BAFI1002 Financial Market : Exchange Rates

BAFI1002 Financial Market :  Exchange Rates

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BAFI1002 Financial Market

Questions:

Overview:

Your team works for a renowned FX trading company, Xhi-Trade. The company specializes in trading major currencies such as Australian dollar (AUD), United States dollar (USD), Japanese Yen (JPY), Euro (EUR) and Great British Pound (GBP). The company also trades various foreign exchange related derivatives for its clients.  In addition, it provides general advice to other clients who trade for themselves. The firm’s chief trading executive, Bill Harrison, has requested your team’s expertise in trading foreign currencies in order to improve firm’s trading strategy and profits. You have been asked to prepare a detailed report in this regard. In your report you must address the following questions:

Question 1:                                                 

You have been asked to select one of the three market views developed by your group in stage:

1. Using this market view, devise a speculation strategy that enables your organisation to take advantage of your predicted changes in the exchange rates. You should specify which currencies you will buy or sell.  As part of your strategy you must create a portfolio as of 24th of April, 2020.  This portfolio will comprise of the currency pair analysed in your market view.

Comm / Terms

Bid

Ask

Mid

AUD/USD

0.5741

0.5743

0.5742

AUD/EUR

0.5378

0.5381

0.5380

EUR/AUD

1.8588

1.8591

1.8590

AUD/GBP

0.4956

0.4960

0.4958

GBP/AUD

2.0169

2.0174

2.0172

AUD/JPY

63.48

63.52

63.5

EUR/USD

1.0673

1.0675

1.0674

GBP/USD

1.1580

1.1584

1.1582

USD/JPY

110.62

110.64

110.63

EUR/GBP

0.9214

0.9218

0.9216

EUR/JPY

118.05

118.10

118.08

GBP/JPY

128.09

128.14

128.12

Table 1: Exchange rates for April 24, 2020. Mid rate = (bid rate + ask rate)/2

The senior management has allocated you 400,000,000 as the initial balance for your speculation strategy if you are speculating on AUD, USD, EUR or GBP and 25,000,000,000 if you are speculating on JPY. For instance, if you are speculating on AUD/EUR and decided to short the EUR then you have been allocated 400,000,000 EURs for this purpose. The corresponding long position should be calculated using bid/ask rates provided in Table 1. Please note that you have to speculate on only one currency pair (two currencies). You must then take long and short positions as of 24th April, 2020 in the respective currencies in accordance with your market view as a price taker. These long and short positions will constitute your portfolio’s current opening position. Based on your initial position you must estimate the opening AUD value of your portfolio using the mid rates in Table 1 and update your position summary table below with your speculative position. Mid rate = (bid rate + ask rate)/2

Currency

Opening Position (current)

Position in AUD (Current)

Net Trades

Net Position (Expected)

Net Position in AUD (Expected)

Change in Position (AUD)

AUD

USD

GBP

EUR

JPY

Net Position (AUD)

Table 2: FX portfolio position summary:

Note: Indicate long positions with a positive sign and short positions with a negative sign (e.g. a short position of 45,000,000 GBP should be indicated as –45,000,000). Mid rate = (bid rate + ask rate)/2

Question 2:

The senior management is concerned about the recent developments in the financial markets.  There is a general belief that market volatility was relatively high, yet it might climb even higher than expected in the near future due to the current global health crisis. You have been asked to conduct a thorough risk assessment of your speculative positions undertaken in question 1. For this purpose, the firm’s foreign currency analyst has provided you with the following forecast for US dollar exchange rates as at the end of June 2020:

 Comm / Terms

Bid

Ask

Mid

AUD/USD

0.6135

0.614

0.6138

AUD/EUR

EUR/AUD

1.8022

1.8035

1.8029

AUD/GBP

GBP/AUD

2.0291

2.0298

2.0295

AUD/JPY

EUR/USD

1.1063

1.1064

1.1064

GBP/USD

1.2437

1.2441

1.2439

USD/JPY

107.9

107.93

107.9150

EUR/GBP

EUR/JPY

GBP/JPY

Table 3: Expected exchange rates for June, 2020. Mid rate = (bid rate + ask rate)/2

Using the estimated exchange rates above, calculate the implied expected bid, ask and mid rates for the remaining currency pairs in Table 3[3 Marks]. You must then calculate the value of your FX portfolio at the end of June using the calculated bid/ask rates. Report the expected value of your position in each currency in the position summary in Table 2. Finally, you must calculate expected profit/loss (gain or loss over the opening position) on your portfolio in AUD [1 Mark]. The AUD value of the net expected position must be calculated using the estimated mid rates.

BAFI1002 Financial Market

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