CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE LEHMAN BROTHERS FOREIGN EXCHANGE TRAINING MANUAL Confidential Treatment Requested By Lehman Brothers Holdings, Inc. LBEX-LL 3356480 CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE TABLE OF CONTENTS CONTENTS ....................................................................................................................................... PAGE FOREIGN EXCHANGE SPOT: INTRODUCTION ...................................................................... 1 FXSPOT: AN INTRODUCTION TO FOREIGN EXCHANGE SPOT TRANSACTIONS ........... 2 INTRODUCTION ...................................................................................................................... 2 WJ-IAT IS AN OUTRIGHT? ..................................................................................................... 3 VALUE DATES ........................................................................................................................... 4 CREDIT AND SETTLEMENT RISKS .................................................................................. 6 EXCHANGE RATE QUOTATION TERMS ...................................................................... 7 RECIPROCAL QUOTATION TERMS (RATES) ............................................................. 10 EXCHANGE RATE MOVEMENTS ................................................................................... 11 SHORTCUT ................................................................................................................................ 14 BIDS AND OFFERS ................................................................................................................. 16 THE RULE OF THE LEFT BID -RIGHT OFFER ........................................................ 17 CROSS RATES ........................................................................................................................... 22 BID-OFFER FOR THE CROSS RATES OF CURRENCIES ON SAME TERMS ................................................................................................................. 25 EXCHANGE RATE MOVEMENT REVISITED FOR CROSSES .............................. 26 BID-OFFER FOR CROSS RATES OF CURRENCIES ON DIFFERENT TERMS ............................................................................................................ 27 SUMMARY .................................................................................................................................. 28 SHORTCUTS .............................................................................................................................. 31 TRADING CONVENTIONS AMONG MARKET MAKERS ...................................... 32 SUMMARY .................................................................................................................................. 33 REVIEW PROBLEMS .............................................................................................................. 35 FOREIGN EXCHANGE FORWARDS: INTRODUCTION ...................................................... 38 FXFORWARDS: AN INTRODUCTION TO FOREIGN EXCHANGE FORWARDS ............................... 39 INTRODUCTION .................................................................................................................... 39 WJ-IAT ARE FORWARDS? ..................................................................................................... 39 CALCULATING THE FORWARD RATE ......................................................................... 40 HOW DO YOU CALCULATE FORWARD POINTS? ................................................... 43 PAY AND EARN POINTS ..................................................................................................... 43 SUMMARY .................................................................................................................................. 46 SAMPLE PROBLEMS .............................................................................................................. 46 PREMIUM VS. DISCOUNT POINTS .................................................................................. 51 (r) Confidential Treatment Requested By Lehman Brothers Holdings, Inc. LBEX-LL 3356481 CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE TABLE OF CONTENTS (continued) CONTENTS ....................................................................................................................................... PAGE SAMPLE PROBLEMS .............................................................................................................. 52 FORWARD RATE CONVENTIONS .................................................................................. 54 SAMPLE PROBLEMS .............................................................................................................. 55 CALCULATING ODD DATES ............................................................................................ 53 TYPES OF TRANSACTIONS ................................................................................................ 59 HOW DO THE FORWARD POINTS CHANGE? ........................................................... 59 WHICH SIDE OF THE MARKET? ..................................................................................... 60 CURRENCY FUTURES ........................................................................................................... 61 FUNDING .................................................................................................................................. 62 TRADE IDEAS AND HOW THEY ARE FORMED ...................................................... 62 TRADING EURODOLLAR FUTURES .............................................................................. 64 TRADING SPREADS INVOLVES ANALYZING YIELD CURVES ......................... 65 EXAMPLE OF A POSITIVE CARRY TRADE ................................................................. 66 FORWARDS REVIEWPROBLEMS .................................................................................... 67 FOREIGN EXCHANGE SWAPS: INTRODUCTION ................................................................. 69 WHAT IS A SWAP ............................................................................................................................ 70 VALUE DATES ......................................................................................................................... 71 BID-OFFER SPREADS ........................................................................................................... 77 CALCULATING SWAP POINTS ......................................................................................... 82 RULES OF THUMB ................................................................................................................. 84 PAY OR EARN THE POINTS .............................................................................................. 86 THE RATIONALE BEHIND THE CHART ..................................................................... 88 LEARNING POINTS ............................................................................................................... 92 SUMMARY .................................................................................................................................. 92 FOREIGN EXCHANGE OPTIONS: INTRODUCTION ........................................................... 94 FXOPTIONS: AN INTRODUCTION TO FOREIGN EXCHANGE DERIVATIVES .......................... 95 INTRODUCTION .................................................................................................................... 95 VANILLA OPTIONS ............................................................................................................... 95 PAYOFF OF A LONG AND SHORT CALL OPTION .................................................. 96 PAYOFF OF A LONG AND SHORT PUT OPTION ..................................................... 96 THE GREEKS ............................................................................................................................ 97 DELTA RANGES FROM 0% (DEEP OTlvf) TO 100% (DEEP ITlvf) ......................... 99 TRADING GAMMA ON A LEHMAN CALL OPTION .............................................. 102 P&L ON GAMMA HEDGING EXAMPLE ..................................................................... 103 (rr) Confidential Treatment Requested By Lehman Brothers Holdings, Inc. LBEX-LL 3356482 CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE TABLE OF CONTENTS (continued) CONTENTS ....................................................................................................................................... PAGE SECOND ORDER GREEKS ............................................................................................... 106 FACTORS AND THEIR EFFECTS ON OPTION VALUE ........................................ 107 EXOTIC OPTIONS ................................................................................................................ 107 TRADING CONVENTIONS .............................................................................................. 110 TRADING STRATEGIES ..................................................................................................... 111 GLOSSARY ............................................................................................................................... 123 (m) Confidential Treatment Requested By Lehman Brothers Holdings, Inc. LBEX-LL 3356483 CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS