Fifth Class Summer 2009

World currencies Writing about the yen, dollar, euro and the world of foreign exchange.

Lesson outline  Who

is in the currency market?

 What

moves the currency market?

 Currency  Adding

basics

value in markets stories

Who is in the currency market?  Companies  Banks  Traders  Governments

(central banks)  Investment funds

What moves the currency market?  Economic

news  Interest rates/monetary policy  Political news  Technicals  Special items

Currencies basics  It's

a dollar world, for now  Commodities trade in dollars  Bonds-currencies-interest rates  Volatility  Hedging  Global trade expanding

Currency terms Option Put/Call Volatility LIBOR Interest rate swaps Repatriation flow Currency Peg Forward Floating\ Free Floating Carry trade

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Sony, a listed Japanese consumer electronics conglomerate, recorded a huge loss and analyst said a partial divestiture of financial division would be considered.   Sony posted group net deficit of about JPY 98bn, a down 126% from a year earlier, for the year ended in March 2009. A dividend for this year is about JPY 40, which is 50% higher than the previous year. An analyst doubts if Sony would be able to pay higher dividends in next year if the company keeps forecasting a minus on net and operating profit; JPY 120bn and JPY 110bn, respectively.   Sony already announced a job cut of about 20,000 employees out of its total 200,000 with a downsizing of sales and production sites on its electronics division, a core business of Sony, to save about JPY 500bn by the end of fiscal 2009 year.    A partial divestiture of its financial sector would be among the possible options for Sony more to improve its financial condition and to focus on its core businesses such as electronics and games for the eyes of shareholders if the company keeps forecasting a loss, the analyst said. A full sale of Sony Financial Holdings would be difficult if looking for relevant buyers, given its    current high market cap of about JPY 700bn, the analyst said. Thus, a partial sale of its businesses such as nonlife insurance, life insurance, or banking division would be possible, the analyst said, adding that  Japanese or foreign financial group might be interested in its stable financial assets.   Sony reported group operating loss of about JPY 227bn, a down 147% from a year earlier on top of its group sales of about JPY 772bn, a down 12% from a year earlier, for the year ended in March 2009.

Sony recorded a huge loss; financial division would be seriously reviewed Sony, a listed Japanese consumer electronics conglomerate, recorded a huge loss and analyst said a partial divestiture of financial division would be considered. Time Size of loss Active verb structure

Sony Corp., Japan’s secondlargest consumer electronics group, posted a record loss, prompting speculation the company will sell part of its insurance and banking unit.  Sony Corp., Japan’s secondlargest consumer electronics group, may sell parts of its insurance, banking and financial services business after posting a record loss for the year. 

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Sony posted group net deficit of about JPY 98bn, a down 126% from a year earlier, for the year ended in March 2009. A dividend for this year is about JPY 40, which is 50% higher than the previous year. An analyst doubts if Sony would be able to pay higher dividends in next year if the company keeps forecasting a minus on net and operating profit; JPY 120bn and JPY 110bn, respectively.

 Time  Active

verb structure  Important numbers first

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Net loss more than doubled to JPY 98bn for the year ended in March 2009 from the previous year and the company said it expects the deficit to widen to 120 billion yen in the current year. The dividend for this year will climb 50 percent to JPY 40 a share, a figure some analysts said may be too optimistic, given the profit outlook.

Sony already announced a job cut of about 20,000 employees out of its total 200,000 with a downsizing of sales and production sites on its electronics division, a core business of Sony, to save about JPY 500bn by the end of fiscal 2009 year.   Time  Active verb structure  Important numbers first

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Sony in April said it would save JPY 500bn this year by cutting 20,000 sales and production jobs at its electronics division out of the total 200,000. 25 million yen per job? Hmmm…

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Sony in April said it would save JPY 500bn this year, partly by cutting 20,000 sales and production jobs at its electronics division out of the total 200,000.

A partial divestiture of its financial sector would be among the possible options for Sony more to improve its financial condition and to focus on its core businesses such as electronics and games for the eyes of shareholders if the company keeps forecasting a loss, the analyst said. A full sale of Sony Financial Holdings would be difficult if looking for relevant buyers, given its    current high market cap of about JPY 700bn, the analyst said. Thus, a partial sale of its businesses such as nonlife insurance, life insurance, or banking division would be possible, the analyst said, adding that  Japanese or foreign financial group might be interested in its stable financial assets.   

Start with the subject Active construction is better than passive Concrete over abstract

Sony’s outlook for widening losses may cause it to sell parts of Sony Financial Holdings, its insurance, banking and financial services unit, which has a market cap of JPY 700 billion. The entire unit may be hard to sell, given the relatively large market capitalization, which is itself larger than three of Sony’s five biggest rivals.

Sony reported group operating loss of about JPY 227bn, a down 147% from a year earlier on top of its group sales of about JPY 772bn, a down 12% from a year earlier, for the year ended in March 2009. Sales dropped 12 percent to JPY 772bn.

WSJ Three More Bodies Found at Air France Crash Site Three more bodies of victims of Air France Flight 447 were recovered Sunday by Brazilian navy ships from the Atlantic Ocean, a navy official said Sunday in Recife, Brazil. The bodies, along with two others found Saturday, will be transported by a navy frigate to the island of Fernando de Noronha, where rescuers have established a mobile morgue, officials said at a news conference. Navy ships are collecting hundreds of pieces of debris, the officials said, including oxygen masks and airline seats with Air France logos, and search planes have spotted a piece of one of the plane's wings. "There is no doubt that the debris being collected is from the Air France flight," an air-force official said. "The bodies are of the passengers on that plane."

Reuters More bodies found near Air France crash site Search crews retrieved four more bodies from a crashed Air France jet on Sunday, spotted other corpses and found a large amount of debris from the plane that plunged into the Atlantic ocean. Six bodies have now been recovered from the plane, following the discovery of two unidentified males on Saturday, five days after the Airbus A330 crashed on its way from Rio de Janeiro to Paris killing all 228 people on board. Investigators are considering the possibility that the speed sensors on Flight 447 may have iced up, and Air France said late on Saturday it was accelerating the replacement of speed sensors on all its Airbus long-haul planes.

NY Times More Bodies Recovered Near Site of Plane Crash SÃO PAULO, Brazil — Brazilian ships picked three more corpses from the water on Sunday, bringing to five the number of bodies recovered from the area where an Air France Airbus disappeared over the Atlantic a week ago. An unspecified number of other bodies have been spotted floating in the sea and “will be picked up in the coming hours,” the Brazilian Air Force said in a statement Sunday morning. The three bodies were picked up Sunday morning by the Brazilian navy ship Caboclo. Two others had been pulled from the sea on Saturday. All five corpses were transferred to another ship, the frigate Constituição, which is taking them to Fernando de Noronha, an archipelago roughly 45 miles away. The bodies will arrive there Monday before being transferred to Recife, the coastal city where the search and rescue operation is being run, the statement said.

Option  An

agreement allowing the holder to buy or sell an asset within a certain time at a specific price.

Put/Call A

put allows its holder to sell an asset at a set price at any time during the set period.

A

call allows its holder to buy an asset at at set price at any time during the set period.

Volatility A

gauge of average changes in price over time. Investors measure volatility to help assess the riskiness of an asset and to determine the price of options.

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``The spread between implied volatility and historic has widened during the recent dollar-yen rally,'' Mann said. ``We expect the spread to narrow over the next few months as implied volatility declines,'' given the likely slowdown in the pace of dollar gains.

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Implied volatility on three-month options rose as high as 7.65 percent last week, up from 6 percent on June 5, the lowest since Bloomberg began tracking such data in December 1995.

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Volatility on options increased in recent weeks as investors boosted purchases of put options, which protect against a dollar fall. The dollar appreciated 6.6 percent versus the yen in the last four months, touching the strongest in almost four years at 124.13 yen per dollar on June 22. The rate traded at 123.22 as of 7 a.m. in London from 122.94 yesterday in New York.

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In February 2004, the last time the premium on implied volatility was so large, the dollar-yen rate had tumbled 14 percent over the preceding eight months. The implied versus historical volatility premium was wiped out by May 2004.

Forward  An

agreement to buy or sell a currency at a set price at a set time in the future.

Floating\ Free Floating  When

a currency’s value is not controlled by a government monetary authority or central bank, it is a floating or free floating currency. The dollar, yen and euro are floating currency. The yuan and the Singapore dollar do not float, they are pegged currencies.

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Investors should bet that option volatility on the dollar-yen exchange rate will decline as a four-month U.S. currency rally wanes, Standard Chartered Plc said.

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Demand for the dollar should fall as U.S. interest rates slip, reducing the currency's allure, the bank said in a research note. Standard Chartered economists expect the Federal Reserve to decrease the benchmark lending rate by 0.25 percentage point to 5 percent and the Bank of Japan to lift its key rate by 0.25 percent to 0.75 percent by year end.

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Volatility on three-month options on the dollar-yen rate was 6.78 percent today, 2.29 percentage points above historical volatility of 4.49 percent. The difference, or spread, was as wide as 2.61 percent this week, the greatest premium of implied volatility over actual since February 2004.

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Implied volatility, a gauge of traders' expectations for price swings, increases as demand for options rises. Traders quote implied volatility as part of pricing options.

Carry trade  Borrowing

in one currency to invest in assets denominated in another currency, usually to take advantage of differences in interest rates. Many investors currently borrow in yen at low interest rates, then invest the money in dollar, or euro assets that pay higher interest rates.

LIBOR  London

Interbank Offered Rate, or the average interest rate at which large banks agree to lend to each other overnight in London.  LIBOR is typically used as the reference for floating interest rates in swaps and other contracts.

Interest rate swaps  An

agreement to exchange cash flow from one interest rate for another. Typically, the cash flow from a fixed interest rate, such as a bond or bank deposit, is exchanged for a floating one, such as the London Interbank Offered Rate, LIBOR.

Currency Peg  When

the central bank or monetary authority of a country maintains the value of its currency against another. China’s yuan, for example, is pegged to the dollar. So when the dollar rises against the euro and yen, China’s monetary authority buys yuan and sells euro and yen to increase the value of the yuan to match the dollar.

Repatriation flow  Cash

that investors or individuals have earned abroad and are returning into their home currency. In Japan, almost all the repatriation flow is from companies that have export earnings in dollar or euro and need to convert them to yen.

Sony recorded a huge loss; Sony, Japan’s second-largest consumer electronics financial division would maker, recorded a loss, prompting an be analyst to say the company may sell its financial unit. seriously reviewed Sony, a listed Japanese consumer electronics conglomerate, recorded a huge loss and analyst said a partial divestiture of financial division would be considered.

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Sony already announced a job cut of about 20,000 employees out of its total 200,000 with a downsizing of sales and production sites on its electronics division, a core business of Sony, to save about JPY 500bn by the end of fiscal 2009 year. Sony in April said it expected to save JPY 500bn this year by eliminating 20,000 employees out of a workforce of 200,000, laying off sales and production workers in its electronics division.

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