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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

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 firms 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

0.7162

0.7164

0.7163

AUD/EUR

0.6063

0.6067

0.6065

EUR/AUD

1.6487

1.6490

1.6489

AUD/GBP

0.5470

0.5473

0.5472

GBP/AUD

1.8276

1.8281

1.8279

AUD/JPY

75.7308

75.7608

75.7508

EUR/USD

1.1809

1.1813

1.1811

GBP/USD

1.3090

1.3095

1.3093

USD/JPY

105.7341

105.7641

105.7541

EUR/GBP

0.9018

0.9023

0.9021

EUR/JPY

124.8795

124.9195

124.8995

GBP/JPY

138.4200

138.4700

138.4500

AUD/CAD

0.9433

0.9441

0.9437

EUR/CHF

1.0746

1.0755

1.0751

GBP/CHF

1.1913

1.1922

1.1918

USD/CHF

0.9101

0.9103

0.9102

USD/CAD

1.3174

1.3178

1.3176

NZD/USD

0.6538

0.6541

0.6540

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 its 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].

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