While Los Angeles is a focal point of international trade, the expanding currency-trading business of local banks has had more to do with customer service than speculation.
A handful of local institutions, including City National Bank, Far East National Bank and Union Bank of California, have beefed up their foreign exchange trading desks in the last few years, largely at the request of business clients needing protection from currency fluctuations.
It's a business that has proven to be a very small revenue-generator for banks, which typically make a profit on a fractional spread between currencies they trade. A handful of banks will execute trades for high net-worth individuals but they tend to be fairly expensive for speculators.
"Currency movement is good for the bank in general," said Robert Sweeney, president and chief executive of Far East National Bank, which caters primarily to Chinese Americans. "We have groups of clients that are importers and with an overall trend of the weakening dollar, they're looking for predictability. They want to lock in their costs and not get hit by where the dollar might or might not be three months from now."
Jim Griffin, vice president and co-foreign exchange manager at Union Bank of California, said about 20 percent of the bank's currency clients are clueless about the details of trading and typically come to the bank for advice on how to eliminate risk in dealing with overseas markets.
"Often a company seeks advice on what to hedge and what vehicle to use to mitigate exchange rate fluctuations," said Griffin, who oversees the largest foreign exchange trading desk in Los Angeles. "Or maybe they have a subsidiary and the foreign earnings have to be translated from yen to euro we're seeing more demand than ever to hedge."
To accommodate an increased number of trades, Union Bank has hired several traders in the past year and now has 22 foreign exchange traders who execute $50 million in trades a day.
As the value of the dollar has fluctuated, those businesses involved in international trade seek to control costs by locking in the price of goods imported to the U.S. and paid for in dollars.
There are a number of currency-trading tools businesses turn to bankers to use, depending on the nature of the enterprise.
-Forward Contracts. These are used to lock in the price of one currency in exchange for another at a future date. If a product to be imported costs 100,000 euros and is to be shipped in June, the buyer can lock in the forward contract for the same date the parts are delivered. This protects the buyer from adverse currency moves, but comes at a cost: the company loses the opportunity to profit from a favorable currency fluctuation.
-Options. Businesses seeking to hedge against fluctuations can purchase currency options that give it the ability, but not the obligation, to buy or sell at a predetermined price at or up to a certain time. Options essentially provide added insurance from adverse currency movements while allowing for some flexibility. Options are often used by multinational corporations that transfer funds among a number of overseas offices.
-Spot Contracts. The most common way to exchange dollars for another currency is through a spot foreign exchange contract, which is generally used by companies that need to make a payment in a foreign currency and want to lock in a current rate. Spot contracts are always valued at the moment the order is placed and delivered in two business days, which is the internationally accepted standard for settlement of foreign currency trades.
Griffin said that fluctuations in the dollar have caused a 15 percent jump in trading activity at Union Bank in the past two years. "We do believe the dollar has further to fall, but we're not going to see it fall at the same pace that it has in the past year," he said. "The low dollar causes more volatility and more volatility causes more trading."
Just as travelers go to a bank to purchase foreign currency when they travel abroad and pay a fee to the bank banks themselves usually participate in the market primarily to cover trades for their customers.
The volatility often bypasses the banks.
In the past few years, a flood of individual speculators, some of whom trade in five to 20 minute intervals, have jumped into the market to make a quick profit.
When President Bush gave his State of Union address last week, speculators from all over the world logged on to the Web site of Global Forex Trading, based in Ada, Mich. to place bets on the dollar.
"It doesn't take people long to realize that if the dollar turns around and they buy dollars against euros at a 1 percent margin, they can make a fortune," said Gary Tilkin, president and chief executive of Global Forex Trading.
*Staff reporter Laurence Darmiento contributed to this report.
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