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 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/JPY7 5.73087 5.76087 5.7508
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 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].