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

   

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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 24h 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]. Mid rate = (bid rate + ask rate)/2 Position in AUD (Current) Net Position Change in in AUD (Expected) Opening Net Position Currency Position Net Trades Position (Expected) (current) (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 [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 BAFI1002 Financial Markets – Group FX Assignment (Stage 2) 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 AUDIJPY 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 EURIJPY 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 [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]. 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 24h 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]. Mid rate = (bid rate + ask rate)/2 Position in AUD (Current) Net Position Change in in AUD (Expected) Opening Net Position Currency Position Net Trades Position (Expected) (current) (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 [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 BAFI1002 Financial Markets – Group FX Assignment (Stage 2) 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 AUDIJPY 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 EURIJPY 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 [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].