑ BOC prepares the advice and sends it to its
Euro correspondent bank SEB.
❑ SEB remits funds to Santander for further
credit to MALTEUROP where Malteurop
maintains its EUR account.
❑ All transactions are processed via SWIFT
wire transfers in real-time.
Philippines
Ireland

Ayala, Makati
City
Skandinaviska Enskilda
BOC Bank Head Office
Banken, Scotland Europe
Mandaluyong, Phils
 SWIFT CODES

SWIFT code CITIPHMXXXX

Swift code (8 characters) CITIPHMX

CITIBANK,N.A., MANILA
Branch name
BRANCH

8741 PASEO DE ROXAS, MAKATI,

Branch address METRO MANILA, CITIBANK
TOWER, FLOOR 9

Branch code XXX

16
 SWIFT CODES
(Local and International)

BANGKO SENTRAL NG PILIPINAS PHCBPHMCXXX

Metrobank (Manila) MBTCPHMMXXX
Citibank NY CITIUS33
Tokyo Bank, Tokyo Japan BOTKJPJTXXX
Midland Bank Ldn MDBLBDDHXXX
BDO (Manila) BNORPHMMXXX
Chinabank CHBKPHMMXXX
RCBC RCBCPHMMXXX
Union Bank UBPHPHMMXXX
United Overseas Bank, Sing UOVBSGSG
ANZ Bank, NZ ANZBNZ22

17
 SWIFT MESSAGE TYPE

MT 103: Individual Advice (Money or Fund Transfers,

Hospital Payment, Tuition Fees, Goods Purchases)
MT 202: Bank to Bank, Large Entities ( Purchase and Sale of
securities, Importation, Remittances)
MT 300: Confirmation of Transaction ( to ensure details are
accurate before the execution of transfers)

18
 FOREIGN
BANKS

19
 FOREIGN BANKS
✓ A foreign bank branch is a type of foreign bank that
is obligated to follow the regulations of both the
home and host countries.

✓ Banks often open a foreign branch to provide their

multinational corporate clients with more services.

✓ Foreign bank branches tend to be more effective in

countries with high taxes and nations where it is easy
for international firms to enter the market.

20
 FOREIGN BANKS
(PHILIPPINES)

✓ USD: Bank of America, Citibank, JP Morgan Chase, Wells

Fargo, BNY, Credit Suisse
✓ YEN: Misuho Bank, Sumitomo Bank, Tokai Bank, Bank of
Tokyo Mitsubishi
✓ GBP/EUR ; Deutsche Bank, Standard Chartered Bank,
Skandiniviska Enskilda Banken, BNP Paribas, Barclays Bank
✓ SGD : UOB, DBS (Bank of Sing)
✓ HKD : HSBC, OCBC,
✓ MYR : Maybank
✓ BHAT : Bankok Bank
✓ WON: Korean Exchange Bank
21 ✓ AUD: Australia & New Zealand Bank
 OFFSHORE
BANKS

22
 OFFSHORE BANKS
✓ Offshore Banks do foreign-currency banking
transactions primarily with non-residents, foreign
banks, other offshore banks, and corporate and
institutional clients.

✓ It offers project finance, export financing, global

trade financing, and other international trade loans.

✓ It can be branches, subsidiaries, or affiliates of

foreign banks authorized to do offshore banking in
one country.
23
 OFFSHORE BANKS

✓ Offshore banks can lend to resident importers and

exporters only if the funds are remitted from abroad
through the banking system.

✓ As of October 2, 2021, there’s only one offshore bank in

the Philippines: Taiwan Cooperative Bank.

24
THANKS!
References:

https://www.investopedia.com/terms/c/correspondent-bank.asp
https://www.wallstreetmojo.com/correspondent-bank/AA
https://www.investopedia.com/terms/f/foreignbranchbank.asp
https://www.letsdeel.com/blog/what-is-swift