Cashflows and Asset Holdings
The trade is an instruction to carry out various asset and cash exchanges at one or many points after execution. The trade lifecycle is a means by which executed trades are turned into cash and assets.
We define cash to be an amount of money denominated in any recognised world currency. An asset is a holding of something other than cash. It is convenient, however, to have one term to describe the flow of cash or assets. So in this book, we use the generic term “cashflow” to mean the flow of either currency or commodity.
An asset holding is a position in currency or commodity. A cashflow will add to or subtract from the holding. The effect of a trade is to change the holdings by means of cashflows. A holding differs from a trade because it does not expire.
Holdings are defined by type and amount. Table 9.1
shows some sample holdings for a bank.
Let us work through an example trade and see how holdings and cashflows come together (see Tables 9.2
). (We are going to use the more unusual case of physical settlement to show the movement of commodity as well as currency.)
Bank de Nord based in France buys a European call option on gold Today: 22 July 2009 Strike: USD 1000 per troy ounce Delivery: physical Notional: 1m troy ounces Maturity: 1 year Premium: USD 0.2 per troy ounce FX: 1 EUR = 1.15 USD on 22 July 2009.
We can summarise the generic effects on holdings and cashflows of different times in the trade’s life in tabular ...