Currency Strategy A Practitioner's Guide To Currency Trading, Hedging And Forecasting

Currency Strategy A Practitioner’s Guide To Currency Trading, Hedging And Forecasting


Currency Strategy A Practitioner’s Guide To Currency Trading, Hedging And Forecasting


By Callum Henderson


Content :

1 Fundamental Analysis: The Strengths and Weaknesses of Traditional
Exchange Rate Models 1.1 Purchasing Power Parity
1.1.1 Reasons for “Misalignments” 1.1.2 Tradable and Non-Tradable Goods 1.1.3 PPP and Corporate Pricing Strategy Example 1 Example 2 1.1.4 PPP and the Real Exchange Rate
1.2 The Monetary Approach 1.2.1 Mundell–Fleming 1.2.2 Theory vs. Practice 1.2.3 A Multi-Polar rather than a Bi-Polar Investment World
1.2.4 Two Legs but not Three
1.2.5 Implications for EU Accession Candidates 1.3 The Interest Rate Approach
1.3.1 Real Interest Rate Differentials and Exchange Rates 1.4 The Balance of Payments Approach
1.4.1 A Fixed Exchange Rate Regime 1.4.2 A Floating Exchange Rate Regime 1.4.3 The External Balance and the Real Exchange Rate 1.4.4 REER and FEER 1.4.5 Terms of Trade 1.4.6 Productivity
1.5 The Portfolio Balance Approach Example
1.6 Summary
2 Currency Economics: A More Focused Framework 2.1 Currencies are Different
2.1.1 (In)Efficient Markets 2.1.2 Speculation and Exchange Rates: Cause, Effect and the Cycle Example 2.1.3 Risk Appetite Indicators and Exchange Rates
2.2 Currency Economics 2.2.1 The Standard Accounting Identity for Economic Adjustment Example 1
Example 2 2.2.2 The J-Curve Example 2.2.3 The Real Effective Exchange Rate
2.3 Summary
3 Flow: Tracking the Animal Spirits 3.1 Some Examples of Flow models
3.1.1 Short-Term Flow Models 3.1.2 Medium-Term Flow Models 3.1.3 Option Flow/Sentiment Models
3.2 Speculative and Non-Speculative Flows 3.3 Summary
4 Technical Analysis: The Art of Charting 4.1 Origins and Basic Concepts 4.2 The Challenge of Technical Analysis 4.3 The Art of Charting
4.3.1 Currency Order Dynamics and Technical Levels 4.3.2 The Study of Trends 4.3.3 Psychological Levels
4.4 Schools of (Technical) Thought
4.5 Technical Analysis and Currency Market Practitioners
Part Two Regimes and Crises
5 Exchange Rate Regimes: Fixed or Floating? 5.1 An Emerging World
5.2.1 The Rise of Capital Flows 5.2.2 Openness to Trade
5.3 Fixed and Pegged Exchange Rate Regimes 5.3.1 The Currency Board 5.3.2 Fear and Floating 5.3.3 The Monetary Anchor of Credibility
5.4 Exchange Rate Regime Sustainability —A Bi-Polar World? 5.5 The Real World Relevance of the Exchange Rate Regime 5.6 Summary
6 Model Analysis: Can Currency Crises be Predicted? 6.1 A Model for Pegged Exchange Rates
6.1.1 Phase I: Capital Inflows and Real Exchange Rate Appreciation
6.1.2 Phase II: The Irresistible Force and the Moveable Object 6.1.3 Phase III: The Liquidity Rally 6.1.4 Phase IV: The Economy Hits Bottom 6.1.5 Phase V: The Fundamental Rally
6.2 A Model for Freely Floating Exchange Rates 6.2.1 Phase I: Capital Inflows and Real Exchange Rate Appreciation 6.2.2 Phase II: Speculators Join the Crowd —The Local Currency
Continues to Rally 6.2.3 Phase III: Fundamental Deterioration —The Local Currency
Becomes Volatile 6.2.4 Phase IV: Speculative Flow Reverses —The Local Currency
Collapses 6.3 Summary
Part Three The Real World of the Currency Market Practitioner
7 Managing Currency Risk I —The Corporation: Advanced
Approaches to Corporate Treasury FX Strategy 7.1 Currency Risk 7.2 Types of Currency Risk
7.2.1 Transaction Risk
7.2.2 Translation Risk
Example 7.2.3 Economic Risk
7.3 Managing Currency Risk 7.4 Measuring Currency Risk —VaR and Beyond 7.5 Core Principles for Managing Currency Risk 7.6 Hedging —Management Reluctance and Internal Methods 7.7 Key Operational Controls for Treasury 7.8 Tools for Managing Currency Risk 7.9 Hedging Strategies
7.9.1 Hedging Transaction Risk 7.9.2 Hedging the Balance Sheet
7.9.3 Hedging Economic Exposure
7.10 Optimization 7.11 Hedging Emerging Market Currency Risk 7.12 Benchmarks for Currency Risk Management 7.13 Budget Rates 7.14 The Corporation and Predicting Exchange Rates 7.15 Summary
8 Managing Currency Risk II —The Investor: Currency
Exposure within the Investment Decision 8.1 Investors and Currency Risk 8.2 Currency Markets are Different 8.3 To Hedge or not to Hedge —That is the Question!
8.4 Absolute Returns —Risk Reduction 8.4.1 Passive Currency Management 8.4.2 Risk Reduction Example
8.5 Selecting the Currency Hedging Benchmark Example
8.6 Relative Returns —Adding Alpha 8.6.1 Active Currency Management 8.6.2 Adding “Alpha” 8.6.3 Tracking Error
8.7 Examples of Active Currency Management Strategies 8.7.1 Differential Forward Strategy 8.7.2 Trend-Following Strategy Example 8.7.3 Optimization of the Carry Trade
8.8 Emerging Markets and Currency Hedging 8.9 Summary
9 Managing Currency Risk III —The Speculator: Myths, Realities and
How to be a Better Currency Speculator
9.1 The Speculator —From Benign to Malign
9.2 Size Matters 9.3 Myths and Realities 9.4 The Speculators —Who They Are
9.4.1 Interbank Dealers 9.4.2 Proprietary Dealers 9.4.3 “Hedge” Funds 9.4.4 Corporate Treasurers 9.4.5 Currency Overlay
9.5 The Speculators —Why They Do It 9.6 The Speculators —What They Do
9.6.1 Macro
9.6.2 Momentum (and Fellow Travellers) 9.6.3 Flow 9.6.4 Technical
9.7 Currency Speculation —A Guide 9.8 Summary
10 Applying the Framework 10.1 Currency Economics 10.2 Flow Analysis 10.3 Technical Analysis 10.4 Long-Term Valuation 10.5 The Signal Grid 10.6 Risk Appetite Indicators 10.7 Exchange Rate Regimes
10.8 Currency Crises and Models 10.8.1 CEMC 10.8.2 The Speculative Cycle
10.9 Managing Currency Risk I —The Corporation 10.9.1 Types of Currency Risk 10.9.2 Internal Hedging 10.9.3 Key Operational Controls for Treasury 10.9.4 Optimization 10.9.5 Budget Rates
10.10 Managing Currency Risk II —The Investor 10.10.1 Absolute Returns: Risk Reduction 10.10.2 Selecting the Currency Hedging Benchmark 10.10.3 Relative Returns: Adding Alpha 10.10.4 Tracking Error 10.10.5 Differential Forward Strategy 10.10.6 Trend-Following Strategy 10.10.7 Optimization of the Carry Trade
10.11 Managing Currency Risk III —The Speculator 10.12 Currency Strategy for Currency Market Practitioners
10.12.1 Currency Trading Example 10.12.2 Currency Hedging


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