3. Discussion….…………….…………….….…………….…………………………….…..17
TRADING SESSION (FOREIGN EXCHANGE dated 25 / 08 / 2011).
Part 1: Pre-Trading Situation/Analysis
1.1 Individual student job assignment and job description
1.2 Market View:
Considering the positive US economy progress of the poor economic performance in Australia, we forecast the AUD to depreciate. Based on this information, we would take advantage by selling big sum of AUD to the corporate prior to the trading session and buy back when the price is low.
1.3 Strategies for the dealing session and the reasons behind it:
- As the economic conditions suggest that the AUD is going to depreciate, we assume that other banks will also try to take short position by selling AUD at the beginning of the trading session. As such, we are going to sell 1 billion AUD to the corporate prior to the trading session to gain a head start.
- We will stick to our projected profit margin of 15 pips or more with average margin of 5-point basis.
- We will react faster within 5 seconds after every announcement to gain competitive advantage amongst other banks in setting the trend rate.
- We will be more aggressive in interacting in the market with targeted turnover of 2.5 billion.
- We will grasp every arbitrage opportunities possible to generate additional profits.
* With the written strategy above however, we will also adjust our strategy based on the conditions that actually happen during the trading session.
Scenario 1: AUD rate depreciate in accordance to our forecast
- We will go short and keep selling when the market opens until announcements commence which will most likely give an indication on the exchange rate trend movement. We would act accordingly from then.
Scenario 2: AUD rate appreciate contradicting our forecast
- If the exchange rate of AUD/USD did not depreciate, we would reverse our position by selling AUD to buy USD to cut loss and take a long position to take advantage of the increasing rate.
- For example, if the current position is 1 billion short AUD and the exchange rate did not move to what we expect, we would quickly buy 1 billion AUD to cut loss. We are then going to take long position by buying more AUD as the price appreciates. In the later session of the trading, we would then sell back AUD when the price is high to gain profit.
Scenario 3: AUD price fluctuates during the trade due to the news
- If this is the case, we will focus on the market price trend and quickly adjust our position to the market. Since we will sell 1 billion AUD in prior to trading, we will try to reduce our risk by selling less amount of AUD if the market price fluctuates intensively due to the impact of news. If the news drives AUD to appreciate, we will quickly long AUD to cut loss; if the news drives AUD to depreciate, we will keep short AUD position to make profit.
1.4 Expected news events and their likely significance
* Expected news and their impacts will be discussed in more detail in the next page of this report.
1.5 Projected Turnover and Profit
1.6 Conclusion
As we predict the AUD to depreciate, NAB plan to sell AUD 1 billion from the corporate in the early session of the trading. NAB will then sell when we reach our estimated profit margin of 5 pips. Also, we would take advantage of every arbitrage opportunities in the market. In relation to other interbank transactions, we will react in a faster pace and more aggressively to be able to reach our goal as market leader and trendsetter.
Part 2: POST-TRADING SITUATION/ ANALYSIS
2.1 Key Performance Indicator
2.1.1 Profit and Profit Margin
- The total market loss for the trading session on the 25th August 2011 was US$ -72,000 million.
- This loss is really unexpected taking into consideration the projected profit of US$ 1.25 million.
- The main reason for this loss was mainly because of the market exchange rate that was not volatile enough to provide sufficient opportunity in obtaining our intended margin profit of 5 pips.
- Our targeted market profitability and rate volatility were overestimated as we did not take into account the fact that the market rate does not only depend of the news.
- The price movement did not go according to the news as the central bank and corporate sectors actively interacted in the market by tendering and offering participating banks to react opposite to the economic news and forecast which in turn affected the way participating banks responded.
- As for that reason, it confused the participating banks to whether take short or long position during the trading session.
2.1.2 Turnover
- The total market turnover for the trading session 25th August 2011 was 17.08 billion (bought and sold $8.540 billion)
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The total turnover for corporate sectors stood at $5.406 billions (32%)
- The turnover for the other participating banks stood at $9.774 billions (57%)
- The turnover for NAB stood at 1.9 billions (11%)
- In total, we produced 11.12% of the total turnover and 19.4% among other 11 participating banks.
- The main reason for this big turnover was because of our early deal with the corporate sector to sell AU$ 500 million prior to the trading session.
- Also, as our plan did not work out in accordance to the market price movement, we decided to be aggressive in buying and selling AUD in order to cut our loss.
2.1.3 Transaction Proportion
* As shown in the graph above, our biggest transaction was with the corporate with total turnover of AU$ 1 billion. The reason for this was mainly because of the deal made prior to the trading session and the opportunity to cut loss as they were able to offer deals in large amount.
2.1.4 Quantity of unmatched transaction
- There was no unmatched transaction during the trading session as we stick to our target plan in having 0 unmatched transactions by reacting fast for every transaction made.
2.1.5 Time taken to amend unmatched transaction
- The actual time to amend unmatched transaction was zero. As we were not responsive enough in the previous trading session, we have learned a very valuable lesson by being quick in amending unmatched transaction so that we could determine our position and break even accurately.
2.1.6 Time taken to record transaction
- The average time taken to record transaction was 6 seconds which was 4 seconds faster than our target of 10 seconds. This was mandatory as we need to be fast and accurate in order to beat the market.
2.1.7 Time taken to interpret news
- The average time taken to interpret news was 5 seconds which is exactly inline with our target. The reason for this is because of the necessity to take fast action considering the volatility of the market.
2.1.8 Closing position
- We successfully managed to square our book before squaring period despite our large turnover.
2.2 Relevant News and Significance
2.3 What we did right during trading session
- We cut loss after 1 hour of the trading session when the price did not depreciate in accordance to our forecast.
- We bought AU$ 300 million from the broker at break-even rate and another other banks in order to cur our loss.
- We constantly quote an attractive two-way price to attract seller of AUD
- We constantly check our break-even points before making decision in adjusting the exchange rate.
- We constantly check if there was any arbitrage opportunity.
- We interpreted every economic data correctly and modified our plan when the market rate did not depreciate.
- We answered every telephone and recorded every transaction within 5 seconds.
2.4 What we did wrong during trading session and remedial action
2.5 What our strategy should have been
The strategy that we adopted for this trading session was to sell AUD to corporations at 3 basis point below opening rate and to buy back AUD when it depreciated. The strategy did not work well because the market keep buying and selling the AUD which causes the volatility margin to be low at approximately 2-3 pips only. Hence, the price of the AUD cannot decrease. Furthermore, the exchange rates fluctuations were not in line with what we expected. If AUD depreciated when the market opened, we would have been in a favorable position as we have a very short position of AUD. Overall, the strategy that we adopted did not work well. We should not have sold 500 million AUD at 3 basis points lower than opening rate because it was not in our advantage even though we forecast the price to depreciate more than 3 pips as to gain profit. In addition, we should have taken low margin during trading instead of waiting to have big spread and put our position in bigger amount of USD.
2.6 What we should have done during trading session
Firstly, we should not to sell 500 million of AUD to corporate, at lower than market rate, which cause us loss 150.000 just start the trading.
Secondly, we should not participate more in tendering process because we could not sell/buy AUD lower rate than we get from tender. Hence, our bank’s loss would be less if we had not quote an attractive bid.
2.7 Best bank to deal with
The best bank to deal with was BankWest and Citibank because the dealer was efficient and well mannered in answering the phone. They are also flexible in terms of amount to buy or sell. Finally, the position keeper was fast and accurate in recording the transaction.
2.8 Worst bank to deal with
The worst bank to deal with is Hong Kong bank. The dealer was not consistent with our deal and often rejects our phone calls. Besides, they could not post the price in the screen correctly.
2.9 Where we think we rank against other banks in terms of profit
- We did not manage to make profit, however we managed to cut our loss up to approximately US$80,000 by being aggressive in buying back AUD at lower targeted margin with total turnover of AUD 1.9 billion (11.12% of total market turnover including the corporate).
- Considering the contradicting actual market movement to our forecast, if we did not take measurable action we would have lost approximately US$150,000 as we have made a deal with the corporate for AU$500M at the rate of 3 pips lower than the market opening rate.
- We should be ranked somewhere between 4 to 6 position in comparison to other banks in term of profit as the total market profit was only $254,000 while
The corporate Sector turnover was $5.460 billion and made a loss of $254,000.
- Total accumulated profit: USD $178,000.00
3. Discussion
At NAB, every experience is viewed as a stepping-stone towards success. Even though we did not manage to make profit this time, we were still able to cut loss considering our mistake of speculation and large amount of transaction made prior to the trading session.
The result for this particular trading period is far below our target as we expect to make US$1.25 billion profit instead of US$72,000 loss, taking into consideration our initial plan of being aggressive and doing large turnover.
The main reason for this is because of our speculation that the market margin volatility rate will be around 10-20 pips considering the higher rate volatility in the previous trading session in which we based our speculation upon as a benchmark.
Also, the reason why agreed to sell AUD500 million at the rate of 3 pips lower than the market was because of our speculation that the price will depreciate at a rate far more than 3 pips. Corporates are price taker, thus we provide them a good price at 3 pips lower as to attract and beat the other participating banks in successfully gaining market advantage prior to the trading session takint into account our plan of being aggressive and having large turnover to be able to reach our target of US$1.25 billion
We aimed to buy back after it reaches 7 pips and above to make profit but instead, the market volatility margin was mainly around 2 to 4 pips most of the time during the trading session.
To improve our performance in the future, we would implement the following strategy:
- Be not overconfident in speculating the market based on the economic news and scenario only but more to the movement of the market price itself.
- React more rapidly when the market rate does not move according to our forecast instead of waiting for it to move as according to the economic scenario and news
- Be more active in quoting the price in order to affect the market rate to favour our plan.