Hi, I need some advice from you battle-hardened pros out there. I will be soon join a FX desk doing exotics (as a quant). FX is one of the most liquid and biggest out there. So naturally I am very excited. At the same time, I have some queries:1) What are the issues that exotic FX traders have to grapple with on a day-to-day basis? The vol smile? erm...jumps? (i guess not jumps huh...) - I ask this because I'm trying to be useful when I get down to the trading desk. So I want to learn/read up about these before I start work. 2) This may come across as an ignorant question, but it is. The stuff that I learnt in school about derivatives usually draw on examples from equity, and some IR stuff. Hardly any FX stuff is discussed. So my question is: For whatever options that are discussed wrt equity, are there analogous counterparts for FX? i.e. There are barrier options, digital options, variance swaps for equity. Are there also barrier, digital, variance for FX? (as well as a myriad of other equity options)3) Is FX considered a growth area? (my guess is no) I ask this because I want to know what are the prospects like assuming I stay in FX long term. Or would it be better to move to a different area after a few years? What are the views of the veterans? This will be my first exposure to the trading floor and I really want to be able to contribute in a concrete way (even if it's some mundane task). Thus, I really appreciate any advice you guys have for me.Thank you very much.

Just my 0.02$ after an internship on such a desk...:1/ depends on whether you are doing plan trading, correlation or basket. As a general thing, the more exotic you get, the more you are interested in hedging rather than the product itself, so you'll have to manipulate the grreks all day long. On FX, correlation is a big thing as well.2/ From what I have seen, the range of options is pretty much the same, given the peculiarity of FX (ie the asset and the currency used to pay are the same thing). FX seems to took more like IR than equity in its mean reverting patterns, which means that you'll see quite a lot of barrier options.3/ A similar question was often heard in 1998 just before the introduction of the Euro in the EMU. Still, the market has kept pace since then so I personally do not see any reason why it should not stay the biggest market. Still, from a long term job perspective, it also involves longer hours than on similar exotic trading desks on the other asset classes (in London, hours were roughly 7am to 7:30am on our desk, first come, last left among other exotic traders)hope this helps!

I'll add my £0.02.1) The issues the traders deal with widely vary depending on the bank and how the desk is set up. What is noticeable in FX exotics is that some outfits are much further advanced in their capabilities than others, I think this gap is less obvious in other areas (with the exception of credit). On one hand you have the likes of UBS, Citigroup, Deutsche, HSBC, RBOS who mainly deal in spot, vanilla/vanilla and 1st gen exotics but have real dominance in this arena with good electronic customer offerings and the ability to make aggressive prices on the strength of their flows. On the other hand you have the likes of Merrills, BNP, Commerzbank and JPM who have fewer clients (particularly corporates) and struggle to rival the main players in liquid products and 1st gen. Instead these groups will concentrate on developing more exotic offerings where they can command a more significant and worthwhile margin on smaller volumes of business. Two things here are that. 1) This market is comparatively small and fiercely competitive (worth mentioning that the demand for exotic structures is more driven by corporates and investors than hedge funds who mostly still play with futures and vanilla options) and unless the bank have a very good sales/structuring desk and good quantitative research they will struggle to grow beyond their historical relationships. 2) The big volume players are catching up on the smaller houses when it comes to their exotic offering - I think that within 12 months both Citigroup and UBS will have the same capability as a Merrill/BNP/JPM - the difference will be that because they currently have strong relationships with a larger volume of clients and deal with a larger percentage of that clients needs through their electronic offerings it will be easier for them to then win that customers needs for more exotic structures whereas it is a bigger task for the smaller houses to build their vanilla businesses in a way that guarantees more dependence on the bank by the client ensuring loyalty. The other thing to note is that the margins in exotics only remain so long as competitors cannot offer the same services and there is limited understanding of the product. As soon as everyone understands the structures and can provide them at competitive rates the margin will drop. When this happens you rely on the creativity of the structurers and also an established and loyal client base (usually built through vanilla business) to continue to create and distribute new products. This is an area in the future where the bigger players will have an edge. In conclusion, what issues you deal with will depend entirely on what type of organisation you will be working for - if its a smaller niche player in exotics then you will often be looking at hedging strategies (provided they already have a well developed models which most of these types of organisations do). If its a larger player but less developed in exotics you may be involved in the development of their modelling capabilities to support thier development in this space.2) Whilst FX perhaps should be treated more like IR, from a modelling point of view it is often treated more like equity due to the comparative simplicity of the underlying. 3) I dont think FX is "growing", it is and will I think remain to be the "biggest" market - However this is mostly because of the size of the spot and vanilla market. The market for exotics is much smaller and has grown but is by no means comparable to IR or Credit Exotics. FX also seems to be less well paid than Credit of IR. From a career point of view I would aim to be as involved in the more long dated side of FX and if possible the PRD business as it will be an easier transition to IR, Credit or Hybrids which I think offers more long term stability and more interesting work. One thing to note here is that there seem to be far more areas where you can make margin in credit derivatives and interest rate derivatives than on fx derivatives.

Thanks a lot for the advice. Are there books/articles you would recommend me to read? Or whether there are things I can do now to familiarize myself more with the FX market?Thank you in advance.

Fully agree. But the problems are dire:short dated : little exotics, no margins, unsophisticated investors (and accordingly, traders). Only chance to get money is the Relative Value RBS way it seems. Crucially, do you think there is a chance the Fx market ever hits the juicy retail sector ?long-dated : good, interesting and high margin. Pick-up of Japan Equities and rates are a deladly danger, since this has been the decade-long cash-cow.I am trying to move from FX quant to trading something else. Which sounds impossible.