RMIT Classification: Trusted BAFI1005 Financial Markets and Institutions - Group Assignment (Stage 2) Semester 1, 2023 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 BAFI1005 Financial Markets and Institutions - Group FX Assignment (Stage 2)/nRMIT Classification: Trusted 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]. BAFI1005 Financial Markets and Institutions - Group FX Assignment (Stage 2)/nRMIT Classification: Trusted [6 marks] Part 3 Arbitrage 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]. BAFI1005 Financial Markets and Institutions - Group FX Assignment (Stage 2)/nCurrency Pairs Comm/Terms 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 Bid 0.6955 EUR/CHF GBP/CHF 0.6425 1.5563 0.5713 1.7708 92.80 1.0614 1.2139 134.93 0.8838 139.79 163.09 0.9332 1.0039 1.1696 0.9376 1.3689 0.6113 Currency RMIT Classification: Trusted 92.83 1.0616 1.2144 134.95 0.8845 139.83 139.84 163.14 163.12 163,04 163.16 0.9335 0.9334 0.9330 0.9338 1.0044 1.0037 1.0048 1.0048 1.1701 1.1699 1.1695 1.1702 USD/CHF 0.9379 0.9378 0.9380 USD/CAD 1.3693 1.3691 1.3694 NZD/USD 0.6114 0.6114 0.6116 Table 1: Exchange rates on 15 Aug 2023. Mid rate= (bid rate + ask rate)/2 AUD CAD Bank A Ask 0.6957 0.6427 0.6426 0.6423 0.6429 1.5566 1.5563 1.557 1.5565 0.5716 0.5715 0.5710 0.5716 1.7713 1.7711 1.7708 1.7716 92.82 92.78 92.84 1.0615 1.0611 1.0616 1.2143 1.2141 1.2137 134.94 134.94 134.90 0.8843 0.8841 0.8836 139.81 139.75 Mid 0.6956 Bid 0.6954 BAFI1005 Financial Markets and Institutions - Group FX Assignment (Stage 2) 0.9374 1.3687 0.6110 Position in Opening Position AUD (current) (Current) Bank B Ask 0.6957 RMIT Classification: Trusted Net Trades Net Position (Expected) Mid 0.7956 0.6426 1.5567 0.5713 1.7712 92.81 1.0614 1.2141 134.93 0.8841 139.80 163.10 0.9334 1.0043 1.1699 0.9377 1.3691 0.6113 Net Position in AUD (Expected) Bank C Ask 0.6959 0.6428 1.5568 0.5719 1.7715 92.86 1.0619 1.2146 134.95 0.8845 139.87 163.15 0.9329 0.9337 Bid 0.6956 0.6424 1.5560 0.5712 1.7705 92.79 1.0612 1.2138 134.90 0.8837 139.77 163.05 1.0036 1.0047 1.1693 1.1700 0.9375 0.9381 1.3687 1.3694 0.6111 0.6115 Change in Position (AUD) Mid 0.6958 0.6426 1.5564 0.5716 1.7710 92.83 1.0616 1.2142 134.93 0.8841 139.82 163.10 0.9333 1.0042 1.1697 0.9378 1.3691 0.6113/nCurrency AUD CAD CHF KMIT Classification: Trusted Opening Position Position in AUD (current) (Current) EUR GBP JPY NZD USD Net Position (AUD) Table 2: FX portfolio position summary Currency AUD GBP CAD EUR NZD CHF JPY USD Net Trades Net Position (Expected) sign (e.g. a Note: Indicate long positions with a positive sign and short positions with a negative short position of 45,000,000 GBP should be indicated as -45,000,000). Mid rate (bid rate + ask rate)/2 Benchmark Interest Rates 1-Month Bank Bill Swap Rates 1-Month GBP LIBOR 1-Month Treasury Bills 1-Month Euro LIBOR 1-Month Bank Bill Yields 1-Month CHF LIBOR 1-Month JPY LIBOR 1-Month USD LIBOR Table 3: Benchmark interest rates on 15 Aug, 2023. Net Position in AUD (Expected) BAFI1005 Financial Markets and Institutions - Group FX Assignment (Stage 2) Change in Position (AUD) 1-Month Benchmark Rates 0.286 0.348 0.487 -0.110 0.266 -0.144 0.452 0.459/nComm/Terms Bid 0.9345 1.2158 RMIT Classification: Trusted Ask 0.9349 1.2165 AUD/CAD GBP/USD NZD/USD 0.6014 0.6103 Table 4: Actual forward FX rates for the 15th Sep 2023. Opinion (over/under fairly valued) BAFI1005 Financial Markets and Institutions - Group FX Assignment (Stage 2) Suggested Strategy/nRMIT Classification: Trusted Formatting & Presentation [2 marks] The report must be professionally presented using Times New Roman, size 12 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 3000 words applies with a tolerance of + 10%, excluding appendices and tables. Submission 1. Students are required to register their groups online via Canvas. 2. 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. 3. 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 BAFI1005 Financial Markets and Institutions - Group FX Assignment (Stage 2)/nBAFI1005 Financial Markets and Institutions - Group FX Assignment (Stage 2) RMIT Classification: Trusted 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 considerations is available at https://www.mit.edu.au/students/student-essentials/assessment-and- exams/assessment/extensions-of-time-for-submission-of-assessable-work

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