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 [5 marks]
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.
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 [2.5 Marks]. 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 [2.5 Marks].
Question 2 [7 marks]
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:
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 [2 Marks]. 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.
Explain your final portfolio position to the senior manager. Given the expected exchange rates in June, discuss whether your speculative positions will generate profits for the company. You must explain ending positions for each currency (and it’s AUD value using mid rates) in your portfolio? Are there any exposure to exchange rate risk? What recommendations, if any, will you make to the senior management? [1 Mark].
Question 3 [6 marks]
The firm’s senior management has taken note of your expertise in arbitrage trading. You have been asked to identify potential arbitrage opportunities in AUD, USD and GBP currencies based on the expected exchange rates Table 3. If arbitrage is possible, outline a strategy for undertaking a triangular arbitrage as a price taker using the bid/ask rates for these currencies.
Inform the company whether your arbitrage strategy would generate profits? [2 Marks]. If there is any arbitrage opportunity available, how much profit can you generate for the company as a price taker with 200,000,000 AUD? [4 Marks].
Formatting & Presentation [2 marks]
The report must be professionally presented using Times New Roman, 12 Font, double-spaced for the main text, and single spaced for tables, figures & appendixes. Figures and graphs should be clearly labelled and numbered. Any information obtained from sources external should be referenced according to AGPS Harvard Style or APA style. A word limit of maximum of 3000 words applies with a tolerance of + 10%, excluding appendices and tables. The report must be written according to “Written Reports and Essays: Guidelines for Referencing and Presentation in RMIT Business”. You are particularly referred to the sections on “Report Presentation” and “Referencing System”.
Students are required to register their groups online via Canvas.
- Go to the course site on Canvas. Submit your assignment under the submission point. Only one submission is required per group. It’s the responsibility of the group members to ensure that the assignment is submitted on time.
- The report must have the university prescribed cover sheet and the following details:
FX Session attended Assignment Group of FX Session Instructor made available on Canvas. You are strongly encouraged to ask questions during the FX sessions and other learning activities so that you can obtain feedback on your understanding of the concepts and issues being discussed. FX sessions running in week 8 will focus specifically on the discussion of this assignment and related concepts. Questions specific to this assessment should be addressed to your session instructor. Contact details can of all instructors can be found on Canvas.
