Treasury and Foreign Exchange

If you work in foreign exchange for in an investment bank you will be immersed in the world of global currencies and their changing values..

Most people come across the foreign exchange (FX) markets when they holiday abroad. Anyone who has calculated the equivalent value of a New York hamburger in euros, or a bottle of French wine in pounds sterling, will understand how to convert one currency into another. Similarly, people who have purchased foreign currency several weeks before going on holiday, only to find that its value falls before they arrive and spend it, will appreciate the need to keep an eye on events in the currency markets.

Banks buy and sell foreign currencies on their own behalf and on behalf of their clients, which are other banks, rich individuals, companies, institutional fund managers, hedge funds and pension funds. Banks and their clients can own currency worth hundreds of millions or even billions of pounds, and stand to lose a lot if that currency drops in value. As a result, the foreign exchange markets tend to be very active, with trading on the 'spot markets' (markets where currencies that are bought and sold are delivered within three days) amounting to over $1.4 trillion every day.

Jobs in foreign exchange tend to fall into one of five categories: sales, trading, structuring, and strategy. Sales jobs in foreign exchange are usually divided between different client types, with some salespeople specialising in hedge funds, while others sell only to companies, for example.

Trading jobs are usually split between 'vanilla' and spot trading, where products are simple and trades are easy to execute, and more complex exotic derivatives trading. Vanilla FX products include simple FX futures, where traders buy and sell contracts giving the right to buy a currency at a particular price at a point in the future. In the past five years, the number of FX traders employed by banks has fallen as simple trades are increasingly performed electronically. In 2003 the global volume of FX traded electronically doubled to $8 trillion according to Greenwich Associates, a US research company.

While simple FX trading is increasingly automated, trading exotic FX derivative products remains labour intensive. Exotic FX derivatives include digital options, in which if a currency hits a pre-arranged price, the purchaser gets an all-or-nothing payout. - If the pre-arranged currency price is not met, the purchaser gets nothing at all. But even if the price is only just reached, the purchaser gets the whole payout, the same as if the price is far exceeded.

It is the role of structurers working in the FX department to assemble these and more complex exotic derivative products on behalf of clients. This is a very mathematical role and structurers must be both strongly numerate and knowledgeable of computer programming languages such as C in order to write the programmes which are used to price complicated derivatives.

David Weiss, an associate currency structurer at Bank of America said structurers have the best of both worlds: they have client contact like sales people, and market exposure like traders. 'A client calls a salesperson and says they want to hedge their exposure to a particular currency. It is up to us to put together a product that meets their needs, given current market conditions.'

Foreign exchange strategists look at macroeconomic events and foreign exchange flows in order to identify trading opportunities and possible risks, such as the value of one currency falling, or 'depreciating,' against another. When the value of a currency rises compared to another it is known as 'appreciation'. Strategists produce written research which is used by the salespeople to keep clients informed of what's happening in the FX markets. A salesman in a European bank in London says: 'We call clients every day to let them know what's going on and provide them with ideas about how to neutralise currency risks.'

Issues

Citigroup, UBS and HSBC are among the banks with the biggest activities in the global FX markets. The landscape of the FX market changed dramatically in 1999 when eleven countries of the European Union gave up their own currencies in favour of the euro. In the years after its launc, the value of the euro fell by more than 30%, while the value of the dollar rose. In 2003, however, foreign exchange markets were coloured by the rising euro, which appreciated 16.5 % during the year vs. the US dollar. The dollar's decline can be partially attributed to the country's large current account deficit, which stood at around $500 billion in 2003.

Careers

If you want to work in FX you will usually need to apply to a broader department. At Goldman Sachs, for example, aspiring FX trainees enter the fixed income, currencies and commodities department, where they may end up working with either FX or fixed income products. At UBS, trainees enter the rates and currencies business, where they could work with government bonds or commodities, as well as FX. At Deutsche Bank, trainees enter the global markets department, and rotate between two or three product areas, one of which may be foreign exchange.

Karen McKinley, head of graduate recruitment at the Royal Bank of Scotland, which also offers FX positions as part of a broader training programme, said the skills required vary depending upon the job. She said FX salespeople need to be good communicators, while traders need to be good at maths; language skills are a distinct advantage.

FX structurers are rarely recent graduates: they usually have a higher qualification in a mathematically related subject; many are mathematically related PhDs.