Homework answers / question archive / RMIT Classification: Trusted BAFI1002 Financial Markets – Group Assignment (Stage 2) Semester 2, 2021 Due Date: 1st October (Friday Week 10), 5 PM (Melbourne Time) Weighting: 20% Overview Your team works for a renowned FX trading company, Snowy River Ltd

RMIT Classification: Trusted BAFI1002 Financial Markets – Group Assignment (Stage 2) Semester 2, 2021 Due Date: 1st October (Friday Week 10), 5 PM (Melbourne Time) Weighting: 20% Overview Your team works for a renowned FX trading company, Snowy River Ltd

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RMIT Classification: Trusted BAFI1002 Financial Markets – Group Assignment (Stage 2) Semester 2, 2021 Due Date: 1st October (Friday Week 10), 5 PM (Melbourne 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 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 scenarios: Scenario 1 Speculation [5 marks] Select two of the three/four market views developed by your team in stage 1, and use the market views to devise speculation strategies that enables 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 as of 1st August 2021. 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 AUD/GBP and decided to short the EUR and long GBP, then you have been allocated 400,000,000 EURs and 400,000,000 AUDs 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 two currency pairs based on your stage 1 market view. You must then take long and short positions as of 1st August 2021 in the respective currencies in accordance with your market view as a price taker. In the report, you are requested to provide a BAFI1002 Financial Markets – Group FX Assignment (Stage 2) RMIT Classification: Trusted brief summary of your market views before demonstrating your long/short speculation strategy. [2.5 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 [2.5 Marks]. Mid rate = (bid rate + ask rate)/2 Scenario 2 Risk Assessment [6 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 scenario 1. For this purpose, the firm’s foreign currency analyst has provided you with the 2-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 two currency pairs you selected [1 Marks]. You must then calculate the value of your FX portfolio at the end of September 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 September, 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? [2 Mark]. BAFI1002 Financial Markets – Group FX Assignment (Stage 2) RMIT Classification: Trusted Scenario 3 Arbitrage [7 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 for the end of September 2021 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)? [2 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]. BAFI1002 Financial Markets – Group FX Assignment (Stage 2) RMIT Classification: Trusted Currency 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 EUR/CHF GBP/CHF USD/CHF USD/CAD NZD/USD Bid 0.7355 0.6225 1.6063 0.5313 1.8808 80.80 1.1814 1.3839 109.93 0.8538 129.79 152.09 0.9332 1.0839 1.2696 0.9176 1.2689 0.7113 Bank A Ask 0.7357 0.6227 1.6066 0.5316 1.8813 80.83 1.1816 1.3843 109.94 0.8543 129.83 152.14 0.9335 1.0848 1.2701 0.9179 1.2693 0.7114 Mid 0.7356 0.6226 1.6065 0.5315 1.8811 80.82 1.1815 1.3841 109.94 0.8541 129.81 152.12 0.9334 1.0844 1.2699 0.9178 1.2691 0.7114 Bid 0.7354 0.6223 1.6063 0.5310 1.8808 80.78 1.1811 1.3837 109.90 0.8536 129.75 152.04 0.9330 1.0837 1.2695 0.9174 1.2687 0.7110 Table 1: Exchange rates on 1st August, 2021. Mid rate = (bid rate + ask rate)/2 BAFI1002 Financial Markets – Group FX Assignment (Stage 2) Bank B Ask 0.7357 0.6229 1.607 0.5316 1.8816 80.84 1.1816 1.3844 109.95 0.8545 129.84 152.16 0.9338 1.0848 1.2702 0.9180 1.2694 0.7116 Mid 0.7356 0.6226 1.6067 0.5313 1.8812 80.81 1.1814 1.3841 109.93 0.8541 129.80 152.10 0.9334 1.0843 1.2699 0.9177 1.2691 0.7113 Bid 0.7356 0.6224 1.6060 0.5312 1.8805 80.79 1.1812 1.3838 109.90 0.8537 129.77 152.05 0.9329 1.0836 1.2693 0.9175 1.2687 0.7111 Bank C Ask 0.7359 0.6228 1.6068 0.5319 1.8815 80.86 1.1819 1.3846 109.95 0.8545 129.87 152.15 0.9337 1.0847 1.2700 0.9181 1.2694 0.7115 Mid 0.7358 0.6226 1.6064 0.5316 1.8810 80.83 1.1816 1.3842 109.93 0.8541 129.82 152.10 0.9333 1.0842 1.2697 0.9178 1.2691 0.7113 RMIT Classification: Trusted 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 2-Month Benchmark Rates (%) 0.095 Currency Benchmark Interest Rates AUD 2-Month Bank Bill Swap Rates 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 August 1, 2021. BAFI1002 Financial Markets – Group FX Assignment (Stage 2) RMIT Classification: Trusted Opinion Comm / Terms Bid Ask AUD/CAD 0.9345 0.9349 GBP/USD 1.3858 1.3865 NZD/USD 0.7014 0.7103 Table 4: Actual forward FX rates for the end of September 2021. BAFI1002 Financial Markets – Group FX Assignment (Stage 2) (over/under/ fairly valued) Suggested Strategy RMIT Classification: Trusted 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 2500 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 BAFI1002 Financial Markets – 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 consideration https://www.rmit.edu.au/students/student-essentials/assessment-andexams/assessment/extensions-of-time-for-submission-of-assessable-work BAFI1002 Financial Markets – Group FX Assignment (Stage 2) is available at help me finish the part 2 Scenario 2 Risk Assessment [6 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 scenario 1. For this purpose, the firm's foreign currency analyst has provided you with the 2- 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 two currency pairs you selected [1 Marks]. You must then calculate the value of your FX portfolio at the end of September 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 September, 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? [2 Mark]. ATTACHMENTS