Description

2.4 Trading strategy and performance analysis

2.4.1 Trading strategy

Given your team's views about current and future market conditions, you should devise trading strategies that you will try to implement over the next six months. These strategies will specify how you will go about achieving your primary and secondary objectives in a way that benefits your organisation – which currency you will buy or sell at a particular rate. What will be your spread and how will you manage your margin. This will also involve devising speculation strategies that will allow you to create a portfolio of currencies that will enable the bank to take advantage of your predicted changes in exchange rates. You should include the bank’s role both as a price maker and as a possible speculator. You will also be required to speculate in the short term which is where you must apply your trading strategy.

You are a treasury team for your bank. You are free to outline and explain any strategies that you believe will benefit your bank/corporation along with risks and obstacles the bank/corporation might face in implementing them. However, you must be able to explain and justify your strategies and convince your Senior Manager that they will be profitable for the bank/corporations. The market view and your trading strategies (which are based on that view) are critically important components of the report. You will not get a passing grade on the report without these components.

2.4.2 Performance analysis (forecast)

What was your beginning cash for the forex trading? Will you be able to use your strategy? Why or why not? Will you achieve your objectives? Why, or why not? Justify. Report how your profit or loss will be made using correct tools to record each expected trading positions. Discuss your expected performances: what will be your final positions, estimated profit or losses, average rates, etc. Ultimately, to what extent you will be able to complete your tasks (primary and secondary)?

Note:

That you should NOT use derivatives products in trading and hedging, only currency spot is allowed.

The market view and your trading strategies (which are based on that view) are critically important components of the report. You will not get a passing grade on the report without these components.

Trading strategy:

Based on Thomson Reuters Eikon data, we predict that USD will devalue against EUR while GBP appreciates against EUR in the next 6 months, so our primary goal is go long for GBP and go short for EUR. It means that we will sell EUR to buy GBP. In addition, we will exchange the US dollar into EUR to buy GBP. On the other hand, Eximbank needs to consider some risks when implementing this plan. Firstly, the bank can sell a large quantity of EUR to buy GBP and can make a high profit as expected. Moreover, this will result in the bank not having enough EUR as well as USD to supply in the short term. Thus, the banks may be exposed to liquidity risk with insufficient supply while the USD is the most liquid currency. Furthermore, if GBP does not gain value like forecast, the bank will suffer losses and resell GBP at low prices. Hence, the bank should consider selling EUR and buying GBP before setting quotes. To minimize the risks, the banks should only use a small amount of EUR and USD to buy GBP and our secondary plan is to bring the bank into the square position on a quarterly basis. Our risk management strategies will be presented in more detail in the two currency pairs below.

3 million GBP and 4 million GBP

Trading strategy for EUR/GBP

According to the data from Eikon, there is a slight increase in EUR/GBP exchange rate in the second quarter of this year. Thus, we suggest that the bank should only go short for EUR to make a profit from July to September, 2020. We will sell 4 million EUR to buy GBP in the quarter 3, 2020. Thereafter, we will adjust the bid/offer rate and square the trading position so that the bank can make profit.