Due Date: 22nd  September 2023, 7 PM (Singapore Time)

Weighting: 20%

Overview

Your team works for a renowned FX trading company, Snowy River Ltd. The company specialises in trading major currencies such as the Australian Dollar (AUD), British Pound (GBP), Canadian Dollar (CAD), Euro (EUR), Japanese Yen (JPY), New Zealand Dollar (NZD), Swiss Franc (CHF) and US Dollar (USD). 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, Jayden Yap, has requested your team’s expertise in trading foreign currencies in order to improve the 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 scenarios:

Part 1 Speculation [5 marks]

Use the three/four market views developed by your team in stage 1, and use the market views to devise speculation strategies that enable your organisation to take advantage of your predicted

changes in exchange rates. You should specify which currencies you will buy or sell.  As part of

your strategy, you must create a portfolio and this portfolio will comprise of

the currency pairs analysed in your market view.

The senior management has allocated you 400,000,000 units of each currency as the initial balance for your speculation strategy if you are speculating on AUD, GBP, CAD, EUR, NZD, CHF or USD and 25,000,000,000 units 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/short position should be calculated using bid/ask rates provided in Table 1. Please note that you must speculate on ALL currency pairs

based on your stage 1 market view. You must then take long and short positions

in the respective currencies in accordance with your market view as a price taker. In the report, you are requested to provide a brief summary of your market views before demonstrating your long/short speculation strategy. [2 Marks]. These long and short positions will constitute your portfolio’s current opening position. Based on your initial position you must choose the most appropriate quotations among Bank A, B and C in Table 1, and estimate the opening AUD value of your portfolio using the corresponding mid rates and update your position summary table below with your speculative position [3 Marks]. Mid rate = (bid rate + ask rate)/2

Part 2 Risk Assessment [7 marks]

Senior management is concerned about the recent developments in the financial markets. There is a general belief that market volatility has been relatively high, yet it might climb even higher than expected in the near future. You have been asked to conduct a thorough risk assessment of your speculative positions undertaken in Part 1. For this purpose, the firm’s foreign currency analyst

has provided you with the 1-month benchmark rates of these major currencies.

Using the interest rates in Table 3, calculate the implied forward bid, ask and mid rates for the THREE OR FOUR currency pairs you selected [1 Marks]. You must then calculate the value of

your FX portfolio 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 the expected profit/loss (gain or loss over the opening position) on your portfolio in AUD [2 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.

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? Does your portfolio have any exposure to exchange rate risk? What recommendations,

if any, will you make to the senior management? [2 Mark].

Part 3 Arbitrage [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 based on the differences in implied forward

rates and actual forward rates. Suppose that the actual forward rates are as presented in Table 4.

Calculate the implied forward rates for the given three pair currencies, and inform the company whether the commodity currencies listed in Table 4 are over-, under-, or fairly valued compared to the implied forward rates you calculated [2 Marks], and which bank will you trade with and what is your suggested strategy to the top management (buy or sell the commodity currency)? [1

Marks].

If there is any arbitrage opportunity available between the implied forward rates and the actual forward rates listed in Table 4, how much profit can you generate for the company as a price taker with 50,000,000 units of currency (choose the most profitable option) [2 Marks]. To minimise the transaction costs involved you can only exploit arbitrage opportunities between two exchange rates (i.e., NO TRIANGULAR ARBITRAGE OPPORTUNITY ALLOWED). Finally, you must convert profit, if any, to AUD using the mid rates estimated in implied forward rates [1

Mark].