ONLY NEED QUESTION 3 COMPLETED

****ALL QUESTIONS ON RELATION TO AUD/USD****

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 22nd of August 2020. 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 22nd of August 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 portfolios 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

Question 2

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 firms foreign currency analyst has provided you with the 2-month benchmark rates of these major currencies:

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 October 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 implied forward rates for October, discuss whether your speculative positions will generate profits for the company. You must explain ending positions for each currency (and its 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].

*****Question 3*****

The firms 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 exchange rates in table 4 and 5. Suppose that the actual forward rates for the end of October 2020 are as follows:

Inform the company whether the commodity currencies listed in Table 5 are over-, under-, or fairly valued compared to the implied forward rates estimated in Table 4 [1.5 Marks], and what is your suggested strategy to the top management (buy or sell the commodity currency)? [1.5 Marks]. If there is any arbitrage opportunity available between the implied forward rates estimated in Table 4 and the actual forward rates listed in Table 5, 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 Table 4 [1 Mark].

Comm/ Terms Bid Mid Ask 0.7163 AUD/USD 0.7162 0.6073 1.6474 0.5473 0.6071 1.6473 0.7161 0.6069 1.6471 0.5470 1.8275 75.75 AUD/EUR EUR/AUD AUD/GBP GBP/AUD AUD/JPY EUR/USD GBP/USD USD/JPY EUR/GBP 0.5472 1.8278 1.8280 75.78 1.1799 75.77 1.1797 1.1795 1.3092 1.3090 1.3087 105.78 105.80 105.81 0.9015 0.9013 0.9010 124.79 124.83 EUR/JPY GBP/JPY 124.81 138.48 138.45 138.50 AUD/CAD 0.9432 0.9440 0.9436 1.0755 1.1934 0.9116 EUR/CHF 1.0750 1.0759 GBP/CHF 1.1929 1.1938 USD/CHF 0.9115 0.9117 USD/CAD 1.3175 1.3179 NZD/USD 0.6539 0.6542 Table 1: Exchange rates on August 22, 2020. Mid rate = (bid rate + ask rate)/2 1.3177 0.6541 Net Trades Net Position (Expected) Net Position in AUD (Expected) Change in Position (AUD) Opening Position in Currency Position AUD (current) (Current) 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 2-Month Benchmark Rates (%) 0.095 0.073 0.150 -0.495 Currency Benchmark Interest Rates AUD 2-Month Bank Bill Swap Rates GBP 2-Month GBP LIBOR CAD 2-Month Treasury Bills EUR 2-Month Euro LIBOR NZD 2-Month Bank Bill Yields CHF 2-Month CHF LIBOR JPY 2-Month JPY LIBOR USD 2-Month USD LIBOR Table 3: Benchmark interest rates on August 22, 2020. 0.270 -0.744 -0.059 0.205 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 October 2020. Mid rate= (bid rate + ask rate)/2 Comm / Terms Bid Ask Opinion (over/under/ fairly valued) Suggested Strategy AUD/CAD 0.9447 0.9455 GBP/USD 1.3100 1.3105 NZD/USD 0.6510 0.6513 Table 5: Actual forward FX rates for the end of October 2020. Comm/ Terms Bid Mid Ask 0.7163 AUD/USD 0.7162 0.6073 1.6474 0.5473 0.6071 1.6473 0.7161 0.6069 1.6471 0.5470 1.8275 75.75 AUD/EUR EUR/AUD AUD/GBP GBP/AUD AUD/JPY EUR/USD GBP/USD USD/JPY EUR/GBP 0.5472 1.8278 1.8280 75.78 1.1799 75.77 1.1797 1.1795 1.3092 1.3090 1.3087 105.78 105.80 105.81 0.9015 0.9013 0.9010 124.79 124.83 EUR/JPY GBP/JPY 124.81 138.48 138.45 138.50 AUD/CAD 0.9432 0.9440 0.9436 1.0755 1.1934 0.9116 EUR/CHF 1.0750 1.0759 GBP/CHF 1.1929 1.1938 USD/CHF 0.9115 0.9117 USD/CAD 1.3175 1.3179 NZD/USD 0.6539 0.6542 Table 1: Exchange rates on August 22, 2020. Mid rate = (bid rate + ask rate)/2 1.3177 0.6541 Net Trades Net Position (Expected) Net Position in AUD (Expected) Change in Position (AUD) Opening Position in Currency Position AUD (current) (Current) 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 2-Month Benchmark Rates (%) 0.095 0.073 0.150 -0.495 Currency Benchmark Interest Rates AUD 2-Month Bank Bill Swap Rates GBP 2-Month GBP LIBOR CAD 2-Month Treasury Bills EUR 2-Month Euro LIBOR NZD 2-Month Bank Bill Yields CHF 2-Month CHF LIBOR JPY 2-Month JPY LIBOR USD 2-Month USD LIBOR Table 3: Benchmark interest rates on August 22, 2020. 0.270 -0.744 -0.059 0.205 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 October 2020. Mid rate= (bid rate + ask rate)/2 Comm / Terms Bid Ask Opinion (over/under/ fairly valued) Suggested Strategy AUD/CAD 0.9447 0.9455 GBP/USD 1.3100 1.3105 NZD/USD 0.6510 0.6513 Table 5: Actual forward FX rates for the end of October 2020