Beruflich Dokumente
Kultur Dokumente
Latifa Al Fadhel
5/8/2015
BSB 7302 International Finance -Group Project
Contents
Executive summary................................................................................3
2.0 Introduction........................................................................................4
3.0 Hedging strategy..............................................................................5
3.1 Euro Payment Hedging Strategy.......................................................................5
3.2 JPY Payment Hedging Strategy..........................................................................5
3.3 GBP Payment Hedging Strategy........................................................................6
3.4 JPY Payment Hedging Strategy..........................................................................6
3.5 KWD Payment Hedging Strategy.......................................................................6
4.0 Outlook and Research.......................................................................7
4.1 Factors affecting the Value of the currency.......................................................7
4.2 Currency pairing................................................................................................ 8
4.2.1 USD............................................................................................................. 8
3.2.2 EUR/USD (Euro against 1 USD)....................................................................8
4.2.3 GBP/USD (British Pound against 1 USD)......................................................9
4.2.4 USD/JPY (Yen against 1 USD).....................................................................10
4.2.5 USD/KWD (KWD against 1 USD)................................................................11
4.3 Technical Analysis............................................................................................ 12
5.0 Evaluation......................................................................................13
5.1 Calculations..................................................................................................... 13
5.2 Hedging Strategy............................................................................................ 13
5.2.1 Euro Payment Hedging Strategy Calculations...........................................13
5.2.2 JPY First Payment Hedging Strategy Calculations......................................14
5.2.3 GBP Payment Hedging Strategy Calculations............................................15
5.2.4 JPY second Payment Strategy Calculations................................................16
5.2.5 KWD Payment Receivable Strategy Calculations.......................................16
5.3 Investment Opportunity..................................................................................17
5.3.1 The Investment Strategy for the Euro Payment........................................17
5.3.2 The investment Strategy for the JPY Payment...........................................18
5.3.3 The investment Strategy For the GBP Payment........................................18
5.3.4 The investment Strategy For the JPY second Payment..............................18
6.0 Suggestions...................................................................................19
7.0 Summary and Conclusion................................................................19
References...........................................................................................20
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Appendices..........................................................................................21
Executive summary
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The following report consists of four main parts that has to do with the
applying of currency derivatives transactions for the purpose to obtain a hedging
position. The four parts of the report are structured as the following: Hedging
strategy, Outlook and Research, Evaluation and Suggestions.
With regards to the Hedging strategy, we have performed the following
transactions: USD/EUR call option contract, USD/JPY forward contract, USD/GBP Call
option Contract, USD/JPY Forward Contract, and USD/KWD Forward Contract.
Regarding the outlook and research, a clear analysis and evaluation have been
conducted regarding the gathered research of USD currency movements against the
other mentioned currency movements. Graphs showing the movements of the
currencies have been gathered for long (5Years) horizons. Based on their movement
against the USD, a series of transaction have been brought up for the opportunity to
hedge the outflow and inflow payments.
The outlook and research, that included figures chats and trend analysis, has
been conducted on the currencies made aided is in deciding which hedging
strategies should be applied. Analyzing the currency rates during the last five years
from the obtained graphical statistics, it is clear that the figures have stated that all
of the currencies that has to do with the companys transactions were appreciating
against the USD currency. Various methods have been analyzed for the purpose of
resistance
measurement
for
the
strategy
that
has
been
applied.
Post the implementation of all of the hedging strategies, we were able to evaluate
the success of four transactions as we have successfully hedged their position thus
earning the company a profit. However a loss of one transaction was resulted in the
second payment of the JPY, that is due to the misinterpretation of the trend and
numbers.
In order to boost the profit of the enterprise we invested the amount into
term deposits in UBank, for the fact that he bank offered the best rates in terms of
saving. The amount was saved for a 1 month duration in the rate of 2.35%. The
investment strategies applied has been effective as were able to make a total profit
of 65.3076.
We were able by the end of the period to have a remaining amount that is
equivalent to $6,367,181.96. This total was calculated by subtracting the total
inflows from the outflows including the investment that we have performed.
Finally based on the experience we had throughout his journey, we have
made a suggestions that will enhance and improve both the hedging and
investment strategies in the future. Moreover help is in hedging our position in a
much better manner.
3 | Page
2.0 Introduction
The following report carries out a research and asses the entry into currency
derivatives for the purpose to hedge the position of Blue Sea Cars Privet Ltd. and
benefit from the FX market. The hedging position is to be made for the series of
payments that Blue Sea Cars Privet Ltd. will make and receive over the first half of
2015. The report will be discussing the hedging strategies by shedding light on how
they will be managed in the FX market, then going over the research conducted
that helped in deriving those strategies, moving on to the evaluation of the methods
using detailed figures and tables, then last to the suggestions for the investment
strategies.
The report is to be submitted to the board meeting, having it been written by
the CFO of Blue Sea Cars Privet Ltd.
4 | Page
The reason why we chose the forward contract for this payment, is for
the fact that we can customize the contract to meet our need, in addition to
not paying a premium. Moreover another reason that we can invest the
amount assigned for this payment, until the assigned date, hence generating
extra profit that could be of a benefit for the enterprise.
3.3 GBP Payment Hedging Strategy
For the third payment we have entered into a GBP/USD call option in
order to hedge our position the best possible way. Based on the analysis and
research which we have conducted on the movement of the GBP against the
USD, it has been noticed that there has been a series of fluctuation during
the past five years. A forward contract would be suitable having such
information, but since the payment is a large in amount, we had to be
cautious. That is why we have chosen the call option contract for this
transaction, where after all we have the choice to execute the call option or
leave it. Recent dates have showed the appreciation of the GBP against the
USD, hence such movement kept up until the date of the transaction then we
execute the call option in order to obtain profit out of the transaction. (Yahoo!
Finance, "GBP/USD Quotes & Info", 2015)
Like mentioned in the first payment those are the reason why we chose
the call option, especially which its a large amount. The reason is that we
are not obliged to exercise at the end, hence if the EUR where to appreciate
we can exercise and collect our profit. Where as if it continued to depreciate
against the USD we wont exercise, and just loose our premium
3.4 JPY Payment Hedging Strategy
For the second JPY transaction we have entered into the same type of
transaction regarding the first JPY transaction which is the forward contract.
That is due to same research and analysis that we have conducted between
the movements of the JPY against the USD. However in this payment we had
to insure that we pick a date where the currency pair is at the peak, in order
to go into a forward contract.
Hence going into a forward contract will provide us with the flexibility
since its customizable.
3.5 KWD Payment Hedging Strategy
For the last payment we have entered into a forward contract in order
to obtain profit out of the inflow payment to be made to our account. The
KWD rate is currently at its highest ever since the past five years. That is why
we decided to enter into a forward contract at the current rate so that we
can guarantee our chance to make profit. Hence due to the slight
fluctuations that both currencies are encountering, hence the enterprise
secures the amount they will receive. Hence being the perfect hedging
strategy.
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7 | Page
inflation, hence increasing the value of the currency. Hence we can relate
interest rates to currency by stating, that the higher the interest rate, the
higher the value of the currency.
9 | Page
The above chart showes the currency movement through out the past five
years, we can see that the the the euro lost more than 1$ against the USD. Since
the beginning of May 2010 and Novemebr 2013 the price fluctated between
USD/EUR 0.8379 and USD/EUR 0.7436.
During those fluctuations the Euro was able to reach to its highest point at
0.8379, when the Euro appreciated against the USD. However by the end of this
year the EUR went back to depreciating again against the Dollar, reaching its lowest
point 0.6761 by the end of April 2011. The trend of fluctuating continued
throughout the years where it went between USD/EUR 0.7803 and USD/EUR 0.7458.
In 2014 the Euro continued to appreciate against the dollar reaching 0.8077.
However with all what is happening in the economy and the news researched the
currency is appeared to depreciate against the Dollar reaching to a USD/EUR1.21,
thanks to the Ukraine and the Greece crisis.
Another reason that favors the GBP lays in the kind of the rating system that
they uses, which is the floating rates. This system facilitates for traders to buy and
sell the GBP in offshore banks.
The third reason for the high demand for the GBP, is due to the currency
faces a lot of extreme and sharp fluctuations. Those extreme fluctuations are
attractive for traders due to hedging opportunities. Those fluctuations are due to
the very tight shaky monetary policy that is being implemented by the CBB. What
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resembles this shakiness is the fluctuations that has always been the case in the
GBP.
The GBP/USD currency pairing is always referred to as cable; this cable currency
is the highly traded currency in the market. The following reason is one of the most
vital reasons why the above cable currency pairing is the highest demanded:
Both paring are very impulsive and unpredictable hence being very volatility.
Hence the brokers assign higher spread quotation.
The above graph states the movement relation of the GBP/USD (Cable) during
the previous 5 years. The graph indicates fluctuations during all years. By the start
of May 2010, the USD was depreciating agaisnt the GBPuntil the end of May. Where
afterwards, it kept on appreciating against the GBP, with fluctuations of the cross
rate where it never went bloew 1.5000 during the following 4 years. Having reached
its highest rate of 1.7153 at the beginning of July 2014. Post the middle of July 2014,
the rate kept on depreciating where it reached its lowest in the beginning of April
2015 at 1.4715 with a slight increased followed by the second week of april. Based
on the following figueres that wre obtained from the graph, we can have an
understaindg on the prdeicted movement of the GBP/USD rate and establish
rational assumptions. It predicated that the rate will be facing s series of fluctiations
during this year, with a high derpreciation compared to the previous year.
rates, hence both the USD and AUD uses it in carry trades. This strategy is selling
currencies with low interest rates in order to purchase currency with a higher
interest rates.
Japan for years have been in economic slump, which they were fighting to get
out of. They tried to introduce reforms that backfired and had a negative impact on.
The first thing they did was introduce Quantitative easing that devalued the
currency, and the value of the dollar increased from 76.88 yen to 120.18 yen.
Japan was the largest holder of American treasury bills, until they were
replaced by china. They always keep their currencies lower than the USD for trade
purposes, however this was not the case since Japanese companies started to
outsource for cheaper in the countries itself.
Based on the above 5 year graph movement of the USD/JPY, we can deduce
that the rate remained above USD/JPY 90, even though it was fluctuating from the
year 2009 to 2010 between the following rates of USD/JPY 86.62 and USD/JPY 94.54.
The Japanese yen started to depreciate against the US Dollar in the end of June
reaching to its lowest point which USD/JPY 75.93 on October 2011.
Starting from the end of February 2012, the Yen start to appreciate sharply
against the USD reaching USD/JPY 93.63. This sharp increase continued until the
mid of May reaching USD/JPY 102.14. Ever since the JPY has continued appreciating
against the Yen reach USD/JPY 116.65.
Interest rate is the main component that drives the currency to move against
one another. Interest related dictates the movement of those pairs, especially that
both countries are known to trade heavily with one another.
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The above graph states the movment relation of the USD/KWD currency cross
rate of the previous 5 years. The graph indicates fluctuations during all years. On
the start of 2010, the KWD slightly depricated aginst the dollar with a rate of
0.2873 until the end of august 2011 with a rate reaching its lowest at 0.2720
agrainst the dollar. However, from that point it kept on appreciating slightly agisnt
the USD until the end of June 2014 with the rate eaching of 0.2815. afterwards, the
KWD strated to drmaticly appreciate till this day agaisnt the USD reching at its
highest rates witnessed during the last 5 years at a spot rate of 0.3022 in todays.
based on the following figueres that wre obtained from the graph, we can have an
understaindg on the prdeicted movement of the USD/KWD rate and establish
rational assumptions. It is predicted that the rate will remain stable with a slight
appreciation compared to the previous year.
This analysis takes into consideration what actually happened in the market,
rather taking what should have happened. Moreover they also consider the price of
the instrument and the volume of trading. Based on the gathered information charts
are created to be used as primary tools.
Technical analysis are established based on the following three points:
Traders depend on price charts, volume charts and many various mathematical
representations of market data. Those data will help traders make decision on when
are the entry and exist point of trade, in addition to be able to predict trends and
the strength and suitability.
It helps the investors in choosing if they want a short or long position. In other
words for example if the investor predicted that the prices, of the currency is
appreciating against another currency, they will choose a long a position.
There are many technical indicators types that are being utilized such as:
Trend
Strength
Volatility
Cycle
Momentum
5.0 Evaluation
Based on the market research and the strategies chosen, to hedge our
position against currency exchange fluctuations. Based on the Payment schedule
that that the enterprise has to make in the below table
Date
31/3/15
11/4/15
12/5/15
25/5/15
1/6/15
Curren
cy
USD
EUR
JPY
GBP
JPY
KWD
Amount
7,750,000
465,000
1,500,000
900,000
11,0000,000
175,000
We created 4 strategies that are aligned with the accounts payable and receivables,
to offset the positon of the enterprise found in the below payment.
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The Table above provides the amount that has to be paid in USD Dollars and the
strategies used to derive the amount. It also highlights the total amount outflows
and inflows that has to be made.
5.1 Calculations
In this section we are going to highlight the detailed calculations that where
performed for each strategy in order for us to derive the payment.
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traditional banks. Moreover since there costs are lower they offer better rates for
the customers. Another reason why we chose Ubank is for the reason that they have
the highest 1 month interest rate, which is equivalent to 2.35%. (AU, "Term deposits",
2015)
In order to calulcate how much profit we are ging to enerate from emtering into
Money Market, we have to use the following formula:
In order to calulcate how much profit we are ging to enerate from emtering into
Money Market, we have to use the following formula:
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In order to calulcate how much profit we are ging to enerate from emtering into
Money Market, we have to use the following formula:
In order to calulcate how much profit we are ging to enerate from emtering into
Money Market, we have to use the following formula:
6.0 Suggestions
There are many suggestions that would help improving the investment
strategy. The first is to have an extensive thorough study regarding the currency
movements and their correlation, as this would give us a better overview on which
currencies should we pair for arbitrage opportunities. Another suggestion would be
to invest a substantial amount from the companies account in a short term deposit
such as a 3 months deposit for the return of interest. Such deposits would help the
company to make effort less profit instead of having the amount standing still.
These short term deposits including the few days ones should be conducted with
banks who offer high interest rates in order to make good profit out of such short
period deposit. It is also suggested for the company to borrow a substantial amount
at a low rate and invest it in order to cover up the interest rate and make some
profit.
Based on the figures we have encountered a loss in the yen second payment,
this was due to us choosing a wrong date or price, a suggestion if we had the
opportunity to do it again in the futures, is have a better look on the historical
charts and test more than one number in order to get to the best figure.
20 | P a g e
There are so many investment types and strategies that could have been
utilized, however due to the short period of time, we decided to go with the
investment that has the highest liquidity and has limited risk that will sill yield for
use the expected profit that we were hoping for.
References
21 | P a g e
Understanding the Impact of Currency. (n.d.). Retrieved May 10, 2015, from
http://funds.rbcgam.com/learning-centre/investing-strategies/impact-ofcurrency.html
GBPUSD=X: Summary for GBP/USD- Yahoo! Finance. (n.d.). Retrieved May 7,
2015, from http://finance.yahoo.com/q?s=GBPUSD=X
Financial assistance to Greece. (n.d.). Retrieved May 4, 2015, from
http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/in
dex_en.htm
GBP/USD Quotes & Info- Yahoo! Finance. (n.d.). Retrieved May 8, 2015, from
http://finance.yahoo.com/q?
uhb=uh3_finance_vert&fr=&type=2button&s=GBPUSD=X,
High Interest Term Deposits - UBank. (n.d.). Retrieved May 8, 2015, from
https://www.ubank.com.au/term-deposits
United States Dollar | 1967-2015 | Data | Chart | Calendar | Forecast. (n.d.).
Retrieved May 10, 2015, from http://www.tradingeconomics.com/unitedstates/currency
Forex Tutorial: Technical Analysis & TechnicaI Indicators | Investopedia. (2006,
September
4).
Retrieved
May
10,
2015,
from
http://www.investopedia.com/university/forexmarket/forex7.asp
JPY - Japanese Yen rates, news, and tools. (n.d.). Retrieved May 10, 2015,
from http://www.xe.com/currency/jpy-japanese-yen
Term
deposits.
(n.d.).
Retrieved
May
10,
2015,
from
https://www.moneysmart.gov.au/investing/investments-paying-interest/termdeposits
Appendices
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USD/EUR
GBP/USD
USD/JPY
26 | P a g e
USD/KWD
27 | P a g e
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