GROUP MEMBERS: Magdalena Fortuna Oleh Kostyrko Małgorzata Regulska International Financial Management by dr hab. Krzysztof Rybiński

AGENDA INSTITUTIONAL INVESTOR – DEFINITIONS WHAT INSTRUMENTS ARE USED IN FX MARKETS THEORIES EXPLAINING FX RATES CHANGES CASE STUDY: SOROS BLOCK 1992,

INSTITUTIONAL INVESTOR INSTITUTIONAL INVESTORS BANKS INSURANCE COMPANIES PENSION FUNDS HEDGE FUNDS, MUTUAL FUNDS INSTITUTIONAL INVESTORS ARE ORGANIZATIONS WHICH POOL LARGE SUMS OF MONEY AND INVEST THOSE SUMS IN COMPANIES.

INVESTMENT BANK Investment bank: financial institution that raises capital, trades securities and manages corporate mergers and acquisitions. Another term for investment banking is corporate finance. Bank of America (Bank of America Merrill Lynch) Barclays (Barclays Capital) BNP Paribas (BNP Paribas CIB) Citigroup (Citi Institutional Clients Group) Credit Suisse Deutsche Bank JPMorgan Chase (J.P. Morgan Investment Bank) Morgan Stanley

A two-day delivery transaction, ‘Direct exchange’ between two currencies, Has the shortest time frame, Involves cash rather than contract, Interest is not included in the agreed-upon transaction, Spot transactions has the second largest turnover by volume after Swap transactions SPOT Buyer and seller agree on an exchange rate for any date in the future, The transaction occurs on that date, regardless of what the market rates are then, duration of the trade can be a one day, a few days, months or years, date is decided by both parties. FORWARD INSTRUMENTS USED IN FX MARKETS

Exchange traded forward transactions with standard contract sizes and maturity dates, Futures are standardized and are usually traded on an exchange created for this purpose, The average contract length is roughly 3 months, Futures contracts are usually inclusive of any interest amounts. FUTURE The most common type of forward transaction, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date, not standardized contracts and not traded through an exchange. SWAP INSTRUMENTS USED IN FX MARKETS

Derivative where the owner has the right (but not the obligation) to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date, The FX options market is the deepest, largest and most liquid market for options. OPTION Exchange-traded funds (or ETFs) are open ended investment companies that can be traded at any time throughout the course of the day, EXCHANGE- TRADED FUND INSTRUMENTS USED IN FX MARKETS

A method of calculating exchange rates that attempts to value currencies at rates such that each currency will buy an equal basket of goods. Creates a balance in trade. When a country has an inflation, its currency depreciates. PURCHASING POWER PARITY THEORY Exchange rates adjust so that expected returns across assets of equal risk are equalized. So if the expected return on European assets is higher than ones in the U.S. assets, the value of the Euro will appreciate. In equilibrium all expected returns are equal ASSET DEMAND THEORY THEORIES EXPLAINING FX RATES CHANGES

1.Great Britain, September Since 1990, Great Britain was a member of European Exchange Rate Mechanism (ERM). 3.Until 1992 ERM countries achieved low inflation level of their currencies, but at the same time caused “bad climate” among investors. 4.Situation became worst after Eastern and Western Germany union in Central Bank of Germany (Bundesbank) had printed vast amounts of money. 6.This policy lead to high inflation. 7.Keeping GBP with-in ERM agreement connected to expensive Deutsche Mark. 8.For a couple of months in 1992 G.Soros was buying GBP without attracting too much attention and after collecting vast amount of GBP he sold it on the market and bought about bln.15 of DM at the price of DM per 1 GBP. 9.Because of this huge disparity of supply and demand, GBP went extremely down causing new GBP rate at the level of DM per 1 GBP. At this moment Soros bought back cheap Pound, selling bln.15 of DM and quitting the trade with around bln1USD revenue. SOROS CASE

Resource: article by Brian Tran,