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Trading Business Overview Front Office the following 4 units

Posted by admin on December 20, 2019
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Trading Business Overview Front Office the following 4 units.
office mid office back office and risk
we will look at each of these units and
understand the role they play in running
of the business we will begin with the
front office front office consists of
traders these are the people who are
authorized to take market risk on behalf
of the institution they are working for
the front office will have equity
traders FX traders bonds commodities and
derivative traders
besides the traders there are
salespeople who form part of the front
office two salespeople are in constant
touch with clients and inform them about
the markets they also understand what
financial market trades their client
want to do and they help them in
executing such trades sales people deal
with client on one hand and deal with
traders on the other hand salespeople
get orders from the client and execute
those orders by doing opposite trade
with the traders for instance a client
wants to buy 100 million USD JPY spot at
ninety eight point forty five the
salesperson will take the order and buy
hundred million USD JPY from the usd/jpy
spot trader from the trading desk
salespeople usually are not allowed to
carry any market position the
take client order on one hand and
immediately do an offsetting trade with
the trading desk in today’s world there
are eat raiding platforms they also act
as sales channels especially for small
sized streams salesperson must also
ensure that they have the authority to
deal with the client all required legal
agreements and documentation are in
place and the bank is okay to take
credit risk on the client we will
understand about credit risk little
later in this video
interbank traders undertake trading with
predefined limits for instance a usd/jpy
trader may have intraday trading limit
of 50 million usd/jpy he may also have a
20 million overnight position limit what
does this mean this means that anytime
during the trading day if the trader
were to add up all his usd/jpy trades
with positive sign for bitrates
and negative for sell trades the sum of
all such trades in a sport folio cannot
exceed either plus or minus 50 million
at the end of the day he must square all
the position to ensure that such sum
does not exceed USD 20 million a
question may come in to your mind that
who decides how much a traders limit
should be and how is it calculated
trading business is a business like
every other business you take risk and
that risk may result in profit or losses
you need to ensure that you have enough
capital to absorb losses if there are
any else you would go bankrupt the
capital would usually consist of equity
that a firm has and the sum of its
retain profits we will not get very
technical here and work with simple
digestible ideas and concepts
if one were to look at a bank it may be
involved in many different businesses a
typical bank will have a retail banking
unit which would accept deposits from
and gives loan to retail clients
it would have a corporate banking unit
that deals with corporates units like
trade finance financial markets etc
provide services to retail and corporate
banking units a bank like any other firm
would have a limited amount of capital
this capital is made available to its
various lines of businesses financial
markets being one such line of business
would get certain part of this capital
to within financial markets there are
many different type of trading
activities this could be FX equity fixed
income commodities derivatives etc the
head of financial market will further
divide the capital and provide it to
each of the trailing units the trading
units do the same again and allocate
capital to each kind of trading
activities this allocated capital is
translated into the trading limits the
trading limits should ensure that the
potential loss is suffered in training
should not exceed the available capital
this means that someone needs to convert
available capital into training limits
by performing some statistical analysis
this is one of the responsibilities of
the risk unit this risk unit is one of
the four units involved in running of
the trading business as we had discussed
earlier
we have understood a bit about
front-office here
it consists of traders and the
salespeople
traders take market risk on behalf of
the bank the extent of trading is
limited by the capital allocated to this
business by the board this allocated
capital in turn gets translated into the
training limits we will move forward and
understand the kind of risk an
institution takes when it gets into. apartment

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