Using foreign exchange knowledge of financial market to solve assignment problem

BAFI1002 Financial Markets – Group Assignment (Stage 2)

Semester 1, 2021

 

Due Date: 9th May (Friday Week 10), 10 PM (Melbourne Time)

Weighting: 20%

Formatting & Presentation [2 marks]

The report must be professionally presented using Times New Roman, size12 font, double-spaced for the main text, and single spaced for tables, figures & appendices. 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 1700 words applies with a tolerance of + 10%, excluding appendices and tables.

 

Overview

Your team works for a renowned FX trading company, Snowy River Ltd. The company specialises in trading major currencies such as 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, Pete Fernandes, 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:

Scenario 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 3rd of May 2021. This portfolio will comprise of the currency pair analysed in your market view.

The senior management has allocated you 400,000,000 units of 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 position should be calculated using bid/ask rates provided in Table 1. Please note that you must speculate on one currency pair only (two currencies). You must then take long and short positions as of 3rd of May 2021 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]. Mid rate = (bid rate + ask rate)/2

 

 

Comm / Terms	Bid	Ask	Mid
AUD/USD	0.7161	0.7163	0.7162
AUD/EUR	0.6069	0.6073	0.6071
EUR/AUD	1.6471	1.6474	1.6473
AUD/GBP	0.5470	0.5473	0.5472
GBP/AUD	1.8275	1.8280	1.8278
AUD/JPY	75.75	75.78	75.77
EUR/USD	1.1795	1.1799	1.1797
GBP/USD	1.3087	1.3092	1.3090
USD/JPY	105.78	105.81	105.80
EUR/GBP	0.9010	0.9015	0.9013
EUR/JPY	124.79	124.83	124.81
GBP/JPY	138.45	138.50	138.48
AUD/CAD	0.9432	0.9440	0.9436
EUR/CHF	1.0750	1.0759	1.0755
GBP/CHF	1.1929	1.1938	1.1934
USD/CHF	0.9115	0.9117	0.9116
USD/CAD	1.3175	1.3179	1.3177
NZD/USD	0.6539	0.6542	0.6541

 

Table 1: Exchange rates on April 22, 2021. 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
CAD
CHF
EUR
GBP
JPY
NZD
USD
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 [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 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 2-month benchmark rates of these major currencies:

Currency	Benchmark Interest Rates	2-Month Benchmark Rates (%)
AUD	2-Month Bank Bill Swap Rates	0.095
GBP	2-Month GBP LIBOR	0.073
CAD	2-Month Treasury Bills	0.150
EUR	2-Month Euro LIBOR	-0.495
NZD	2-Month Bank Bill Yields	0.270
CHF	2-Month CHF LIBOR	-0.744
JPY	2-Month JPY LIBOR	-0.059
USD	2-Month USD LIBOR	0.205

Table 3: Benchmark interest rates on April 23, 2021.

 

Using the interest rates above, calculate the implied forward bid, ask and mid rates for the currency pairs in Table 4 (next page) [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.

Comm / Terms	Bid	Ask	Mid
AUD/USD
AUD/EUR
EUR/AUD
AUD/GBP
GBP/AUD
AUD/JPY
EUR/USD
GBP/USD
USD/JPY
EUR/GBP
EUR/JPY
GBP/JPY
AUD/CAD
EUR/CHF
GBP/CHF
USD/CHF
USD/CAD
NZD/USD

Table 4: Implied forward rates at the end of June 2021. Mid rate = (bid rate + ask rate)/2

Explain your final portfolio position to the senior manager. Given the implied forward rates for 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? Do your portfolio have any exposure to exchange rate risk? What recommendations, if any, will you make to the senior management? [1 Mark].

 

 

 

 

 

 

 

 

 

Formatting & Presentation [2 marks]

The report must be professionally presented using Times New Roman, size12 font, double-spaced for the main text, and single spaced for tables, figures & appendices. 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 2000 words applies with a tolerance of + 10%, excluding appendices and tables.

Submission

1. Students are required to register their groups online via Canvas.

1. 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.

1. The report must have the university prescribed cover sheet and the following details:

· Student names and student numbers of those who have contributed to the report

· FX Session attended

· Assignment Group Number

· Name of FX Session Instructor

Feedback & Marking

A rubric with marking criteria will be 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

Late Submissions

Late submissions of assignments without special consideration or extension will be automatically penalised at a rate of 10% of the total marks available per day (or part of a day) late. For example, if an assignment is worth 20 marks and it is submitted 1 day late, a penalty of 10% or 2 marks will apply. This will be deducted from the assessed mark. Assignments will not be accepted if more than five days late, unless special consideration or an extension of time has been approved.

Special consideration is available for unexpected circumstances outside students’ control. For more. More information regarding special consideration is available at https://www.rmit.edu.au/students/student-essentials/assessment-and-exams/assessment/extensions-of-time-for-submission-of-assessable-work

 

BAFI1002 Financial Markets – Group FX Assignment (Stage 2)

 

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