Assignment Paper

BANK 3011 International Currency and Banking Markets
Assignment 2 (Project) SP 5, 2020
You are given foreign currency forecasts for a number of currency pairs in Table 1. This data is to be
used for answering the questions that follow. The quoting convention is the base currency/quote
currency format. Additional data for the project (as required) may be sourced from internet sources
such as:
https://au.investing.com/rates-bonds/forward-rates
https://au.investing.com/currencies/
https://tradingeconomics.com/country-list/interest-rate
Government Bond Price may be sources from:
https://www.wsj.com/market-data/quotes/bond/BX/TMBMKAU-03Y/historical-prices
https://www.wsj.com/market-data/quotes/bond/BX/TMBMKAU-01Y/historical-prices
https://www.wsj.com/market-data/bonds/governmentbonds
On-campus students may choose to obtain spot rate data from the IRESS trading room.
Table 1: Foreign currency Forecasts: Source NAB September 28, 2020
Question 1 (60 marks)
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.
Required
(a) (i) Obtain spot rates for five currency pairs chosen from those listed in table 1. Please specify
the date and time at which you obtained the quotes. (5 marks)
ii)) Which currency pairs indicate profit opportunities if you buy at the spot rate indicated in your
answer a) and sold at the predicted rate shown in table 1? (3 marks)
iii) Which currency pair gives the highest rate of return? (2 marks)
b) (i) Obtain forward rates for five chosen currency pairs from table 1 with a maturity of September
2021. (5 marks)
(ii) Compare the forward rates obtained in b) (i) above to the predicted spot rate in Table 1.
Assuming that the predictions in Table 1 are accurate, does it point to profit making opportunities?
That is can you buy at the forward rate and sell at the forecast spot rate to make a profit?
Alternately, can you sell at the forward rate and buy at the predicted spot rate to make a profit?
Assume that you have AUD 1 million for the trade and show your profit calculations for three
currency pairs. (15 marks)
c) Choose three currency pairs with AUD on one side. Obtain the government interest rates for the
three foreign countries on the other side of the forex quotes. 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. (30 marks)
Question 2 (20 marks)
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. Assuming that the forecasts
given in table 1 are accurate and using the forward rates for AUD/USD and AUD/JPY, does it make
sense to hedge a) your payable in USD; b) your receivable in JPY? Illustrate with data obtained from
internet sources / IRESS trading room. You may use forwards/futures/options on the relevant
currency pairs (if available). (20 marks)
Question 3 (recommended total word limit 500 words) (20 marks)
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. (10 marks)
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? (10
marks)