Bafi1002 Financial Markets Assignment Sample Answers

• Internal Code :
• Subject Code : BAFI1002
• University : royal melbourne institute of technology
• Subject Name : Accounting and Finance

Executive Summary of Financial Markets

This study focuses on the current conditions prevailing in the exchange rates between the US and the Australian dollar. It studies the history of relationship of exchange rates between the two currencies and the conditions that presently prevail, especially after the world has been hit by the health disaster.

The study then further tries to draw out the way Australian dollars, in this current plight, can manage some relief by clinging to investing in shares that have an exposure to the US dollars, and tries to draw out the portfolio for the same.

Contents

Executive Summary.

Introduction.

Literature review..

Question 2.

Question 3.

References.

Introduction to Financial Markets

In this study, the currency pair of USD/AUD has been considered. This currency set of the US dollar vs Australian dollar is often represented as a commodity coupling. This implies that it comprises of currencies from nations with the substantial measures of raw material traded across the borders. (Pankratyeva, 2020). Although, for past few months, given the economy instability at the global level, the currency pair of the USD and AUD have been on a roller-coaster. Prior to that, owing to the economic problems in the past decade, the exchange rate between the two was very volatile. But all this is predicted to change in the coming few months.

Literature Review of Financial Markets

The lowest plunging of the Australian dollars was not observed since the 2002 currency movements that have ended up setting a deep impact on the operations of many investment companies. Yet, in trying to be stabilizing the market, the AUD/USD exchange rate has dropped as considerably as 25% than in the previous year, tumbling from roughly seventy seven US cents in the previous year, down to almost fifty seven US cents currently.

The current financial fallout due to the global health pandemic of Coronavirus has led to severe decline of the Australian dollar which has been showing dire effects specially on the businesses that depend upon importing the goods from abroad to the Australian region. However, on the silver lining, there is a prediction that the investment in the shares that have an exposure to the US dollars could offer a little support and heads up to the currency, especially when the Australian dollar seems to be on the freefall. (SelfWealth, 2020).

Some key considerations would have to be undertaken while considering the investment portfolio planning, to derive the benefits to already weakened AUD base:

• The movement of interest rates: The central banks of the nations globally, at present, have embarked upon providing what is practically an extra ordinally levels of stimulus funding in their respective countries, due to this, the Australian dollar has been trapped in the antagonism as an exchange of currency is vulnerable to such movements.
• Currency hedging and reporting: A lot of times when companies generate the revenue in the US dollar, the major benefit is received after the conversion to the feebler Australian dollar. The other thing to be considered is that the intension of hedging strategy is used for normalizing the impact of the currency movements which may lead to shortfalls instead of the gains if not hedged. Also, the companies reporting in the USD will often report dividends too in the same currency which also provides leverage.
• Other concerns: The companies may deem to have a strong benefit from the foreign exchange especially the ones benefitting from the investing of shares with a strong USD stand. For this, the things like debt levels, cash flow and other marginal criteria need to be considered before investment. Particularly in the times like these when the global economy is crashing.

Financial Markets - Question 2

The above coloured cells in the table are calculated values or are the implies bis, ask and mid rates

AUD/EUR = AUD/USD * USD/EUR = 0.6135 * 1/1.1063 = 0.5546 (Bid Rate)

AUD/EUR = AUD/USD * USD/EUR = 0.6140 * 1/1.1064 = 0.5550 (Ask Rate)

AUD/EUR = (Bid rate + Ask rate)/2 = (0.5546 + 0.5550)/2 = 0.5548 (Mid Rate)

AUD/GBP = AUD/USD * USD/GBP = 0.6135 * 1/1.2437 = 0.4933 (Bid Rate)

AUD/GBP = AUD/USD * USD/GBP = 0.6140 * 1/1.2441 = 0.4935 (Ask Rate)

AUD/GBP = (Bid rate + Ask rate)/2 = (0.4933 + 0.4935)/2 = 0.4934 (Mid Rate)

GBP/JPY = GBP/USD * USD/JPY = 1.2437 * 107.9 = 134.1952 (Bid Rate)

GBP/JPY = GBP/USD * USD/JPY = 1.2441 * 109.93 = 134.2757 (Ask Rate)

GBP/JPY = (Bid rate + 6Ask rate)/2 = (134.1952 + 134.2757)/2 = 134.2355 (Mid Rate)

In the first case with AUD currency the opening position is 400,000,000 and the net trade is 154,400,000 using the ask rate. Then the net position in AUD using the mid-rate is 150,749,280 and the change in position in AUD is 3,650,720. This continues for each currency pair. Finally, the Net Position (AUD) of all the currencies is 1,862,000,000. It can be said that there is exposure to currency risk if the rates are not same.

Financial Markets - Question 3

Using either currency pairs of AUD/USD and AUD/GBP simultaneously with their respective bid and ask rates, there are arbitrage opportunities available in both the currency pairs. In the first case the profit generated in 100,000 and in the second case profit generated if 48,659.36 and the total profit generated is 148,659.36. One strategy is to sell the overvalued currency pair and buy the undervalued currency pair thereby lock in the profit immediately.

References for Financial Markets

Damodaran, A. (2015). In A. Damodaran, Country Risk : Determinants, Measures and Implications.

Fabozzi, F. J. (Third Edition). Foundations of Financial Markets ans Institutions. Pearson. References

Pankratyeva, A. (2020). AUD/USD forecast 2020: consider investing in Australian dollar to US dollar currency pair.

SelfWealth. (2020). Investing in Shars with Exposure to the US Dollar. Retrieved from self wealth.com.au: https://www.selfwealth.com.au/investing-in-shares-with-exposure-to-the-us-dollar/

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