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 scenario 1. For this purpose, the firm’s foreign currency analyst has provided you with the 2-month benchmark rates of these major currencies.
Using the interest rates in Table 3, calculate the implied forward bid, ask and mid rates for the two currency pairs you selected [1 Marks]. You must then calculate the value of your FX portfolio at the end of September 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.
Explain your final portfolio position to the senior manager. Given the implied forward rates for September, 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? [2 Mark].
Sample Solution
