Question

Primary task: your company has raised EUR 700m through the debtor finance facility:

You are required to make coupon payment in 2 day's time for the Yankee bonds issued exactly 6 months ago (Coupon= 12% p.a, FV= 1000, No of bond issued = 4.8 million)

You required to make a lease payment of GBP 320m to advoid foreclosure of your factory in the UK.

Secondary task: You are also expected to take a view on one currency pair. You must speculate on the movement of exchange rate for the next six months

My question: First explain how you intend to achieve your primary objective. It is possible that you may have devised some tools or engines that helped you to get an idea of when to square for example. If you have, please discuss it! It is encouraged and unique strategies are rewarded if explained properly. Anything that you feel may have helped you prepare for your dealing session should be discussed here. Note that if you’re a corporation you will probably have a scenario that involves you to trade currencies that are not a part of your market view; this is expected. If you’re a bank you’ll need to devise an appropriate trading strategy as you will be most likely dealing with all 5 currencies.

• Then, look at your secondary objective and given your view about current and future market conditions (based on your market view), you should devise a strategy that you will try to implement during the session. This strategy will specify how you will go about achieving your secondary objectives in a way that benefits your organisation – which currencies you will buy or sell. Alternatively put, for the secondary task, you need to devise a trading strategy that directly involves what your market view was. For example, if you predict that in the next 3-6 months that the AUD will depreciate against the USD, how would you set up a trading strategy to take advantage of this depreciation? Where appropriate, you should also devise a speculation strategy which will allow you to create a portfolio of currencies which will enable your organisation to take advantage of your predicted changes in the exchange rates.

Answer 1

Primary task:

This can be acheive by

1. Bond payment due in 2 days= 4.8m*1000*(12%/2)= GBP 288

We can sell ~EUR 241 ( converted using latest spot rate) and buy GBP 288 in open market to make bond payment

2. Sell ~EUR 363 and buy GBP 320 in open market (converted using latest spot rate) to pay the lease charges and avoid foreclosure of UK Factory.

After completing primary task company will be left with EUR 96 (700-241-363)

Secondary Objective:

Basis current market situation I will speculate between GBP and USD. USD is expected to rise in future, so I will buy USD now and go 6 months short on GBP and at the end of 6 months I can square of the position by buying GBP and covering the short and selling USD as it value has increased.