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 firms chief trading executive, Pete Fernandes, has requested your teams 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 questions:

Question 1 [5 marks]

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 22^nd of August 2020. This portfolio will comprise of the currency pair analysed in your market view.

Comm / Terms	Bid	Ask	Mid
AUD/USD	0.7161	0.7163	0.7162
AUD/EUR	0.6069	0.6073	0.6071
EUR/AUD	1.6471	1.6474	1.6473
AUD/GBP	0.5470	0.5473	0.5472
GBP/AUD	1.8275	1.8280	1.8278
AUD/JPY	75.75	75.78	75.77
EUR/USD	1.1795	1.1799	1.1797
GBP/USD	1.3087	1.3092	1.3090
USD/JPY	105.78	105.81	105.80
EUR/GBP	0.9010	0.9015	0.9013
EUR/JPY	124.79	124.83	124.81
GBP/JPY	138.45	138.50	138.48
AUD/CAD	0.9432	0.9440	0.9436
EUR/CHF	1.0750	1.0759	1.0755
GBP/CHF	1.1929	1.1938	1.1934
USD/CHF	0.9115	0.9117	0.9116
USD/CAD	1.3175	1.3179	1.3177
NZD/USD	0.6539	0.6542	0.6541

Table 1: Exchange rates on August 22, 2020. Mid rate = (bid rate + ask rate)/2

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 22^nd 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

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