updating fpmls fx products andrew jacobs handcoded consulting ltd. 4 th mar, 2010
TRANSCRIPT
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Updating FpML’s FX ProductsAndrew JacobsHandCoded Consulting Ltd.4th Mar, 2010
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Contents• Introduction
▫ Background▫ The ‘Option’ Framework▫ Validation Issues
• Basic FX Products▫ Spot & Forward▫ FX Swaps
• FX Option Products▫ Simple FX options
Barriers Averaging
▫ Digital Options▫ Range Accrual
• Term Deposits▫ Money Market Deposits▫ Dual Currency Deposits
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Background• This presentation describes a number of
change to the FX options to bring them into line with other product areas▫Turned out not to be that easy as every product
area derives its options inconsistently with the others
▫The changes also update the base products to make better use of XML schema and simplify the validation rules
• This work has been based on experience of using the FX products at BNP Paribas, JP Morgan and a few other firms, as well as designing the FX validation rule set.
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Currently No Common Option Base
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Option Framework?
•There is no common ‘Option’ base type in FpML▫‘OptionBase’ comes close but forces the
inclusion of a put/call flag which is no good for digitals
•The only thing all option types have in common is that they have is a buyer and seller/writer.
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New Option Base Type
• Only enforces a buyer and seller
• Could be used to re-factor other option types
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Grammar & Rule Issues
•FX products where added to FpML 3.0 as a DTD based model▫The grammar is very loose – Too many
independent optional elements. It does not enforce relationships between elements
▫The basic data types used for values like rates have no constraints (e.g. can be negative)
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Validation Issues
•The FX product set current has ~47 rules▫A lot of rules for such simple products
•A number of rules can be eliminated by adding constraints to element▫e.g. FX rates must be greater than zero
•Some can be eliminated by having more general enumerations▫e.g. sideRateQuoteBasis
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Spot & Forward Trades
•In 4.x the spot and forward trades are based on the same fxSingleLeg element▫New model renames this to
fxSpotOrForward
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FxSpotOrForward• Largely the same as 4.x
▫ New dealtCurrency element
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Exchange Rate• Stricter grammar than 4.x
▫ Eliminates a few rules
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FX Swap Trades•An FX Swap is a combination of two trades,
either spot/forward or forward/forward▫The old model allowed any number of
exchanges but the new restricts it to just two.• In the old model FX Swap was a container for
other products – like a strategy. In the new model it’s a single product▫Underlying FX trades are named the ‘nearLeg’
and the ‘farLeg’ to indicate the value date order
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FxSwap• Now contains only two
underlying legs▫ 4.x. allowed any number –
was effectively a strategy
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FX Swap Legs• Near and far legs based
on a new type and not FxSpotOrFoward▫ Is not derived from
Product as in 4.x
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FxOption• More consistent with other
products▫ Separate exercise
structures for American and European
▫ Averaging and barriers are represented as ‘features’ not separate products
• New ‘soldAs’ reference to allow buyer/seller perspective to be easier to derive▫ Did I buy a put or sell a
call? • Reordered to bring related
data together
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FxAmercanExercise• Adds support for multiple
exercise▫ With optional limits on
the notional size
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FxEuropeanExercise• Describes the exercise
parameters and the associated value date
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FxOptionFeatures• Adds Asian and/or Barrier
features to the option
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FxAsianFeature• Captures the parameters
for the average rate calculation
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FxBarrierFeature• Defines a barrier level and
then condition for activation
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FxDigitalOption• Uses grammar to ensure
triggers match the exercise style
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FxTouch
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FxTrigger
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• Payout is proportional to the number of days that an FX rate remains between bounds▫ notional * accruing days /
days in period• Can have additional
barrier features▫ e.g. Knock-out barriers
FxRangeAccrualOption
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Consistency with Interest Rates?• It was suggested that the TermDeposit
model be made more consistent with Swaps, but▫Confirmations for Term Deposits are much
simpler▫The current model is compares well with
example confirmations•The changes introduced
▫Change the terminology used to identify the parties (e.g. the depositor and deposit taker)
▫Re-order some of the elements to group related data
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TermDeposit• Some renaming and
reordering compared to 4.x model
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Dual Currency Term Deposits• A term deposit with an embedded option that
causes the payout to be in a second currency▫The fixed interest rate + the foreign exchange
option can provides a higher rate of return• These products are confirmed as a single
trade which combines deposit and option data attributes
• Has been modelled as a ‘feature’ that can be added to a term deposit▫There are other variants that could be added
(e.g. deposit take can decided interest and principal payment currency)
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DualCurrencyFeature• Describes the properties
of an option used to deliver the interest and principal in another currency
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Compatibility with 4.x
•All 4.x FX products can be transform into the new model▫Some element renaming and re-ordering▫Could be achieved with XSLT
•FX Swaps with more than two legs can be modelled as strategies