Forex Report

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Executive Summary

This report details the performance of Corporation G and Bank A during the simulated foreign exchange dealing sessions of 15/03/2012 and 22/03/2012.

We were provided with a trading scenario at the start of each trading session. During session 1 our team acted as Corporation G (price takers) and during session 2 we acted as Bank A (price makers). As a corporation we were presented with a foreign exchange risk management problem to solve, involving trading in spot and forward foreign exchange products. At dealing session number 2, we were presented with a scenario to act as a bank and provide liquidity to the market.

In this report we will discuss our strategies and outline how we were able to achieve them. The starting point was to analyse any data that could have an impact on the currencies related to our objectives. The general nature of the FX market is that it is generally sensitive to new information. In order to have an informed position it is essential to consider the most up to date and recent relevant economic data. Furthermore, it was essential to analyse the market data before the dealing session in order form a relevant strategy. It is critical to keep in mind that the 7 day gap between the two dealing sessions would have included new information and new events that would affect our trading objectives and overall portfolio; therefore, it was necessary to reconsider and adjust our sentiment towards each currency.

On our first dealing session, given the available data and technical analysis, we anticipated that most major currencies would depreciate against the US Dollar. We consequently based our trading strategy on these predictions. On the second day of trading, 7 days later, we suspected that the US dollar and the Yen would be relatively strong against the Euro and the Aussie dollar, and that the Aussie dollar would appreciate against the British pound.

The idea of trading is quite simple, that it consists of buying one currency and selling the other, however, when it comes to the practicalities of actually putting all the theory to use it is very difficult. Given the difficulties and complexities of accurately forecasting FX price movements, we were unable to achieve a profit as a corporation but we did however meet our objectives. As a bank we successfully made a profit due to a large error by another bank.

Introduction

The forex market is a market in which currencies are traded. Currency trading is the world's largest market consisting of trillions in daily volumes and as investors learn more and become more interested, the market continues to rapidly grow and increase in liquidity. Not only is the foreign exchange market is the largest market in the world, but it is also the most liquid, differentiating it from the other markets. In addition, there is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter. Unlike the stock market, this decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to pass that on to their clients. The foreign exchange market is quite volatile because it is highly sensitive to any news, events or current affairs that can impact a nation’s economy. The corollary of the exchange rate volatility is that market participants can take a position to hedge (any business activities i.e. future transactions) or speculate (simply make a bet on the anticipated direction). The participants in the market include price makers and price takers which both have various different objectives. A price maker (usually a forex broker or bank) makes their profit predominantly through spreads, which is essentially the difference between the bid and ask price they are quoting. A price taker, on the other...
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