You have just started your new job at a prominent investment bank. As part of your initial training, you have been assigned to a six-month rotation in the currency trading division. You are excited but nervous. Your firm has put you in charge of a trading account with $1,000,000 in it. Your supervisor wants to see what you can do to invest the amount over the next six months. You will be judged not only upon the final balance (i.e. earnings on the $1MM) but also on your creativity (number of ideas) and your assessment of risks. You are anxious to make a good impression!

The case details and problems are in the attachment below:

1a. You note that an investment in US Treasuries is currently yielding 2%. That is always an option of where you can park your trading account. You also see some current F/X quotes from some of the other banks where your firm has set up trading relationships. You see quotes on Russian rubles versus USD, and you also note a quote on rubles versus Mexican pesos. Spot USD/RUB 63.8302 - (you know this means one USD is currently worth 63.8302 rubles) - this quote is from JP Morgan USD/MXN 19.4231 from Citi - so you can trade one USD for 19.4231 Mexican pesos MXN/RUB 3.3309 from Credit Suisse is also on your screen. You do the math to compute the cross rate and decide that there is a profitable arbitrage strategy here. Describe the strategy and the expected profit opportunity. You want to impress your supervisor. 1b. You look at the current yield of investing rubles with the safest banks located in Russia. You see an annual yield of 7.00% for a six-month investment - much better that the 2.00% available in USD. You then check out the spot and forward rates. Spot USD/RUB 63.8302, 3-month USD/RUB 64.8190, 6-month 65.2010. You see there is a possible covered interest arbitrage trade to be done here. Describe the trade and the profit potential for your new boss. 1c. An analyst at your firm has been looking at the fundamentals of the Russian market. According to her research, Russia is going to incur a surprising surplus over the next six months. As a result, her analysis suggests that the exchange rate between the USD and ruble should stay equal to where it is today! If you utilize this analysis, suggest an uncovered interest arbitrage trade that could be done and demonstrate the potential profit to your boss if the exchange rate does not change over the six months. 1d. Although you are showing a number of possible strategies here, you are worried that the return is too meager and your supervisor will feel you're not cut out for this work. You remember that there is much more potential leverage (greater possible upside with more risk) by dealing in options. You see that you can buy a put option that allows you to sell USD for rubles (effectively a put on USD and a call on rubles) in six months at an effective rate of 65.25 rubles per dollar (the strike price). Each contract is for 2,500,000 rubles and the price of the option (the premium) is .000730 per ruble. You figure out how many contracts you could purchase and the profit potential if the analyst at your firm is correct and the exchange rate does not change over the next six months. You also compute the return if the forward rates turn out to be correct and the ruble depreciates in value (in this case, what if the forward rate is not only unbiased but accurate!?). You describe the possible trade and the two possible outcomes to your boss. 1e. Your boss tells you that this is all very interesting but you need to make a decision. What option do you think delivers the \"best\" possible outcome given the level of risk? What is your recommendation for implementation? (You can select up to two strategies in combination, and remember that investing in US Treasuries is always an option as well.) 2. Six months have passed and not only was your firm's analyst on to something, but she underestimated the strength of the ruble. The spot rate at the end of six months is USD/RUB 63.2112 The ruble appreciated against the USD (slightly). Assess your trading strategy that you implemented in 1e. Go over the actual results (what is your final balance in the account?) with your boss and demonstrate why the strategy you put in place was sound, profitable and properly accounted for risks (if you can!). 3. Alternate ending: Six months have passed and the analyst at your firm was way off the mark. In fact, she was terminated about 3 months ago and she is still out of a job. In reality, the ruble took a dive against the dollar. The spot rate at the end of your six months is USD/RUB 68.9230 Assess your trading strategy that you implemented in 1e. Go over the actual results (what is your final balance in the account?) with your boss and demonstrate why the strategy you put in place was sound, profitable and properly accounted for risks (if you can!). 4. Did you come up with a strategy that you can defend in both states of the world (ruble stronger or weaker than expected)? Are you still employed at the firm