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.

Question 3 [6 marks]

The firms 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 exchange rates in table 4 and 5. Suppose that the actual forward rates for the end of October 2020 are as follows:

Comm / Terms	Bid	Ask	Opinion (over/under/ fairly valued)	Suggested Strategy
AUD/CAD	0.9447	0.9455
GBP/USD	1.3100	1.3105
NZD/USD	0.6510	0.6513

Table 5: Actual forward FX rates for the end of October 2020.

Inform the company whether the commodity currencies listed in Table 5 are over-, under-, or fairly valued compared to the implied forward rates estimated in Table 4 [1.5 Marks], and what is your suggested strategy to the top management (buy or sell the commodity currency)? [1.5 Marks]. If there is any arbitrage opportunity available between the implied forward rates estimated in Table 4 and the actual forward rates listed in Table 5, 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 Table 4 [1 Mark].

Table 4:

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/GBY	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	1.99911212
NZD/USD	1.000033	0.99996678	1.00000000