Business Briefing Session Fixed Income/Foreign Exchange Victoria Taylor, Corporate FX Sales

Where does FI/FX fit in to Citigroup? Global Consumer Global Corporate & Investment Bank Private Client Services Cards Consumer Finance Retail Banking Corporate Banking (GRB) * Transactional Services * Global Equities * Global Investment Banking * Global Research Global Fixed Income Life Insurance PBG Asset Management Investment Advice Financial Planning Brokerage Global Rates & Currency Credit Products Futures Securitization Treasury FI Sales & Research NSSB Global Investment Mgt. & Private Banking

Citigroup Foreign Exchange CitiFX is the largest foreign exchange institution in the world CitiFX handles approximately 10% of the world’s total FX market volume CitiFX offers its services to over 1,900 customers globally with a presence in over 100 countries CitiFX has over 325 foreign exchange professionals providing 24 hour global coverage CitiFX offers in-depth research, analytical tools and execution through both traditional and e-channels

The FX Market FX Market is the largest financial market in the world Operates globally, 24 hours a day, 6 days a week $1.1 Trillion turnover a day. By comparison, London Stock Exchange’s average daily turnover is approximately $20 billion Highly Liquid Highly Transparent Highly Efficient

Factors affecting the market Technical Fundamental Expectation Interventions Economic Political Psychological Events Market

Market Dynamics – The Players Speculators Bank Corporates Brokers Bank Bank Bank Central Banks Investors

FX Trading Floor Sales Teams Trading Desks Research Teams Corporate Investor Leveraged investor Banks & Central Banks Trading Desks Spot or cash trading STIRT (Short Term Interest Rate Trading) Options/Derivatives Proprietary trading Emerging Markets Research Teams Economics/Fundamentals Technicals Flows

What does a Sales job involve? Managing Client relationships Market updates Providing Trade/Hedging ideas to suit customer’s needs Differentiate yourself from the competition Position yourself to be the number 1 FX provider

Customer’s FX needs Corporates Leveraged investors Investors Day to day business operations outside functional ccy Hedging FX exposure to minimise the effects of adverse exchange rate movements Leveraged investors Speculative - FX now perceived as an asset class in its own right Investors Some speculative activity Managing the FX transactions generated by fixed income and equity trading Central Banks Stabilise exchange rates - either Support or Suppress Foreign Reserves Management E.g China

Example: UK Airline Corporate customer Multinational business with operations (revenues/costs) and assets/ liabilities denominated in numerous foreign currencies Hence, exposure to both Transactional and Translational FX risk Transaction risk comprises commercial flows in foreign currency (costs and revenues) so earnings are affected when exchange rates fluctuate Translation risk comprises the translation effects on balance sheet items such as assets and liabilities in foreign currency due to changes in exchange rates

Example: UK Airline Primary exposure is to movements in GBPUSD as Fuel costs and Aircraft leases denominated in dollars xxx, therefore, have in effect a long sterling position, resulting in their earnings being adversely affected by a depreciation of sterling against the dollar e.g. xxx have $100,000,000 dollar fuel costs payable in three months Therefore, in three months xxx must sell GBP / buy USD to pay the dollar denominated fuel costs xxx are exposed to GBPUSD movements since a sterling depreciation will have the effect of increasing their costs in sterling, their functional currency

To hedge or not to hedge Remain Unhedged - Sell GBP at the prevailing CABLE exchange rate, three months from now, leaving them exposed to movements during that time In the last 3 months GBP required to buy $100,000,000 has been between £52.4 million and £56.5 million. Fuel costs could fluctuate by £4.1 million in a 3 month period b) Hedge their Exposure - hedging is the process of implementing protection for a present or future position which has exposure to market price fluctuations This involves locking in a forward FX rate today that will enable them to buy USD at a known rate in 3 months time

What does a trader do? Market making to Sales desks, brokers and other banks Book running A trader takes different proprietary positions: Directional trades, i.e. long or short the market outright Differential trades, i.e. difference between interest rates in two different currencies Relative Value trades, i.e. trades where the 6 year price looks wrong given where 5 and 7 years trades

Trading Principles Position Taking Position Long Short Traders may buy and sell currencies to generate a position (either long or short respectively) based upon a certain view that the trader possesses. Position Long Short If the base currency appreciates the position will yield a PROFIT depreciates the position

Position Taking The trader may either: allow a position created from a customer transaction to run i.e. the trader will not immediately cover the position ask another bank for a price and hit it on the desired side to cover his position e.g. A customer sells $5m USDJPY at 119.41 to a spot trader. The trader who believes the USD will appreciate will allow the position to run. If USDJPY appreciates to 120.00 the trader has made 59 pips of profit on $5 million. USD Profit equals (0.59 * 5m)/120.0 = $24,583.33

Role of a Structurer? Works between the trader and the sales person Identify new solutions for clients Considers relative merits of different instruments given market conditions and objectives Checks component prices so that he can revert back to the sales person with the overall price and the characteristics of what is going to be marketed to the client Always thinks about new ideas that “exploit” current market conditions and/or help to achieve the clients goals Peer analysis, what are similar sectors looking at?

How the market moves? US employment data EURUSD moved sharply higher after soft US employment data on Friday EURUSD rallied from 1.2775-1.29

How the market moves? BoE rate hike Bank of England surprise 25b rate hike GBPUSD moves from 1.87-1.8760

China- Pegged Currency In 1994 China devalued its currency and was pegged to the USD within a band until last year. Now a ‘crawling peg’. CNY can only appreciate within a defined band each day. US calling for quicker appreciation of CNY

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