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Newsletter | 21 Dec 2013 | Issue 288


Manipulation of currency fixings: We have seen the media reporting about banks manipulating the LIBOR rate, and recently they have allegedly also manipulated currency fixing, the London World Markets fixing in particular, see the reports on Bloomberg or in the German media.

Let me explain some basic principles of foreign exchange spot trading and currency fixings: A spot trader is hired to buy low and sell high. This is the general business model in a trading environment. The global turnover of FX spot transaction is very high and more than 50% of it is turned around by four big banks (Deutsche, Barclays, Citi, UBS). Spot traders trade the spot, they don’t trade fixings. While the spot is generally tradable, a fixing is not. Moreover, a fixing is often published with a significant delay. A fixing is a source of a foreign exchange rate, typically at one particular time on each trading day. It is used as a reference for market participants. In particular, it is used as a spot reference to settle all foreign exchange transactions, for which parties have agreed to use a specific spot fixing, or for valuation (not pricing!) or assets in foreign currency or currency derivatives. Common examples of currency fixings are those of central banks like the daily ECB fixing of many currency pairs against the Euro, the fixing of the Federal Reserve Bank against the US dollar. On top each bank uses a daily in-house fixing for many their clients’ trades. Since an in-house fixing is hard to control from outside the bank, there was a fixing called OPTREF in Germany, which would provide the average of the fixings of Deutsche, Dresdner, Commerzbank and Hypo-Vereinsbank. This reference will cease to exist from 2014 (Dresdner bought by Commerz, HBV decided to drop out of it this summer, so with only two banks left it becomes obsolete). Another popular fixing is the daily London fixing by World Markets (WM-fixing), which is the median of all spot transactions in EBS in a time interval of 1 minute around the agreed fixing time. Now, if one bank has a large share in the turnover during that minute there is, in principle, a way to influence the fixing. The impact is generally small for major currency pairs, because the market has a lot of participants. The less liquid an underlying exchange is, the higher the possibility of affecting the average calculation. How could bank X use this to its advantage? Example: If bank X consider all the client orders for one day and notices that there a lot of GBP to be sold for EUR, then by pumping all the GBP into the market at fixing time may push the value of the GBP measured in EUR down. This is even more likely if bank X knows that bank Y will also have to sell many GBP against EUR. Therefore, a large position in the client order book could indicate a drop of the GBP and act like fairly safe prediction of a falling spot rate. Therefore, the strategy of a spot desk could be to sell some of their own GBP before the drop and buy them back after the drop (buy low - sell high). Slightly more aggressively, bank X could buy GBP in many single transactions during the WM-fixing calculation interval and before the client orders are executed to push up the WM-fixing. This appears like a safe money making machine, but first of all, a situation with so many client orders in one specific direction does not happen very often and even if it does, there is still a chance that somebody else in the market has an equally large book of clients’ GBP purchasing orders, in which case riding the suspected fixing-drop may fail.

Now, is this manipulation? At the end of the day this is a legal call with a potentially non-intuitive result. Here is my view: A spot trader is hired to look for profit opportunities. If you had a stall selling cherries on the farmers market and you knew that one day all your competitors wouldn’t show up and in addition you were told that there is a delegation of 500 visitors from a cherry-loving country coming, would you keep the offer price of your cherries the same? Could anybody blame you if you jacked up the cherry price on that day? And even drive to the wholesale market to buy more cherries so you sell more of them? Or how about the fact that hotel prices in Frankfurt increase by a factor of four during days of active fairs? I personally don’t think it is reasonable to blame a trader to buy low and sell high. And banker shouldn’t be expected to do charity work at their desk. Furthermore, the procedure isn’t FX-specific. If you place a sell-order of a share of stock with your bank, similar procedures will happen. You will also find out the selling price of the stock only after the transaction is done.

For the client or investor, there is a way out: FX transactions in the spot market don’t have to be fixing-based: You can always call up your bank and do a spot transaction over the phone, and if the quoted price is too high, then you wait or call up another bank. As a treasurer you can sign up with one of many FX trading platforms of banks or treasury advisory firms and you will be shown a bid and offer price for your position for a time span of 10 seconds and can decide if you really want to trade at the quoted price. As a retail client, you also find numerous web platforms where FX spot is traded at fairly tight bid-offer spreads. You can even trade exotics like one-touch with 5 minutes maturity over the internet.

Regulators, media and politicians are asking for more transparency. I think, FX spot market is one of the most transparent markets in the world, and one could use the energy more productively to ask for more transparency in other markets like life insurance or more importantly in the medical system, where millions of innocent patients are taken for a ride every day, who can’t escape the system.

2013 is almost up, many thanks to everybody who congratulated me on my 10-year work anniversary at MathFinance AG. Without you I would have most certainly forgotten about it. I am happy that our team contributed a lot of solutions and explanations to the currency derivatives market this year and I am looking forward to continuing in 2014. I wish all our readers, fans, clients, competitors, and even those who don’t know us a happy holiday season and a very happy new year.


  1. Becker and Wystup: On the Cost of Delayed Currency Fixing Announcements (paper in pdf format - slides in pdf format - handouts in pdf format - Talk audio file in MP3 format), Annals of Finance, Volume 5, Issue 2 (2009), pp. 161-174
  2. Liam Vaughan, Gavin Finch and Ambereen Choudhury - Jun 12, 2013 on Bloomberg
  3. WM fixing patent
  4. WM Reuters Methodology
  5. Süddeutsche Zeitung

Uwe Wystup
Managing Director of MathFinance


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Advanced Equity Derivatives

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This two-day course focuses on advanced aspects of pricing, trading and risk managing equity derivatives. It covers recent product developments as well as advanced models used by exotics trading businesses. New topics include issuer risk and collateral agreement. Course participants will learn about latest research in the areas of stochastic volatility, correlation as well as dividend modeling. Quantitative analysts will gain insight how to efficiently implement these models.

This course complements Practicalities of Equity Derivatives. Prior attendance is however not required.

Markov Functional Model

Presented by Dr. Oliver Brockhaus.
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This course focuses on advanced modeling aspects of interest rate derivatives. The Markov Functional model will be presented in detail, taking into account recent developments such as multiple factors as well as cross currency models. The focus is on practical implementation as well as numerical issues. Course participants will gain an overview of relevant interest rate models and learn which products can be managed successfully using Markov Functional. Quantitative analysts will gain insight how to efficiently implement this model.

Company News

F(x) - Our New FX Derivatives Pricing Tool

F(x), MathFinance's desktop application for pricing a range of popular foreign exchange derivative products was launched.

The F(x) pricing wizard makes it easy to create and save portfolios of vanilla options, barriers and digitals. Structured products are simplified with pre-defined templates, and market data can be set up with your own data feeds and archived for later reference.

F(x) pricing runs on MathFinance's Excel Add-In library, with fully documented pricing models comparable to those used in many banks. Volatility surfaces are checked for arbitrage and interpolated in a market-compliant way (by time/strike or time/delta). The add-in functions are also directly accessible in Excel with detailed help files.


LSV pricing library

MathFinance can now offer a first version of an LSV pricing library, for which we currently appreciate requests for collaboration. It extends our current offer beyond our pricing tool F(x), where LSV has not been included.

MathFinance Conference 2014

The MathFinance Conference is the largest quantitative finance event covering the European market and an influential driver in the dissemination of ideas, information and knowledge. Renowned speakers from all over the world, including Senior Quantitative Analysts, Risk Managers and Academics, deliver their talks as part of this two-day event, to be held in Frankfurt on the 14th and 15th of April 2014.

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8th World Congress of the Bachelier Finance Society


The 8th World Congress of the Bachelier Finance Society will take place in Brussels, Belgium from 2-6 June 2014.  The congress is jointly organised by the Katholieke Universiteit Leuven, Universiteit Antwerpen, Universiteit Gent, Université Libre de Bruxelles and Vrije Universiteit Brussel.

The World Congress of the Bachelier Finance Society is the premier event in the international quantitative and mathematical finance calendar, attracting hundreds of participants every two years.

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We are proud to announce the following list of confirmed plenary speakers: Peter Carr, Rama Cont, Darrell Duffie, Ernst Eberlein,Paul Embrechts, Helyette Geman, Paul Glasserman, David Hobson, IoannisKaratzas, Eckhard Platen, Steven Shreve.

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The deadline for early bird registration is March 7, 2014.

More information is available on the conference website www.bacheliercongress.com/2014/.

LondonFS Courses 2014

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Accounting for Derivatives in Practice under IFRS9

London: 27th - 29th January 2014

An intensive 3-day programme providing hands-on experience in accounting for derivatives for the equity, FX and interest rates markets. The complex topic of hedge accounting is demystified through the use of practical cases.

The programme provides a conceptual framework based on an intensive use of real world cases. Each case is covered step by step, encouraging interactive participation. The cases will cover the decision-making, documentation requirements, hedge effectiveness assessment and the accounting of a hedging strategy during its life.

All participants receive a copy of the "Accounting for Derivatives" book by Juan Ramirez.

Presented By: Juan Ramirez

Implementing Fundamental Quantitative Techniques

London: 28th - 30th January 2014

In a complicated financial world a detailed understanding of the application of quantitative techniques is essential. This course provides an in-depth coverage of practical quantitative methods important in today's financial markets.
This course is charged and can be booked by the day. Select the days that meet your needs, or participate in the whole course for a thorough understanding of these important techniques.

Presented By: Dr. Simon Acomb

High Yield and Leveraged Finance Analysis and Investing

London: 30th - 31st January 2014

This course begins with foundation work covering background on the high yield and leveraged finance market, the instruments and their key terms and conditions, leveraged buyout (LBO) structuring and a cash flow template that provides key insights on corporate debt service capacity.
The course then considers business, financial and instrument aspects of high yield credit analysis, recovery analysis and common drivers of corporate distress, and valuation. Real company examples and in-depth case studies cover a variety of high yield issuers across sectors and geographies.
These case studies illustrate various investment situations that arise in the high yield space - companies in structural decline, successful LBOs, unsuccessful LBOs, turnaround situations, project finance-like situations and fallen angels.

Presented By: Rupesh Tailor

Equity Derivatives 1: Trading and Managing Vanilla Options

London: 10th - 12th February 2014

An intensive three-day workshop on trading and managing risk of vanilla equity derivatives. This programme provides a solid understanding of modern vanilla equity derivatives and their markets, including best practices and conventions both from a buy side and sell side perspective.
The course will also explore the technical basis of derivatives pricing, hedging and risk management. Delegates will assess volatility and its impact on option pricing and gain a deep understanding of standard models used in the market. The Black- Scholes framework is discussed in depth including extensions, while the last session covers the volatility surface in detail, including trading and risk management of vanilla portfolios.
The course will also explain how to compute probabilities from market option prices, and discuss applications to proprietary trading and simple exotic options.

Presented By: Alberto Cherubini

Commodities and Commodity Derivatives

London: 20th - 21st February 2014

Commodity prices have experienced unprecedented volatilities in recent years driven by geopolitical events, macro uncertainties and shrinking supply against a major shift in demand from the BRICs. In this highly uncertain environment, executives are challenged to be vigilant and to develop new financial strategies to help their organizations manage commodities financial risks and uncertainties.

Presented by Helyette Geman, this comprehensive 2-day executive programme focuses on management of spot and derivatives commodities risk and investing in commodities. The content is designed for traders in financial institutions, managers in hedge funds and insurance companies, risk executives and corporate managers in charge of raw materials purchase.

All delegates will receive a copy of Professor Geman's book, "Commodities and Commodity Derivatives: Modelling and Pricing for Agriculturals, Metals and Energy".

Presented By: Helyette Geman

Interest Rate Derivatives 1: Hedging and Managing Risk

London: 24th - 27th February 2014

A comprehensive workshop on pricing and managing interest rate derivatives. This course is charged and can be booked by the day. Select the days that meet your needs, or participate in the whole course for a thorough grounding in these instruments.

Presented By: Cheryl Brown

All the programs above are eligible for 24 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.