Citigroup FX Sales and Trading Business Briefing Session Fixed Income/Foreign Exchange Victoria...

Citigroup FX Sales and Trading

Business Briefing SessionFixed Income/Foreign Exchange

Victoria Taylor, Corporate FX Sales


2

Where does FI/FX fit in to Citigroup?

Global Investment Mgt.& Private Banking

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


3

Citigroup Foreign Exchange

CitiFXCitiFX is the largest foreign exchange institution in the world

CitiFXCitiFX handles approximately 10% of the world’s total FX market volume

CitiFXCitiFX offers its services to over 1,900 customers globally with a presence in over 100 countries

CitiFXCitiFX has over 325 foreign exchange professionals providing 24 hour global coverage

CitiFXCitiFX offers in-depth research, analytical tools and execution through both traditional and e-channels


4

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


5

Factors affecting the market

TechnicalTechnical

FundamentalFundamental

ExpectationExpectationInterventionsInterventions

EconomicEconomic

PoliticalPolitical

PsychologicalPsychological

EventsEvents

MarketMarket


6

Market Dynamics – The Players

Bank

Bank

Bank

BankBrokers

Investors

Speculators

Central Banks

Corporates


7

FX Trading Floor

Sales 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


8

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


9

Customer’s FX needs Corporates

– Day to day business operations outside functional ccyDay to day business operations outside functional ccy

– Hedging FX exposure to minimise the effects of adverse exchange Hedging FX exposure to minimise the effects of adverse exchange rate movementsrate movements

Leveraged investors– Speculative - FX now perceived as an asset class in its own rightSpeculative - FX now perceived as an asset class in its own right

Investors– Some speculative activitySome speculative activity

– Managing the FX transactions generated by fixed income and Managing the FX transactions generated by fixed income and equity tradingequity trading

Central Banks– Stabilise exchange rates - either Support or SuppressStabilise exchange rates - either Support or Suppress

– Foreign Reserves ManagementForeign Reserves Management

– E.g ChinaE.g China


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Example: UK Airline

Corporate customerCorporate 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


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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


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To hedge or not to hedge

a) 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


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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


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Trading Principles

Position Taking Traders may buy and sell currencies to generate a position (either long

or short respectively) based upon a certain view that the trader possesses.

PositionPosition

LongLong ShortShortIf the base currencyappreciates the position will yield a PROFIT

If the base currencydepreciates the position will yield a PROFIT


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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 ofprofit on $5 million. USD Profit equals (0.59 * 5m)/120.0 = $24,583.33


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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?


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How the market moves? US employment dataEUR=, Close(Bid) [Line] 1 Minute

04Aug06 04:33 - 07Aug06 14:39

06:00 08:00 10:00 12:00 14:00 16:00 18:00 20:00 19:00 21:00 23:00 01:00 03:00 05:00 07:00 09:00 11:00 13:00

PrUSD

1.276

1.277

1.278

1.279

1.28

1.281

1.282

1.283

1.284

1.285

1.286

1.287

1.288

1.289

1.29

EUR= , Close(Bid), Line07Aug 13:57:00 1.2871

EURUSD moved sharply higher after soft US employment data on Friday

EURUSD rallied from 1.2775-1.29


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How the market moves? BoE rate hikeGBP=, Close(Bid) [Line] 5 Minutes

02Aug06 23:47 - 07Aug06 01:22

03Aug06 02:00 04:00 06:00 08:00 10:00 12:00 14:00 16:00 18:00 20:00 22:00 04Aug 02:00 04:00 06:00 08:00 10:00 12:00 14:00 16:00 18:00 20:00 19:00 21:00 23:00 01:00

PrUSD

1.868

1.87

1.872

1.874

1.876

1.878

1.88

1.882

1.884

1.886

1.888

1.89

1.892

1.894

1.896

1.898

1.9

1.902

1.904

1.906

1.908

1.91

GBP= , Close(Bid), Line07Aug 14:05:00 1.9098

Bank of England surprise 25b rate hike

GBPUSD moves from 1.87-1.8760


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China- Pegged CurrencyCNY=, Close(Bid) [Line] Weekly

26Oct91 - 27Nov 06

Jan92 Jul Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul Jan06 Jul

Pr/ USD

5.4

5.6

5.8

6

6.2

6.4

6.6

6.8

7

7.2

7.4

7.6

7.8

8

8.2

8.4

8.6

CNY= , Close(Bid), Line13Aug06 7.9680

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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ADDITIONAL INFORMATION AVAILABLE UPON REQUESTCitibank, N.A., London Branch and Citigroup Global Markets Inc, including their parent, subsidiaries and/or affiliates (“the Firm”), may make a market in the securities discussed in this report and may sell to or buy from customers, as principal, securities recommended in this report. The Firm may have a position in securities or options of any issuer recommended in this report. An employee of the Firm may be a director of an issuer recommended in this report. The Firm may perform or solicit investment banking or other services from any issuer recommended in this report.

Although information has been obtained from and is based upon sources the Firm believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the Firm 's judgement as of the date of the report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security.

This report is distributed in the United Kingdom by Citibank, N.A., London Branch or Citigroup Global Markets Limited, Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, UK. This material is directed exclusively at market professional and institutional investor customers and is not for distribution to private customers, as defined by the rules of the Financial Services Authority, who should not rely on this material. Moreover, any investment or service to which the material may relate will not be made available to such private customers. This material may relate to investments or services of a person outside of the United Kingdom or to other matters which are not regulated by the Financial Services Authority and further details as to where this may be the case are available upon request in respect of this material. If this publication is being made available in certain provinces of Canada by Citigroup Global Markets (Canada) Inc. ("CGMI Canada"), CGMI Canada has approved this publication. This report was prepared by CGMI and distributed in Japan by Nikko Citigroup Limited, it is being so distributed under license. This report is made available in Australia through Citigroup Global Markets Australia Pty Limited (ABN 64 003 114 832), a Licensed Securities Dealer, and in New Zealand through Citigroup Global Markets New Zealand Limited , a member firm of the New Zealand Stock Exchange. This report does not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain advice based on their own individual circumstances before making an investment decision. Citigroup Global Markets (Pty) Limited is incorporated in the Republic of South Africa (company registration number 2000/025866/07) and its registered office is at Citibank Plaza, 145 West Street , Sandown, Sandton, 2196, Republic of South Africa. The investments and services contained herein are not available to private customers in South Africa. This publication is made available in Singapore through Citigroup Global Markets Singapore Holdings Pte Ltd, a licensed Dealer and Investment Advisor.

Citigroup Global Markets Inc. is a member of the Securities Investor Protection Corporation (SIPC). © Citigroup Global Markets Inc., 2003. All rights reserved. Smith Barney is a division and service mark of Citigroup Global Markets Inc. and its affiliates and is used and registered throughout the world. Citigroup and the Umbrella Device are trademarks and service marks of Citicorp and its affiliates and are used and registered throughout the world. CitiFX is a service mark of Citicorp, Inc. Nikko is a service mark of Nikko Cordial Corporation. Any unauthorized use, duplication or disclosure is prohibited by law and may result in prosecution.

Issued by Citibank N.A., London Branch is regulated by the UK Financial Services Authority 33 Canada SquareCanary WharfLondon E14 5LB

This document does not represent an accounting opinion. The Company should consult with their auditing firm for further accounting opinion on the proposed transactions.

Citigroup FX Sales and Trading Business Briefing Session Fixed Income/Foreign Exchange Victoria...

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