Question

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

Currency	Benchmark Interest Rates	2-Month Benchmark Rates (%)
AUD	2-Month Bank Bill Swap Rates	0.095
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 22, 2020.

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.

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

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 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? [1 Mark].

Answer 1

in this case we use the formula for forward rates without the exchange rate Ta/B.

for the ASK we only divide ASK=1 / BID

Comm / Terms	Bid	Ask	Mid
AUD/USD		0,998173	1,00183044	1,00000167
AUD/EUR		1,009915	0,99018221	1,00004867
EUR/AUD		0,990182	1,00991513	1,00004867
AUD/GBP		1,000366	0,99963391	1,00000007
GBP/AUD		0,999634	1,00036622	1,00000007
AUD/JPY		1,002569	0,99743739	1,00000329
EUR/USD		0,988373	1,01176372	1,00006839
GBP/USD		0,997807	1,00219733	1,00000241
USD/JPY		1,004413	0,99560671	1,00000969
EUR/GBP		0,990545	1,00954542	1,00004513
EUR/JPY		0,992726	1,00732712	1,00002665
GBP/JPY		1,002202	0,99780267	1,00000242
AUD/CAD		0,999086	1,00091522	1,00000042
EUR/CHF		1,004202	0,99581548	1,00000879
GBP/CHF		1,013788	0,98639988	1,00009376
USD/CHF		1,016015	0,98423719	1,00012622
USD/CAD		1,015087	0,98513716	1,00011212
NZD/USD		1,000033	0,99996678	1,00000000

• In this case, the rates inherent to AUD are subtracted and then the net profit or share of these calculations is obtained.

	-    0,019733
0,003658	-    0,019733
0,001830	-    0,000732
0,005487	-    0,040198
profit rate	lost rate
0,005487	-    0,040930
net loss	-    0,035443

• strong change table

Comm / Terms
AUD/USD	AUD
AUD/EUR	EUR
EUR/AUD	EUR
AUD/GBP	GBP
GBP/AUD	GBP
AUD/JPY	JPY
EUR/USD	EUR
GBP/USD	GBP
USD/JPY	JPY
EUR/GBP	EUR
EUR/JPY	EUR
GBP/JPY	JPY
AUD/CAD	AUD
EUR/CHF	CHF
GBP/CHF	CHF
USD/CHF	CHF
USD/CAD	CAD
NZD/USD	USD

• Speculations for the month, do not generate profits for the company, on the contrary, the value of the currency in the two months is devalued in most changes, therefore the acquisition of the portfolio at a present value will generate a loss due to exchange rates compared to AUD

• The directives should maintain or carry out futures operations with stable rates to maintain and avoid the validity of the exchange rates with respect to the AUD