1. Updating FpMLs FX Products Andrew Jacobs HandCoded Consulting Ltd. 4 th Mar, 2010

2. 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

3. 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.

4. Currently No Common Option Base Product Commodity Option FxAverage RateOption FxDigital Option FxOptionLeg FxBarrier Option OptionBase OptionBase Extended BondOptionSwaption Equity Derivative Equity Derivative ShortForm Base BrokerEquity Option Equity Derivative LongForm Base Equity Option

5. 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.

6. New Option Base Type Only enforces a buyer and seller Could be used to re-factor other option types

7. 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)

8. 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

10. Spot & Forward Trades In 4.x the spot and forward trades are based on the same fxSingleLeg element New model renames this to fxSpotOrForward

11. FxSpotOrForward Largely the same as 4.x New dealtCurrency element

12. Exchange Rate Stricter grammar than 4.x Eliminates a few rules

13. 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 its a single product Underlying FX trades are named the nearLeg and the farLeg to indicate the value date order

14. FxSwap Now contains only two underlying legs 4.x. allowed any number – was effectively a strategy

15. FX Swap Legs Near and far legs based on a new type and not FxSpotOrFoward Is not derived from Product as in 4.x

17. 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

18. FxAmercanExercise Adds support for multiple exercise With optional limits on the notional size

19. FxEuropeanExercise Describes the exercise parameters and the associated value date

20. FxOptionFeatures Adds Asian and/or Barrier features to the option

21. FxAsianFeature Captures the parameters for the average rate calculation

22. FxBarrierFeature Defines a barrier level and then condition for activation

23. FxDigitalOption Uses grammar to ensure triggers match the exercise style

24. FxTouch

25. FxTrigger

26. 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

28. 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

29. TermDeposit Some renaming and reordering compared to 4.x model

30. 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)

31. DualCurrencyFeature Describes the properties of an option used to deliver the interest and principal in another currency

32. 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