BAFI1002 Financial Markets – Group Assignment (Stage 2)
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 firm’s chief trading executive, Pete Fernandes, has requested your team’s 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 scenarios:
Scenario 3 Arbitrage [7 marks]
The firm’s 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 implied forward rates and actual forward rates. Suppose that the actual forward rates for the end of September 2021 are as presented in Table 4.
Calculate the implied forward rates for the given three pair currencies, and inform the company whether the commodity currencies listed in Table 4 are over-, under-, or fairly valued compared to the implied forward rates you calculated [2 Marks], and which bank will you trade with and what is your suggested strategy to the top management (buy or sell the commodity currency)? [2 Marks].
If there is any arbitrage opportunity available between the implied forward rates and the actual forward rates listed in Table 4, 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 implied forward rates [1 Mark].
|Currency Pairs||Bank A||Bank B||Bank C|
|Comm / Terms||Bid||Ask||Mid||Bid||Ask||Mid||Bid||Ask||Mid|
Table 1: Exchange rates on 1st August, 2021. Mid rate = (bid rate + ask rate)/2
|Currency||Opening Position (current)||Position in AUD (Current)||Net
|Net Position (Expected)||Net Position in AUD (Expected)||Change in Position (AUD)|
|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
|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 1, 2021.
|Comm / Terms||Bid||Ask||Opinion
(over/under/ fairly valued)
Table 4: Actual forward FX rates for the end of September 2021.
Formatting & Presentation [2 marks]
The report must be professionally presented using Times New Roman, size12 font, double-spaced for the main text, and single spaced for tables, figures & appendices. Figures and graphs should be clearly labelled and numbered. Any information obtained from sources external should be referenced according to AGPS Harvard Style or APA style. A word limit of maximum of 2500 words applies with a tolerance of + 10%, excluding appendices and tables.
- Students are required to register their groups online via Canvas.
- Go to the course site on Canvas. Submit your assignment under the submission point. Only one submission is required per group. It’s the responsibility of the group members to ensure that the assignment is submitted on time.
- The report must have the university prescribed cover sheet and the following details:
- Student names and student numbers of those who have contributed to the report
- FX Session attended
- Assignment Group Number
- Name of FX Session Instructor
Feedback & Marking
A rubric with marking criteria will be made available on Canvas. You are strongly encouraged to ask questions during the FX sessions and other learning activities so that you can obtain feedback on your understanding of the concepts and issues being discussed. FX sessions running in week 8 will focus specifically on the discussion of this assignment and related concepts. Questions specific to this assessment should be addressed to your session instructor. Contact details can of all instructors can be found on Canvas
Late submissions of assignments without special consideration or extension will be automatically penalised at a rate of 10% of the total marks available per day (or part of a day) late. For example, if an assignment is worth 20 marks and it is submitted 1 day late, a penalty of 10% or 2 marks will apply. This will be deducted from the assessed mark. Assignments will not be accepted if more than five days late, unless special consideration or an extension of time has been approved.
Special consideration is available for unexpected circumstances outside students’ control. For more. More information regarding special consideration is available at https://www.rmit.edu.au/students/student-essentials/assessment-and-exams/assessment/extensions-of-time-for-submission-of-assessable-work