Topic: Discuss the second part of the assignment and the required contents of the Forex Report.

Introduction:

This is a written report authorised by Snowy River Ltd to deliver and improve the trading strategy for a renowned FX trading company. Due to the high market uncertainty caused by the coronavirus pandemic so that its profitability can be enhanced in the upcoming future.

BAFI1002 Financial Markets – Group Assignment (Stage 2)

Scenario 1: Speculation

Stage 1 Market View Summary:

The first pair of currencies that we analyzed in stage 1 market view report was Canadian Dollar and Swiss Franc (CAD/CHF). In which we relatively evaluated the interest rate, inflation rate, GDP growth and balance of payment in both countries. Our analyses concluded that the Canadian Dollar would depreciate against the Swiss Franc keeping other things constant. The second pair of currencies that we analyzed in stage 1 market view was the US Dollar and Japanese Yen (USD/JPY). After evaluation of interest rate, inflation, and economic growth of both countries we concluded that the Japanese Yen will likely appreciate against the US Dollar.

Conclusion 1: Canadian Dollar will depreciate against Swiss franc.

Conclusion 2: US Dollar will depreciate against Japanese Yen.

Speculative Strategy:

We take a long position in any asset. We expect the asset value to be increased so that we can sell it at a higher price and make profits. Oppositely we take a short position when we expect the asset value to decrease in future. In short position investors borrow the asset and sell it immediately and when the asset price decreases, they buy it again at a lower price and return it to the lender with some interest. Long Position in Swiss Franc and Japanese Yen (buy CHF and JPY and hold it) because our stage 1 market views suggest that these both will appreciate. We also take short positions in Canadian Dollar and US Dollar that is we borrow and then sell them. Because we expect these two will depreciate so will buy and repay once they become cheaper.

Portfolio Opening Position on 1^st August 2021:

Scenario 2: Risk Assessment

Scenario 3: Arbitrage

Table 4: Actual forward FX rates for the end of September 2021.

●      ⨍AUD/CAD = 0.9334*{[1+0.095*(60/365)]/[1+0.15*(60/365)]}=0.9251

As implied forward rate for AUD/CAD is lower than the bid and ask price (Actuarial forward rate), the commodity currency of AUD is overvalued. Hence, the strategy of buying AUD at implied rate and selling it at actuarial forward rate can be undertaken so that buy at a lower price and sell at a price to make the profit. A FX trading company can be considered as a price taker who will buy commodity currency at the ask price of the banks and sell it at the bid price of the banks. As a result AUD should be bought from Bank B because they obtain the highest ask price and AUD should be sold to Bank B as well because they also obtain the lowest bid price.

●      ⨍GBP/USD = 1.3841* {[1+0.073*(60/365)]/[1+0.205*(60/365)]}=1.3671

As implied forward rate for GBP/USD is lower than the bid and ask price (Actuarial forward rate), the commodity currency of GBP is overvalued, Hence, the strategy of buying GBP at implied rate and selling it at actuarial forward rate can be undertaken so that buy at a lower price and sell at a price to make the profit. A FX trading company can be considered as a price taker who will buy commodity currency at the ask price of the banks and sell it at the bid price of the banks. As a result GBP should be bought from Bank C because they obtain the highest ask price and GBP should be sold to Bank B because they obtain the lowest bid price.

⨍NZD/USD = 0.7114 * {[1+0.27*(60/365)]/[1+0.205*(60/365)]}=0.7188

As implied forward rate for NZD/USD is higher than the bid and ask price Actuarial forward rate (Actuarial forward rate), the commodity currency of NZD is undervalued, Hence, the strategy of buying NZD at actuarial forward rate and selling it at implied rate can be undertaken so that buy at a lower price and sell at a price to make the profit. A FX trading company can be considered as a price taker who will buy commodity currency at the ask price of the banks and sell it at the bid price of the banks. As a result NZD should be bought from Bank B because they obtain the highest ask price and NZD should be sold to Bank C as they obtain the lowest bid price.

In Comparison to the implied forward rate and actual forwards rate from three banks. I will trade with Bank A, as Bank A has the lowest value of ask rate for GBP/USD and AUD/CAD to buy. It also has the highest bid rate of 0.7113 for NZD/USD to sell. Due to exchange rate, the strategy for the tip management is to buy GBP/USD and AUD/CAD at Bank A ask rate and sell NZD/USD at Bank A bid rate.

Calculation of Arbitrage profit between exchange rates:

 In the arbitrage  opportunity between the implied forward rate and the actual forward rate in Table 4. There are overvalued and undervalued currencies between markets and to buy low and then sell high. The price taker of 50,000,000 units of currency, the most profitable opinion from three pairs of currencies is GBP/USD. It is stated as the highest currency pairs compared to the other pairs because the USD Net Profit is at 1045798.7739

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