FX trades... onshore/offshore
Hi guys,
just trying to learn about this. So when you trade currencies, what is the difference between trading onshore and trading offshore? Like when trading something like USD/SGD and you can choose onshore or offshore what is the difference?
can you guys give like a crash course on this please?
thanks!!
Look up 'non-deliverable forward.' A lot of emerging market countries curtail 'hot money' flowing into and out of the country by making it difficult for entities that are not legally domiciled in the country to actually touch meaningful quantities of actual currency. To get around this, banks created NDFs 15 years ago (roughly). An NDF is a contract for difference that is net-settled in dollars (generally). It's a way for offshore legal entities to speculate and hedge on FX moves. Some governments get pissed with this (Egypt used to get angry about this during the crisis). And some banks manipulate the system through onshore-offshore arbitrage. Banks like HSBC are loathe to try to capitalize on the differences between the onshore and offshore curves in countries like, say, India or China because the governments could shut down their retail operations. A bank like Deutsche, though, doesn't give a fuck, and have been known to do it over the years.
In any case, SGD doesn't trade as a non-deliverable forward. In Asia, HKD, SGD and THB all trade normally. Everything else trades as an NDF.
For options pricing, the math changes only slightly, as you're technically pricing an option on a derivative (even though a contract for difference is a very simple derivative). The options are called 'NDOs', and you hedge your delta positions with NDFs.
In LATAM, everything that matters except for Mexico trades as an NDF.
Egypt, Kenya, and Ukraine trade as NDFs. Russia is a fully convertible currency, and trades against a basket of euros and dollars.(45 euro cents and 55 dollar cents in the basket).
Still, the vast majority of world currencies are still pegged to the USD.
Every bank puts out a document outlining the currency services they provide by country. They are freely available. Just do a google search for 'NDF', and do a bit of reading.
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