Foreign currency Forecasts

Question 1
You are given foreign currency forecasts for a number of currency pairs in Table 1. You are a forex trader and wish to use the forecasts for September 2021 to make a profit.
a) First obtain spot quotes (both bid and ask) from an internet source for at least five currency pairs. Please specify the date and time at which you obtained the quotes. Identify currency pairs that indicate a profit potential. What is the rate of return you can achieve by trading on this currency pair?

b) Obtain forward rates from an internet source for the five chosen currency pairs with a maturity of September 2021. Using these forward rates, actual spot rates and the predicted spot rates in Table 1, find out if you can make a profit. You can assume that the September 2021 forecasts are accurate. To illustrate you may assume that you have AUD 1 million for your trades.

c) Choose three currency pairs with AUD on one side. Obtain the government interest rates for
the three foreign countries. Using this data in addition to those obtained in a) and b) above,
verify if interest rate parity holds. You may draw additional data if required.

Question 2
You are a CFO of an Australian company with a liability of USD 1 million due in December 2021. You have receivables of 10 million Japanese yen due in December 2021. Given the forecasts given in table 1 and the forward rates obtainable for these currency pairs, does it make sense to hedge a) your payable in USD; b) your receivable in JPY? Illustrate with data obtained from internet sources. You may use forwards/futures/options on the relevant currency pairs (if available)
Question 3  (recommended total word limit 350 words)
a) In generating their forex forecasts, NAB economists would have made a number of assumptions. These may or may not hold. For instance, take the AUD/USD forecast. Outline factors or events that may render the forecasts inaccurate.

b) In question 2, we looked at exposures of an Australian company in major currencies such as USD and JPY. If the firm had exposures in currencies such as Brazilian Real or Indonesian Rupiah, what options does the firm have in terms of hedging/foreign exchange risk management?

Sample Solution

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