FX Summary Report

BFF5260 Money Market Dealing

Foreign Exchange Summary Report

Semester 1 2015

Name of Bank: CIMB Group

Day of Class: Thursday

Date: 23 April 2015

Individual student contribution to this trading report

Name of student

Number of Hours Total Percentage contribution

Li Chen 36 1/3

Chenyang Jiang 36 1/3

Danlin Wang 36 1/3

Total Hours 108 1

HONOUR STATEMENT

“I affirm that I have neither provided nor received any assistance during the completion of this assessment task other than that approved by the Chief Examiner”.

…………………………………………………….

Executive summary

The report focuses on the overall financial performance, summary of economic scenario, entire

adjusting strategies, effects and influences of changing foreign exchange market price, wrong

actions, the numerical performance of each role and what we have learned from the trading

sessions.

This report measures the financial performance by demonstrating the budget and actual

performance based on several financial indicators. The comparison to the market is also given in

addition to that in this part. The overall performance of CIMB Group is assessed as the average

level of market in terms of profitability. Then, pre-trading strategies and contingency strategies are

established according to the analysis of the economic scenario and expectation of the market. In

addition, the strategies we used and didn’t use during the two trading sessions are discussed.

Meanwhile, the contribution of each strategy to our total profit is calculated to show the usefulness

of the strategies. Moreover, the market price movement indicates the market is fundamentally

inefficient. The performance of each role is also measured; suggesting that each member

performed well whilst further improvement is still needed since we also made several mistakes

during the trading sessions.

Highlights

Researching the economic scenario before each trading is useful to set a proper opening price

when the market opens.

In the first trading session, most profit came from trailing the market and finding arbitrage

opportunities and corporate tenders. When the market was contractive, contingency strategy

helped us outperform in this situation.

In the second trading session, most profit came from corporate tenders and contingency

strategy in contractive market.

Paying attention to the market news and trailed the market before changing our bank’s quoting

price in order not to be hit by our counterparties.

Table of Contents

1 Financial performance...................................................................................................................1

1.1 Financial performance indicators.................................................................................1

1.2 Financial Performance.................................................................................................1

1.3 Comparison to the market.............................................................................................2

2 Economic Scenarios.......................................................................................................................6

3 Overall strategies developed including contingency strategies......................................................7

3.1 First formal trading session................................................................................................7

3.1.1 Primary strategy..............................................................................................................7

3.1.2 Second Strategy................................................................................................................8

3.1.3 Contingency strategy.......................................................................................................9

3.2 Second formal trading session............................................................................................9

3.2.1 Primary strategy............................................................................................................10

3.2.2 Secondary strategy.........................................................................................................10

3.2.3 Contingency strategy......................................................................................................11

4 Strategies actually used during the trading sessions....................................................................11

4.1 First trading session..........................................................................................................11

4.2 Second trading session......................................................................................................14

5 Analysis of Foreign Exchange Market price changes..................................................................17

5.1 Market price movement in trading session 1....................................................................17

5.2 Market price movement in trading session 2....................................................................18

6 What you did wrong and remedial action EACH WEEK............................................................20

6.1 Practice trading................................................................................................................20

6.2 First trading......................................................................................................................21

6.3 Second trading..................................................................................................................23

7 Overall performance measures of each role.................................................................................23

8 What you learned from EACH trading session............................................................................25

Appendix 1......................................................................................................................................27

Appendix 2......................................................................................................................................34

Appendix 3......................................................................................................................................41

Appendix 4......................................................................................................................................49

Appendix 5......................................................................................................................................49

1 Financial performance

1.1 Financial performance indicators

Financial performance indicators focus on two aspects: Return and risk. In terms of

the return, the profitability comprises two measurements that are dollar profit and

profit margin. The dollar profit is how much money we make at the end of each

trading session; The profit margin, which is also called the basis points or number of

pips, is calculated by the formula [profit/(volume/2)]*10000.

Regarding the risk estimation, we monitored our maximum transaction amount and

extreme long/short position. The larger transaction amount could increase the

operation risk but it is also a key point to get more profitability. Additionally, the

extreme long/short position represents the top amount that would remind us to deal in

an adverse direction.

1.2 Financial Performance

The overall budget and performance of CIMB group is demonstrated in the following

table:

Financial indicators Trading Session 1 Trading Session 2Budget Reality Budget Reality

Return Dollar Profit 0.8M 0.038M 0.2M 0.056MProfit Margin 20 1.5 5.7 1.6

Risk

Maximum transaction

amount (AUD)

50M 30M 200M 150M

Extreme Long/Short

position (AUD)

100M 80M 100M 100M

Total Turnover 800M 520M 700M 700MTable1: Overall budget and performance of CIMB group

From the table it can be seen that the differences between the budget and actual are

big although our profitability has been improved in the second trading session. The

variance mainly stems from our overly optimistic expectation for the market condition

and our conservative operation.

In the first trading session, we set out profit margin up to 20, which was unrealistic

given the market situation. The market didn’t react to the news efficiently and the

price quoted stayed in a relatively stable level as a result, hence it was difficult to

make large profit from this constrictive market. And we didn’t achieve our

presupposed turnover target. In addition, we lost several opportunities to expand our

gain due to our conservative trading strategy. For example, we adopted a strategy by

bidding a higher price and asking a lower price than the market when we found the

market was constrictive, which was proved useful, but still we failed to magnify our

profit since we tried to control risk by reducing transaction amount.

In the second trading session, we did better than the first one in term of achieving the

budget. We kept our risk target successfully; nevertheless, our profit margin was still

overestimated. In fact, the overall profit margin had been smaller than the first

trading session, suggesting the market became more constrictive than the first time.

Apart from this, we made several mistakes such as filling the wrong number in the

tender sheet. The specific details related to this issue will be discussed in the 3 rd and

4th part involving strategies of this report.

1.3 Comparison to the market

The statistical financial data of the market in terms of profit and risk is shown as

below:

Financial Indicators Trading

Session 1

Trading

Session 2

Overall

Highest dollar profit $671,000 $144,000 $706,000

Lowest dollar profit -$302,000 -$49,000 -$302,000

Highest profit margin 14.91 1.76 8.83

Lowest profit margin -3.60 -3.06 -2.85

Market Average dollar

profit

$87,857 $30,619 $118,476

Market average margin 2.90 0.59 1.59

Market average turnover 639,047,619 802,857,142 1,441,904,761

Dollar profit (CIMB) $38,000 $56,000 $94,000

Profit Margin (CIMB) 1.46 1.60 1.54

Turnover (CIMB) 520,000,000 700,000,000 1,220,000,000

Table 2: Statistical financial data of the market

From the statistical data of the market, we can see that both dollar profit and profit

margin are little less than the market average, suggesting our bank has a average

profitability in the market.

The data of dollar profit is shown as below:

DEUTS

CHE BANK

BAER

BANKWES

TICBC

BNZOCBC

BARCLAYS

WELL

S FARGO

SUNW

AY

HONG KONGANZ

$(400,000.00)

$(200,000.00)

$-

$200,000.00

$400,000.00

$600,000.00

$800,000.00

Session 2Session 1

Dollar Profit

Figure 1: Dollar Profit

From figure 1 we can clearly see that the overall profitability of our bank (CIMB

GROUP) lies on the middle level among the 21 banks. An interesting phenomenon is

that only 5 banks made more profit in the second trading session than the first, the

proportion is only 24%, as shown in chart 1. Our bank is one of the 5 banks that

enhanced their dollar profit.

5; 24%

16; 76%

Banks that improved dollar profitBanks that didn’t improve dollar profit

Chart 1: Dollar profit

One potential explanation is people became more sophisticated in the second trading

session, pushing the market towards more constrictive direction, hence the profit

margin shrunk considerably. This explanation can be supported by the profit margin

figure:

DEUTS

CHE

LLOYD

SBAER BNI

BANKWES

T

BANGKOKICBC

UBSBNZ

CIMBOCBC

CITIBANK

BARCLAYS

SACOM

WELL

SNAB

SUNW

AY

BENDIGO

HONG

WES

TPAC

ANZ

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

Session 2Session 1

Profit Margin

Figure 2: Profit Margin

Figure 2 explicitly demonstrates the trend of profit margin changes during the two

trading sessions. Only 4 banks gained larger profit margin in the second trading

session, the proportion of which is less than 20%. Compare this to figure 1, it can be

found that 4/5 of the banks that enhanced their dollar profit achieved higher profit

margin. Still, our bank is one of the 4 banks that promoted their profit margin.

16; 76%

4; 19%

1; 5%

Chart 2: Profit margin

In addition to profit margin, turnover is another consideration when measuring

performance.

DEUTS

CHEBAER

BANKWES

TICBC

BNZOCBC

BARCLAYS

WELL

S

SUNW

AYHONG

ANZ0.00

500,000,000.00

1,000,000,000.00

1,500,000,000.00

2,000,000,000.00

2,500,000,000.00

3,000,000,000.00

Session 2Session 1

Turnover

Figure 3: Turnover of Banks

Turnover data indicates another aspect of the each bank’s performance. The situation

of turnover is just opposite to profit margin. Only 5 banks reduced their turnover in

the second trading session whilst 16 banks chose to expand their turnover, suggesting

the majority of the banks tended to enhance their profitability by magnifying their

Banks that improved dollar profit

Banks that improved profit margin

turnover. However, since the constrict market, the increases in turnover were

insufficient to offset the loss in profit margin for most banks, which is why 76% banks

failed to expand their dollar profit.

2 Economic Scenarios

As is shown in the economic scenario, the Australian financial market has been

bearish for several weeks, and this trend will continue to affect the economy of

Australian. Apart from that, with the decreasing of the foreign investment in Australia,

the demand of Aussie dollar will drop. In this situation, the Aussie dollar will continue

depreciating in the near future.

1. With the falling of business confidence level, the average number of investment

trading will drop. It means that the demand of Aussie dollar will decrease and this

results in the depreciation of the AUD.

2. Although the retail expenditure has been steadily reducing over the past 15 months,

the consumers regain the confidence in the economy. As the confidence of consumers

rises, the Aussie dollar will appreciate accordingly.

3. The rate of unemployment has increased by 1.25% despite of the high level of job

creation. It will result in the depreciation of Aussie dollar and bearish share market.

4. Since the Australian's economy mainly depends on the export of its commodity, the

decreasing commodity price leads to the high demand of Aussie dollar, theoretically,

this will result in the appreciation of Aussie dollar. However, China has become the

largest commodity import country from the Australia. If the demand of commodity

decreases in China, which means that China wants to relieve its economic growth and

does not need so much iron ore or coppers etc., then the Aussie dollar will continue

depreciating despite the price of the commodity drops down.

5. Worldwide terrorist activity results in negative influences and serious situation. The

global economy will drop down and Australia certainly cannot avoid the negative

influences on its economy. It is no longer a safe paradise where investors can invest

without any doubts. As a result, the Aussie dollar will depreciate.

6. The high-priced property market means that there exist many economic bubbles in

the property. And investors do not want to invest those risky properties. Therefore, the

demand of Aussie dollar declines with the depreciation of the Aussie dollar.

In summary, based on the analysis of the economic scenarios, we expect the Aussie

dollar will depreciate in the near future.

3 Overall strategies developed including contingency strategies

Before each trading session starts, we discuss how to set a proper opening quoting

price according to the economic scenario and closed AUD/USD market rate in New

York. Setting the opening price is quite important for that if someone sets a low

opening price which has arbitrage opportunity, and then this bank will suffer huge

losses at the beginning of the trading session. For example, if the market average

selling price is 0.8500, and we set our selling price at 0.8495, then other banks will

buy from us at 0.8495. Meanwhile, if the AUD appreciated in the market, then we had

no opportunity to buy back these AUD at the price lower than 0.8495 and hit by other

banks at the beginning. Therefore, setting a proper opening price is critical for us to

implement our strategies successfully in the period of trading session.

3.1 First formal trading session

According to economic scenario, with the falling business confidence level, reducing

retail expenditure, increasing unemployment rate and falling commodity prices which

all infers that the Australian dollar will depreciate when the market opens. The closed

AUD/USD market rate is 0.8500, thus we planned to set our opening price lower than

0.8500 at the beginning and trailing the market average opening price in order not to

hit by other banks.

3.1.1 Primary strategy

Our primary strategy is to change the quoting price according to the market events

assuming that all events are efficient to the market. Meanwhile, find any arbitrage

opportunities in the market under the code of conduct. Certainly, buying AUD at a

lower price and selling AUD at a higher price is the most principal way to help us to

make profit. At the first trading stage (9:15--10:15), there existed two market events,

the first one is balance of payments surplus of $5 billion which indicated that the

AUD would appreciate when the announcement released. And the second one is

concerning the economy slowed down which indicated that the AUD would

depreciate when news was announced. According to two market events, we planned to

long about $50 million Australian dollar before the first news announcement at the

market average selling price or buy from those banks with selling price lower than the

average price. After the first announcement released, we observed the market average

selling price at that time, and changed our quoting price a little bit higher to attract

other banks to buy in order to reduce our risk exposure. After second news

announced, the AUD depreciated, and we changed our price lower than previous rate

but still set the price above the break-even rate in order to make profit. At the second

stage(10:35--11:30), two market events also indicted that the AUD would continue to

depreciate, thus we decided to short about $100 million AUD before 10:55, and we

could buy back these amount at lower price from other banks with the depreciating of

the Australian dollar. At this stage finding arbitrage mispricing also helped us to make

more profit.

3.1.2 Second Strategy

If the market events had little effect in the market, or most of banks did not change

their quoting price after announcements, then the market would become very

contractive. It means that little arbitrage opportunities could be found in such market.

If we held too much AUD at the beginning of trading session, we could not sell these

amounts at a good price in the contractive market. Hence, we should use our second

strategy which takes advantage of corporate tenders to make profit in the contractive

market. There were two corporate tenders in the trading session. The first one is that

BHP wishes to buy AUD1 billion, and the second one is that AMP wishes to buy 100

million. Using tenders would help us to make more profit. If we had a 100M AUD

long position at 0.8495 in the contractive market, we could sell this amount to BHP or

AMP at 0.8499 or 0.8500 rather than attract other banks to buy from us at 0.8496.

Therefore, we would set our selling price little bit higher than market average selling

price to win the tender and make more profit.

3.1.3 Contingency strategy

The contingency strategy should be used when our tender did not be accepted by the

corporate and the market went the opposite way which we could not predict. For

example, when the market showed the slowing of growth of consumer credit, the

normal market movement should make AUD depreciate. When we long 50 million

AUD at 0.8495 at that point, and all other banks rise their quoting rate, how to deal

with? We planned to raise our bid price to attract other banks to sell. If the market

average price is 0.8489/0.8499, we can set our bid price at 0.8491 to buy from other

banks. In this way, we buy at a lower price and decrease our previous cost below

0.8495. Then in order to attract other banks to buy from us, we changed our selling

price below 0.8499, such as 0.8497 to make profit because our cost is just below

0.8495! Hence, this strategy can be used in emergency situation and also give us

opportunity to make profit.

3.2 Second formal trading session

According to the economic scenario which is the same as the first trading session, the

Australian dollar would depreciate when the market opened. Apart from that, the cash

rate in Australia reduced to 2% while the US cash rate increased to 0.75%, this also

inferred that the AUD would continue depreciating. The closed market AUD/USD

rate is 0.8495. After last week trading, we found that the market events and scenario

seem to have little effect in the market. Thus, we decided to follow the other banks'

quoting price to set our opening price in order not to be hit by other banks at the

beginning.

3.2.1 Primary strategy

We changed our primary strategy to fully take advantage of corporate tender in this

week transaction because most banks did not change their price when announcements

released. Thus, winning the corporate tenders means more profit we could make.

There existed two tenders during this trading period. Toll holding wish to buy AUD 2

billion and BHP want to sell AUD 2 billion. We found the tender amount was much

greater than previous trading, and gave us good opportunity to make money. Thus

before the first tender closed, we should long as much as we could( e.g. 100M) in the

market at a relative low selling price by discovering any mispricing in the market and

buy more from them. Meanwhile, we filled the tender at the selling price at the market

average level to win the tender. Although setting a lower selling price may more

attractive to the corporate, this also eroded our profit margin. Before the second tender

closed, we should short about 60--80M AUD at a market average selling rate, if the

market average selling price is 0.8500, we can set 0.8498 or 99 to attract other banks

to buy, and we could fill the tender at the market average buying price such as 0.8494

or 95 to buy back these amount of AUD and make profit.

3.2.2 Secondary strategy

Since the economic scenario and market event were almost the same as previous

trading session, and we concluded that the overall tendency of AUD is depreciating.

All banks should change the quoting price when the news released. However, the

market seemed to be not efficient in the last trading session, thus we decided to trail

the market average quoting price when market news released and tried our best to find

arbitrage mispricing opportunities during the trading session. For example, when the

news of bearish economy released, one bank change their price first at a lower selling

rate while other banks did not change, then this bank would be hit but it was a good

opportunity for us. (Assuming the market average selling price is 0.8500 and this

bank change its selling price at 0.8495)

3.2.3 Contingency strategy

According to the experience from last trading session, we found that the contingency

strategy which was used was quite effective to make profit in the contractive market.

And we also predicted that other banks might also find this strategy and used it in this

week trading session. Thus, we regarded that the profit margin may decrease when

using this strategy this week. Assuming that the market average quoting price is

0.8496/0.8501, and many banks would set their buying price at 0.8496-98, and selling

price at 0.8499-00. In this case, the lowest profit could be earned only AUD 1000 per

10M transaction. But we still reckoned that this strategy can make profit even if in

such tight market.

4 Strategies actually used during the trading sessions

4.1 First trading session

When the market opened, we set our opening price at 0.8490/00 according to closed

AUD/USD market rate in a conservative way. Meanwhile, we tried our best to find

any arbitrage opportunities. After observing the market, we found the most attractive

price to buy is at 0.8495 from Sunway, thus we long 30 million AUD. However, in

order to attract more banks to sell us AUD we change our price at 0.8497/03, and

CITI bank and Bendigo bank sold us 20 million in total which indicated that our

buying cost increased to 0.8498. Then we sold 20 million at 0.8497 to Barclays and

made $2400 profit at that time. After that we found that we still had 30M AUD

exposure, and we wanted to square the account before the first news released.

Although we just found Westpac bid price was the most attractive in the market at

0.8495, this mean that we would lose all profit made previous if we made this

transaction. In order to decrease our risk exposure, we finally made this transaction

and our profit was still zero. After the first news released which would make AUD

depreciate, we changed our price at 0.8488/98 according to the news. Then SACOM

and Sunway totally bought 30M at 0.8498 from us. Then we found that other banks

all decreased their selling price, and some of them such as Bankwest, BNI and ANZ

adjusted a lot in their selling price. We grabbed this arbitrage opportunity and bought

20M at 0.8497 from BNI, while bought 30M in total from ANZ and Bankwest at

0.8495. After that, we adjusted our quoting price at 0.8490/00.Surprisely, Bendigo

bank still wanted to buy 20M from us at 0.8500, we accepted this transaction happily

and squared the account with $15000 profit. At 10:03a.m, we suddenly found the

selling price of ANZ was just 0.8492, we called them immediately and wanted to buy

about 30M, but they rejected and just sold us 10M at 0.8492. This was still a good

price for us, and ANZ then called us to buy 10M at 0.8498 from us, finally we made

$21000 profit after this transaction. At the first trading stage(9:15--10:15), we had

used our primary strategy by finding arbitrage opportunities and trailing the market

quoting price, but we still did not used tender and contingency strategy at this

moment. In fact, BHP wanted to buy AUD 1billion, but we unintentionally ignored

this tender and missed opportunity to make more profit.

Chart 3: source of profit

Figure 4: Contributions of each strategy

At the second trading stage( 10:35--11:30), AMP wanted to buy 100M from market,

this time we filled the tender and planned to sell 30M at 0.8496. At 10:28 the US cash

rate increased to 0.75%, and we found that the Bangkok bank adjusted their price at

0.8495 and we immediately bought 20M from them. After this transaction,

unexpected situation happened; almost all banks raised their selling price from 0.8497

to 0.8501 and set their buying rate from 0.8487 to 0.8490. If we still set the rate at

0.8488/98 we would have no advantage in this market. We found the market average

buying price is 0.8489 and we used contingency strategy which set our buying price at

0.8491 to attract sellers and decreased our buying cost simultaneously. When we just

changed our bid price, UBS sold us 30M at 0.8491 and our long position cost was

only 0.84926. Then we sold 20M to Barclays at 0.8494 and made $2800 profit. After

using this contingency strategy we totally made $38000 profit ($21000 from primary

strategy, $16087.5 from secondary strategy and $912.5 from contingency strategy).

During using contingency strategy, we also made some mistakes and lost $7612.5

potential profit due to not record our cost in time.

Market Average Buy RateMarket Average Sell RateCIMB GROUP Buy RateCIMB GROUP Sell Rate

Figure 5: Contingency strategy by changing bid/ask price to attract buyers and sellers

4.2 Second trading session

Although the economic scenario and expected events indicated that the opening price

of AUD/USD should be lower than the first trading session because of cutting cash

rate in Australia and rising cash rate in U.S, we just wanted to follow the market

opening price, and set the opening price at 0.8490/00. According to the trading

experience last week, we found that when the news released, those banks changed

their quoting price first may suffer loss because others could catch arbitrage

opportunities from them. Apart from that, we predicted that the market would be more

contractive than previous trading session because no one wants to change the price

first. When the trading started, the market average price was about 0.8492/01. And

this price lasted nearly 15 minutes, in order to make the first transaction; we set our

buying price at 0.8497. Then, Bendigo bank and Sunway sold us 30M in total at this

rate. When the first news released, all banks almost had no reaction about this event.

There existed a tender which should be handed in before 10:20. Thus, we planned to

sell 50M to Toll Holding at 0.8499 and made profit from this tender. Using tender to

make profit was our primary strategy in this week. At 10:17, we suddenly found the

selling rate of ANZ was only 0.8495 and we bought 10M from them. Simultaneously,

we changed our selling price at 0.8496 and Sunway bought 10M from us at this rate.

This transaction helped us to make $1000 profit, and this was the only arbitrage

transaction we made during the whole trading session. After that we continued to find

relative lower price in the market in order to decrease our buying cost. We bought

50M in total from OCBC, NAB and Deutschebank at 0.8496, 0.8495, and 0.8495

respectively. When the tender handed out, we successfully sold the Toll Holding at

0.8499 and made $15000 profit. However, at this time we still had 30M long position,

and we made mistakes when sold these amounts. The cost of selling rate was 0.8496,

but we sold them at 0.8495 and suffered a $3000 loss in two transactions. When

several announcements released, which all indicted the depreciation of the Australian

dollar, all banks still did not change the quoting price effectively. The market was still

in the contractive situation. At 10:52, Novin Corporation wanted to buy 10M at

0.8505; we filled the selling amount and rate, and then handed in. When this

transaction completed, we set our bid price at 0.8496. Barclays immediately sold us

10M and we made $9000 profit after trading with corporation. When the second

trading stage started, the market average price stayed stable at 0.8495/02 from 11:28

to 11:51, and we had to use our contingency strategy again during this period. We set

our bid price at 0.8498 and long 90M in total from Deutschebank, SACOM and

LLOYDS and sold at 0.8499 to other banks. Finally we made $9000 profit from

contingency strategy. At the end of the trading session, BHP wished to sell 2 billion

AUD by tender, and we filled 150M at 0.8495 in tender. After handed in the tender,

we sold 80M at 0.8497 to BEAR, WELLS FARGO and BARCLAYS. We won the

tender after these transactions and buy 150M at 0.8495, and made $20000 profit, but

we still have 60M long position at 0.8495. The Deutschebank then bought 40M from

us at 0.8497 and helped us make additional $8000 profit. Unfortunately, we did not

realize that there still existed one unconfirmed transaction with Bankbook bank, thus

we had to buy 10M at 0.8498 which increased our cost to 0.8496. In order to square

our position in time, we had no choice but sell 30M at 0.8495 to BARCLAYS, and we

suffered $3000 in this transaction.

Trailing the market and arbitrage opportunities Using tenders Contingency strategy$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

$1,000

$46,000

$9,000

Source of profit

profit Figure 6: Source of Profit

1.79%

82.14%

16.07%

Trailing the market and arbitrage opportunities Using tendersContingency strategy

Chart 4: Contributions of each strategy

5 Analysis of Foreign Exchange Market price changes

5.1 Market price movement in trading session 1

3/26/2015 9:15 3/26/2015 10:04 3/26/2015 10:510.843

0.845

0.847

0.849

0.851

0.853

0.855

Adjusted FX Market Price Movement

Market Average Buy RateMarket Average Sell Rate

Figure 7: Adjusted Market Price Movement in Trading Session 1

Figure 4 represents the market price movement with outliers removed in trading

session 1. From this figure we can directly find that the market price stayed in a

relatively steady level with several slight fluctuations. The trading started with an

average 0.8488-0.8502 bid-ask spread, reflecting the previous closing rate of 0.8500.

Although the pre-trading news should have indicated a depreciating trend in Aussie

dollar, the market didn’t react to that news at all. Then the market price moved to an

unreasonable position that the buying price is high than the selling price from 9:26 to

9: 33. The reason is that BankWest mispriced its selling price. This situation didn’t

last long and the price level returned back to normal soon. After a stable period, the

market witnessed a short term downside which followed by some fluctuations. During

the fluctuating period, the phenomenon of buying price higher than the selling price

appeared again. From that we can deduce that the market experienced a short term

chaos before the trading halted for the mid-session break. After the mid-session break

the market price entered into a long term flat phase and the market didn’t react to any

news since then. In summary, the market showed fundamentally inefficiency in term

of reacting to the market events and the price lied in a relatively steady level during

the first trading session.

Compared to the market, the price movement of our bank is shown as below:

3/26/2015 9:15 3/26/2015 9:53 3/26/2015 10:30 3/26/2015 11:070.843

0.845

0.847

0.849

0.851

0.853

0.855

Price movement of CIMB Group


Figure 8: Price movement of CIMB group

The overall price trend of our bank was consistent with the market price movement

except the abnormal period, suggesting that we stuck to our trading strategies of

following the market.

5.2 Market price movement in trading session 2

2/04/2

015 10:01:00

2/04/2

015 10:08:00

2/04/2

015 10:15:00

2/04/2

015 10:27:00

2/04/2

015 10:34:00

2/04/2

015 10:46:00

2/04/2

015 10:53:00

2/04/2

015 11:00:00

2/04/2

015 11:07:00

2/04/2

015 11:31:00

2/04/2

015 11:38:00

2/04/2

015 11:45:00

2/04/2

015 11:52:00

2/04/2

015 11:59:000.848

0.84850.849

0.84950.85

0.85050.851

Adjusted Market price movement


Figure 9: Adjusted market price movement in trading session 2

After deducting the outliers and abnormal data, the market price movement

demonstrates a stable tendency during the trading session with slight fluctuations. The

market turned out to be fundamentally inefficient since it didn’t respond to the market

news correctly. Meanwhile, there were several banks mispriced their quotes which

dragged the market to abnormal situation. However, we cannot take advantage of

these banks according to the code of ethics. By the end of the trading session, the

bidding and asking prices tended to move towards a certain level since banks were

squaring their position.

Compared to the market, the price movement of our bank is shown as below:

2/04/2

015 10:01:00

2/04/2

015 10:08:00

2/04/2

015 10:15:00

2/04/2

015 10:27:00

2/04/2

015 10:34:00

2/04/2

015 10:46:00

2/04/2

015 10:53:00

2/04/2

015 11:00:00

2/04/2

015 11:07:00

2/04/2

015 11:31:00

2/04/2

015 11:38:00

2/04/2

015 11:45:00

2/04/2

015 11:52:00

2/04/2

015 11:59:000.848

0.8485

0.849

0.8495

0.85

0.8505

0.851

Price movement of CIMB Group


Figure 10: Price movement of CIMB Group

From this figure it can be seen that the price fluctuation of our bank is more severe

than the market. The reason is that we adopted a strategy of buying higher than the

market and selling lower than the market. In addition, we controlled our each

transaction amount for risk management, which explains the waves in our price

movement curves.

To conclude the market in the two trading sessions, we can say the market was

fundamentally inefficient since it didn’t respond to the market events correctly. As a

result, the market became considerably constrictive and the profit margin was very

small. Especially in the second session, people had been more sophisticated in trading

tricks, so corporate tenders became the major source of profit for many banks.

Meanwhile, mispricing happened during both of sessions, some of which might

provide arbitrage opportunities for other banks. Nevertheless, banks should take care

of the code of ethics when grabbing these opportunities.

6 What you did wrong and remedial action EACH WEEK

6.1 Practice trading

No. Wrong Actions Reason Remedial Actions Effects

11

The dealer accepted traction of 15M buying.

Not clear about the trading policy that 5 million is not accepted due to its complexity

First, the dealer tried to sell the 15M to other banks but ignored it was wrong and cannot be accepted by them as well. Second, all three individuals remembered the rule and why it cannot be accepted.

Well done. We all keep the rule in mind to trade and rejected other ones who want to buy or sell 5M to us.

2

22

The dealer refused to buy 100M.

Because it was the first time we traded FX, the dealer was hesitated to make decision and he thought there were risks to sell them at lower prices than our buying price that could lead to losses.

First, the dealer and risk manager discussed to adjust our trading strategies more aggressive to accept relatively large amount. Second, just acceptance big amount is not enough, we have to keep the initiative to buy or sell.

Not so good as expected. It was hard to trade at a large amount due to the consideration of market risk in terms of quoting changes.

33

The position keeper typed the wrong transaction information.

The position keeper was not familiar with the recording system in the first time. Therefore, the mistakes exist when the recording data of trading counterparties did not match. Sometimes, the dealer gave wrong information to the position keeper as

When the dealer was busy to answer phone calls and quoted prices, the risk manager can help and communicate with position keeper to record accurately.

Well done. The risk manager can help both the dealer and position keeper when record transactions and adjust strategies.

dealer answered too many calls.

Table 3: Wrong operations in the practice session

6.2 First trading


44

4

The dealer became emotional during the trading time.

When it was busy to answer phone calls, the dealer cannot focus on looking through price changes of other banks and she needed the risk manager to fully concentrate on the market changes. However, the risk manager did not concern changes carefully and consistently.

First, communicating with the risk manager in advance about how to cooperate with each other. Second, to find out what I did wrong and why I cannot focus on two different things although it is not compulsory normally. Third, calm down. Fourth, using ears to listen phone calls and using eyes to see market changes. It is little hard to concentrate at the same time.

Keep calm is a good way to obtain more information. Ears and eyes are good friends to coordinate in order to complete one thing.

55

When the risk manager was trying to decrease our bid price, the dealer rejected to trade with other banks.

Answering the calls when we changed our quoting prices. The dealer told them we had already changed our bid price but we were asked to sell at former price. Therefore, we rejected to deal with them.

When we changed our prices, we should answer calls a little latter to give them some time to react. Explaining well to other banks about changes of our prices.

It is useful to wait for a moment to answer phone calls without conflicts.

6

The dealer did not change the 0.849 bid price to a lower level 0.8488 as soon as

Our reaction of market prices was not good as we expected. The dealer cannot

Strength the cooperation between the dealer and the risk manager. When dealer

Well done, communication and cooperation are good ways to solve

6 possible to crab arbitrage changes when answering phone calls.

answer phones and change prices at the same time. The risk manager did not react quickly as well.

answer calls, risk manager should focus on the market price changes and released news all the time.

problems.

77

The reaction of dealer and risk manager should be enhanced to quote and look for arbitrage opportunities.

We are not so familiar with the strategies when we changed our quoting prices. We need time to consider the possible profit and loss.

To keep the principle ‘buy low and sell high’ in mind. Consider clearly about the how to change prices and make strategies.

Effective. Each dealer remembered that we need to do more practice to have quick and accurate reactions.

Table 4: Wrong operations in the first session


11

8

The dealer and the risk manager discussed to sell a large part of the tender of corporate 500,000,000 but make a mistake to sell an undesirable amount 50,000,000.

The dealer and risk manager were not sensitive about numbers. They did not react that it is an extremely big amount but we just take a little amount to sell.

First, to be careful when looking through the corporate’s tenders.Second, when there are tenders, the dealer and risk manager should discuss about the amount to buy or sell.

It should be effective to cope with this kind of situation.

9

9

The dealer intended to type an ask price of 0.8500 but has a technological mistake to type 0.8490.

Thought a wrong way to quote but altered the price immediately without trading at this price and explained well to other banks.

Before we change prices, we need to think whether the price should be increased or reduced.

One quoting mistake would let us check and think about our trading strategies. If we take the wrong direction, we may suffer losses.

1

10

The position keep recorded a wrong bank name and the bank called her to change but unfortunately it did not work since she misunderstand that the counterparty bank

(Barclays) is the broker.

First, the dealer told the position keeper some wrong information about the bank. Second, the position keeper is not clear about which bank tended to trade with us and misunderstood it was the broker. Third,

The dealer should clearly ask names of other banks and explicitly tell the keeper about our trading information. Moreover, the risk manager can help the other two coordinate all transaction conflicts.

Finally well done. When it is very busy to answer calls, Our risk manager did very well to monitor all the transactions and help check inappropriate recordings.

their abbreviations are very similar, thus the keeper did not realize the mistake.

Table 5: Wrong operations in the second session

6.3 Second trading

It is accurate that more mistakes we made more things that we could learn. What we did wrong could finally help us to improve. Additionally, reviewing mistakes is also very useful and helpful to learn, to experience and to harvest.

7 Overall performance measures of each role

The performance of our dealer, risk manager and position keeper are numerically described as below:

Role Responsibility Indicators

Target Performance

Measure

Actual Performance

Measure

Dealer

Quickly answering phones from other banks.

Immediately Almost Immediately, while several times dealers hesitated for a while to answer.

Clearly trade with other banks and ask their bank name, whether to buy or sell, trading amount, and transaction number.

About 1 minute Almost completed in 1 minute but sometimes dealers needed more 20 seconds.

Dialling phones to buy and sell AUD when there is arbitrage profits that can be obtained.

Immediately Immediately, and Match well.

Communicating with the position keeper about details of trading information including bank name, trading quantity,

About 30 seconds About 20-25

seconds.

reference number in time.

Closely watching the price changes of other banks.

During the whole trading process

During the whole

trading process.

Discussing trading strategies with the risk manager according to the various market and policy changes.

Each time 20-30 seconds and during the whole trading process

30-40 seconds

and during the

whole trading

process.

Change quoting prices 30-40 seconds each time

20-30 seconds each time

Grabbing arbitrage opportunities.

Immediately each time

Immediately.

Position keeper

Communicating with dealer and recording transactions.

Around 30 seconds

Around 30

seconds to record

each transaction.

Checking accepted transactions in time.

10-20 seconds 10-20 seconds.

Match well.

Recording accurately. About 20 seconds About 20 seconds.

Discovering trading mismatches with our counterparties. If there exists mistakes, the keeper needs to dial the counterparty bank as soon as possible.

Within 1 minute Almost within 1

minute.

Sometimes

exceed 2 or more

minutes.

Keeping in touch with the risk manager to ensure correct buying and selling quantity.

Within 30

seconds

Within 30

seconds. Match

well.

Risk manager

Tracking the quantity traded and the net position. Identifying arbitrage opportunities.

About 20 seconds About 20 seconds

each time. Match

well.

Discussing contingency strategies with dealer.

Around 20-30

seconds

Around 30-40

seconds each

time.

Continuously noticing all the market announcements and observing the market fluctuation.

About 30 seconds About 30 seconds

after news

announcement.

Continuously checking price changes and immediately giving suggestions to the dealer.

During the whole

trading process

During the whole

trading process

Table 6: Overall performance measures of each role

The performance of each role is numerically measured to summarize our trading process. We can see that measurements of target are always equal of less than them of actual situations. In sum, we almost did well and possess a medium level performance. Although there were some inappropriate actions and mistakes we made, each role has taken their responsibilities and tried their best to finish trading.

8 What you learned from EACH trading session

No. Key points What we have learned

1. Risks The first thing we learned is to understand two important risks that are market risk and operational risk. The market risk is about changes of monetary policies, inflation rate, interest rate, and foreign exchange rate. These indicators would affect the depreciation or appreciation of AUD. In addition, the operational risk is related to trading actions of the dealer, risk manager and position keeper. If the dealer receipts some large volume transactions, we have to bear the risk that the volume is difficult to be balanced and we may suffer losses when the market prices change unexpectedly. However, our trading amount is always small that we lose the initiative and become passive to compete with other banks. If the dealer quotes to an opposite direction, the risk that we have to accept some transactions resulting in our losses and more seriously the losses would be expanded if we do not take actions to prevent.

2. Preparation Preparation is extremely important for each bank before the market becomes active. The dealer has to be very clear about the trading principles, quoting strategies, cooperation with our risk manager, and how to balance our trading position. Moreover, the risk manager also has to understand the trading process

and cooperation with both our dealer and position keeper. The position keeper has relatively mild burden but the recording accuracy is related to our ultimate results of trading. Therefore, each position has to keep calm and prepare well before trading starts.

3. Reaction Our reaction is required to be strengthened in the later trading sessions. It is essential to react all market price changes and other banks’ quoting prices to adjust our strategies. One ways to enhance is to learn and to understand and the other way is to practice until we could react bid/ask prices, short/long positions and adjusting strategies quickly and accurately.

4. Quoting Initially, we are so nervous to make very attractive bid and ask prices, thus we all stand in the middle to observe others’ actions. When we tend to attract other banks to sell, we could increase a little of bid price. While our ask price is attractive when we decrease a bit. Therefore, we could gain the spread of the bid and ask price. We also have to consider the effects after we change our quoting prices in terms of other banks’ reaction to reply and their expected trading intention and amount.

5. Strategy Our strategies could be more aggressive. As we can see that conventional strategy cannot help us gain large amount of profit but can be easy balanced and reduce operational risks. Hence, different types of strategies possess advantages and disadvantages. Once choosing one type, what we need to do is to find a suitable way to adopt and crab arbitrage opportunities.

6. Job allocation

Job allocation is vital to complete our trading successfully. Each role has to cooperate well to cope with all abnormal situations. An important thing is that risk manager has the responsibilities to monitor and analyze the entire market when there are economic events releasing. Moreover, the manager also has to help our dealer noticing price changes and position keeper checking inappropriate recordings.

7. Gap between expectation and reality

There are always undesired results that we cannot change by ourselves. It is about the future trend of price changes after news releasing, the tight market spread to arbitrage and conventional of aggressive strategies. Our intention to expand trading amount is always affected by quoting prices of other banks and our initial is always weakened by our fear to loss. Therefore, what we need to improve is to diverge our mind to figure out solutions when dealing with all transactions and abnormal situations. Finally, we remember that our ultimate goal is to obtain profits by complying with the code of conduct.

Table 7: What we have learned

Our desire to improve does not stop when just finish the foreign exchange trading sessions. Learning and possessing good attitudes are more important things to continue our next part of trading.

Appendix 1

……Chenyang Jiang……Team Member responsible for the Report

a. Financial Performance.

Financial performance indicators include two aspects: Return and risk.

In terms of return, we adopt the formula profit / (volume/2) to measure our profitability. This formula tells how much profit we earn for per dollar of trade. We set our profit budget at least 0.25% since the USD case rate is 0.25%. This formula is used since our original position is zero for both AUD and USD which means we cannot use return on investment to measure our profitability.

From our perspective of risk, we decide to measure risks by controlling the maximum transaction quantity and extreme long/short position. Specific data of the performance indicators is shown as follow:

Indicators Budget Reality

Return Rate of return 0.25% 0.095%

Dollar profit (USD)

2.5M 104,000

Risk

Maximum transaction

amount (AUD)50M 30M

Extreme long/short

position (AUD)100M 80M

Total Turnover (USD)

1Billion 220M

Table 1. Financial Performance Indicators in Budget and Reality

As it can be seen from the Table 1, there is a large distance between our

budget and the reality. The major reason causing the variance is that we operated our trading too conservatively. For instance, we set the maximum transaction amount target as 50M, but we only achieve 30M. Our average transaction amount is even 118M, which is less risky but diminishes our profit obviously. In addition, our actual extreme position is lower than the target as well. In fact, we tried to keep our position as small as possible to minimise risk exposure. As a result, we lost several opportunities to expand our profit.

b. According to the economic scenario, we expect that the AUD will depreciate.

Generally, the Australian financial market has been bearish in the past few weeks. As a result, the demand of AUD will fall since foreign investment will reduce, implying a depreciation in AUD. The specific reasons will be demonstrated as follow:

1. A fall in business confidence level suggests investors’ willingness to invest in Australia will fall, so the demand of AUD falls accordingly.

2. The growth of consumers’ confidence suggests the economy will recover, so the AUD shall appreciate.

3. Unemployment increased 1.25% while the job creation is in a high level.

4. Australia is highly reliant on the commodity export. On one hand, the decrease in commodity price could stimulate exports since the price is cheaper, which might push the AUD going up. On the other hand, if we assume the exports remain the same or even lower, which is the scenario in this case, the demand of AUD will reduce and AUD will depreciate as a result.

5. Worldwide terrorist activities deliver information that Australia is no longer seen as a safe heaven. Some investors might lose confidence in the circumstance and reduce investment in Australia. This will lower the demand of AUD.

6. The concern of international analysts is able to undermine investors’ confidence with no doubt. Consequently, the AUD will depreciate.

c. The overall strategy we developed is buying at lower price and selling at higher price. Due to the expectation of depreciation in AUD, we decided to short AUD at the beginning and long AUD when the price falls. However, considering this is the first trading session, chaos might happen and the price trend could go without following the fundamental expectations, we decided operate more conservatively by observing the market reactions first. If the market reacts to news effectively, then we will follow our fundamental analysis. Otherwise we will try to take arbitrage opportunities from mispriced

quotes.

Given the expected events schedule, we construct our pre-trading strategies accordingly:

1. Balance of payments due; expected surplus of $5 Billion

The surplus of BOP implies that the capital inflow is higher than capital outflow. That suggests the demand of AUD is higher than the supply of AUD, hence AUD shall appreciate. Therefore, we should long AUD after the event.

2. Central bank’s quarterly Statement of Monetary Policy due; expected to reflect concerns that economy is overheating.

Concerns of economy overheating will force CBA to adopt tight monetary policy, such as increasing the interest rate. High interest rate will attract international capital to invest in Australian financial market, pushing the AUD going up. Therefore, we should long AUD after the event.

3. Consumer credit figures due. Expected to show continued growth.

The growth of consumer credit figures show increased confidence towards future economy, which will lead to AUD appreciation. Therefore, we should long AUD after the event.

4. Consumer Price Index figures due. Expected Annual Inflation Rate = 3%.

The 3% of inflation stays in the acceptable level. However, the inflation rate of US is unaware, the change in exchange rate is unknown. We should wait and see the movement of the market.

d. Although we had established our trading strategies to cover as many as market possibilities, the reality is still quite different from the expectation.

Overall, we kept the strategy of buying at lower price and selling at higher price. However, the fundamental analysis seems to be not significantly related to our actual trading strategy, because the market did not move effectively after the events released. In fact, we started as price taker and set our quotes in a medium level to ensure we will not lose money immediately. Then we found mispriced quotes and tried to grab them, because of which we made our first profit.

As the trades proceeding, some banks began to dial us. Since our price was the middle level of the market, we could make profit as long as others took our price. On one hand, due to our conservatism of our strategy, the average transaction amount of our bank is relatively low, because of which we lost several opportunities to expand our profit. On the other hand, we did not suffer any lose during the trading session.

e.

19/03/2015 10:01:00 19/03/2015 11:07:000.8300

0.8500

0.8700

0.8900

0.9100

0.9300

0.9500

0.9700

0.9900

1.0100

1.0300

1.0500


Market FX rate movement

Graph 1. Original Market FX Movement

From this graph, it can be observed clearly that the market movement is extremely abnormal. The sell rate of AUD even reached up to 1.05. By analysing the original data, we find that the reason is some banks mispriced their quotes, which pulled the sell rate to an abnormal level. Obviously, the extremely abnormal data should be deducted in order to find the real movement of the market. After deducting the extremely abnormal data, we get the graph as follow:

19/03/2015 10:01:0019/03/2015 11:04:000.8420

0.8430

0.8440

0.8450

0.8460

0.8470

0.8480

0.8490

0.8500

0.8510

0.8520

0.8530


Market FX rate movement

Graph 2. Addressed Original Market FX Movement

At 10:01:53, news is released regarding the USD cash rate. Federal Reserve announces the cash rate increased to 0.5%, which shall fundamentally lead to AUD depreciation. Then, BHP state it wanted to buy AUD 100M at 0.8494. This announcement could be able to give us a hint to set our quotes higher than 0.8494. However, the sell rate rises sharply while the buy rate remains in the same level without significant news being released. It is very likely that this movement is caused by mispricing.

At 10:15:00, the price falls dramatically and the sell price is even lower than the buy price. The reasonable explanation is that the actual BOP surplus is lower than the expectation, causing the depreciation of AUD. Meanwhile, there are still some banks might misprice their price since the abnormal quotes. After that the price quotes return to the normal level.

From 10:24:43, there are three continuous news released which have negative impact on AUD. After that the market price goes down slightly as response to the news. But the following appreciation of AUD is unexplainable except mispricing. Then the market price stays in a relatively stable level since no vital information is released. ‘

Overall, the market is not sufficiently efficient since the changes in price are always delayed and mispricing happens frequently. The major reason is that people are not familiar enough with the trading system and the foreign exchange quoting mechanism.

f. What you did wrong and remedial action.

Wrong Actions Reason Remedial Actions

1 Agreed to buy 15M

Forget the principle of 10M interval

Try to sell 15M to another bank

2 Refuse to buy 100M at 0.8488

Conservative strategy

Try to expand our transaction amount afterwards

3 Record the wrong information in position keeping

Not familiar enough with the trading system

Alter the wrong records

4 The reaction to arbitrage opportunities is too slow

Not familiar enough with the trading system

Try to be more concentrative

Table 2. Wrong and Remedial action

g. Depth and quality of operational performance measures of each role.

Role Responsibility Performance

Dealer Quickly and clearly answer and dial phones when banks tend to trade and we tend to buy.

About 1 minute

Communicate with the position keeper about details of trading information including bank name, trading quantity, trading number in time and ensure accurate recordings.

About 20 seconds

Discuss and change trading strategy with the risk manager to decide what role they are and whether they need to buy or sell.


Closely notice the price changes of price makers. If there are arbitrage opportunities, follow them and capture them.

Immediately and almost at any time

Position keeper

Communicate with the dealer and record trading details.

Around 20 seconds, but little transactions are time-consuming to record and more than 2 minutes are used.

Check transactions are accepted in time and recorded accurately.

10-20 seconds

Discover trading mismatches with their counterparties. If there are mistakes, the keeper needs to dial the trading bank as soon as possible.

Within 1 minute

Keep in touch with the risk manager to ensure buying and selling quantity.

Within 30 seconds

Risk manager

Know the quantity traded and their net position. Take chances to arbitrage and estimate their risks.


Discuss strategies with the dealer. Around 30 seconds each time

Continuously notice all the news and analyse their affects.

30 seconds after news announcement

Continuously check price changes and immediately give suggestions to the dealer.


Table 3. Operational Performance Measures of Each Role

h. What you learned from the trading session.

The first thing we have learned is that there are always discrepancies between expectation and reality. It is difficult to stick to our pre-established strategies during the real trading. One reason is our strategies do not take every possibility into account. More importantly, we failed to adjust our strategies swiftly to respond the market movement. For instance, we should be more aggressive when realising we were able to take advantage of the inefficiency and chaos of market.

In terms of job descriptions of each role, the risk manager should be more concentrative in monitoring the market movement and giving the rational expectation of the price movement based on the news released. The position keeper should be more careful in recording the transactions and notify the dealer and risk manager about the mismatched transactions in time. The dealer should concentrate on discovering desired quotes in the market and place reasonable quotes that comply with our strategy. Moreover, the dealer should be unambiguous in expressing the trading details when dealing with other banks in case mismatched transaction happens.

In summary, we have learned a lot in this trading session and been better prepared for the next session.

Appendix 2

……… Danlin Wang …Team Member responsible for the Report

a. Financial Performance.

Financial performance indicators focus on two aspects: Return and risk.

In terms of the return rate, we use the formula profit / (volume/2) to calculate our profitability. Since our first budget was aiming to high, we change our target of profit to a more practical and reliable level, which is 0.1%. Although the US Federal Funds Rate is 0.25%, it is a little higher rate for us to achieve according to the market limitations and small spread between market buying rates and selling rates.

Regarding the risk estimation, we monitored our maximum transaction amount and extreme long/short position. The larger transaction amount could increase the operation risk but it is also a key point to get more profitability. Additionally, the extreme long/short position represents the top amount that would remind us to deal in an adverse direction.

Indicators Budget Reality

Return Rate of return 0.25% 0.1% 0.095%

Dollar profit (USD)

2.5M 0.8M 0.038M

Risk

Maximum transaction amount (AUD)

50M 50M 30M

Extreme long/short position (AUD)

100M 100M 80M


1Billion 800M 520M


It can be discovered that there is also a big difference between the budget and

reality. We reset a new budget with lower profitability but the real dealing is not good as we expected. Our strategy was conservative in order to reduce risks last time and we tend to expand our transaction amount. However, it is not so easy to reach a higher level like 80-100 million each transaction.

b. Summary of the economic scenario and your bank’s view on the foreign exchange price prior to the trading session

Based on the economic scenario, the Australian financial market would experience a falling trend since it has already been bearish a few weeks ago. In addition, the demand of AUD would decrease due to the gradually reducing foreign investment. Therefore, AUD would depreciate in the future.

1. The falling business confidence level represents decreasing average of trading and probability percentage. At the same time, the demand of AUD investment would decline as well.

2. Reducing retail expenditure leads to higher confidence, thus the Australian financial market will recover and AUD will appreciate correspondingly.

3. Although the job creation is at a high level, the unemployment rate has increased 1.25% which is affected by the recession of economy.

4. Since the Australian economy is largely depending on the commodity exports, the reducing commodity price would increase its demand, which could help AUD’s appreciation. However, if the quantity of exports is not large to stimulate the entire economy, there will be little effects on AUD’s fluctuation.

5. Worldwide terrorist activity would result in some bad influences and serious results. The world economy would go down and Australia would no longer safe paradise to invest. As a result, the value of AUD will depreciate.

6. High-priced property would weaken the investors’ willingness and confidence to invest. Hence, demand of AUD would decline with the depreciation of AUD.

c. Strategies developed for the trading session, including contingency strategies prior to the trading session..

The overall dealing strategy has remained to buy at lower price and to sell at higher price. It is the most important principle to trade through banks. Based on the economy scenarios, AUD will depreciate. Hence, we need to short first at a higher price and then long at a lower price. However, during the whole

trading process, the market reaction is slow that the buying and selling spread is very small to get profit.

We first analyse these news and then set different pre-trading strategies to face these situations to crab arbitrage opportunities.

Balance of payments due and AUD dollars have an expected surplus of $5 Billion. The great surplus of BOP represents that the capital inflow is larger than the capital outflow in Australia. It indicates that the demand of AUD has increased in terms of international trading and business. This will lead to the appreciation of AUD and we need to long AUD to react (9.25am).

Central bank quarterly statement of monetary policy due and the economy is expected to be slow. Thus, the demand of AUD would be reducing and the AUD would depreciate. Then what we need to do is to short our AUD (9.35am).

Consumer credit figures due and the economy would go down. The consumer credit figures indicate the benchmark of interest rates. If the economy slows down, we can see that the interest rate would witness a downside trend. Therefore, foreign investors would decrease investment in AUD. The value of AUD would depreciate accordingly and we should short AUD (10.55am).

Reduction in Australian cash rate by 0.5% would slightly decrease the demand of AUD. Therefore, we need to short the AUD after the event (11.20am). In addition, at the same time, the inflation rate reduced to 2.5%. There may be slight fluctuations but not big changes so that we can first observe the market tendency.

CPI provides the information that the Australian annual inflation rate equals 3%. It is a normal rate but the US inflation rate and changes of interest rates are unknown. Hence, we were waiting for the movement of the market (11.55am).

d. Strategies actually used during the trading session

The fundamental strategy is to buy at lower price and sell at higher price.

At the beginning, we play as a price taker and wait other banks’ quoting. Based on their quoting, we choose to maintain in the middle level. However, this conservative action makes us sinking into a passive situation and can only be affected by other active banks. In addition, we can hardly averse our situation in a short time.

Quoting price is critical to occupy a favorable position to trade. When there are arbitrage opportunities and other banks’ selling prices are almost at a same level, we increase just several pips based on their quoting but not

change our selling price. Therefore, there are banks tending to sell us their AUD dollars. It does work but the amount is not large. Then we decreased our selling price to a normal middle price and at the same time we reduced our buying price as well to attract buyers of AUD but the price would be a little higher than our increasing selling price. Hence, we could get the profit of the spread.

However, we did not suffer any lose in the whole trading process. Our selling prices are always a little higher than our buying prices. Although the selling and buying amount is not large, we understand the principles of FX trading. We tend to increase risk tolerance and return expectation in the next trading session.

e. Analysis of how and why the foreign exchange market price changed

3/26/2015 9:15 3/26/2015 10:05 3/26/2015 10:550.8350

0.8400

0.8450

0.8500

0.8550

0.8600

0.8650

FX Market Price Movement


Graph 1. Original Market FX Movement

FX market price should change with the releasing news. At 9.25am, there was a downward trend of sell rate but it did not match the releasing event that the AUD would appreciate. The market may have a time lag or mismatch to reflect the effects of the surplus of BOP. However, the buy rate retained as the same level compared with the former performance.

At 11.12am, the market witnessed an excessive reaction of the news that the economy would go down. During this period, there were no arbitrage opportunities because of the market mispricing. Therefore, this trend misleads the selling price far away from the normal level.

3/26/2015 9:15 3/26/2015 10:02 3/26/2015 10:490.8350

0.8400

0.8450

0.8500

0.8550

0.8600

0.8650

Adjusted FX Market Price Movement


Graph 2. Adjusted Market FX Movement

When the abnormal data was deducted, the selling price trend recovered to the normal level. The continuous events have slight impacts on both the sell and buy price fluctuation. Overall, the market is not efficient enough to reflect and indicate all the influences of events. Price takers and makers may sometimes misunderstood and mismatch their quoting that result in some mispricing satiations.



1 Have emotional reactions to others.

When the counterparty bank confused about their buying price and selling price

Clearly talk to them about their prices and raise their attention to understand the principles of quoting and trading.

2 Reject other bands’ requests twice.

We changed our prices at the same time answered the phone. The other rejection is that we closed our quoting and there are also a bank wanted to take our price.

Tell them to pay attention to the market changes. When we tend to change prices, we should be as quick as possible to prevent some misunderstanding of our situation.

3 Not change quoting in time.

We need to change our quoting to get larger arbitrage spread but our quoting plan delayed because of answering phones.

To ask the risk manager for help to change our prices when the dealer is busy to answer phones.

4 The reaction to arbitrage opportunities is too slow.

Not react quickly with the requests of our customers and their buying and selling rate.

Prepare in advance to remember and understand the buying and selling of price takers and price makers. Tend to be more concentrative but actually always passive trade.



Dealer Quickly and clearly answer and dial phones when banks tend to trade and we tend to buy.

About 1 minute

Communicate with the position keeper about details of trading information including bank name, trading quantity, trading number in time and ensure accurate recordings.

About 25 seconds

Discuss and change trading strategy with the risk manager to decide what role they are and whether they need to buy or sell.


Closely notice the price changes of price makers. If there are arbitrage opportunities, follow them and capture them.


Position keeper

Communicate with the dealer and record trading details.

Around 30 seconds, but little transactions are time-consuming to record and more than 2 minutes are used.

Check transactions are accepted in time and recorded accurately.

10-20 seconds

Discover trading mismatches with their counterparties. If there are mistakes, the keeper needs to dial the trading bank as soon as possible.

Within 1 minute

Keep in touch with the risk manager to ensure buying and selling quantity.

Within 30 seconds

Risk manager

Know the quantity traded and their net position. Take chances to arbitrage and estimate their risks.


Discuss strategies with the dealer. Around 30 seconds each time

Continuously notice all the news and analyse their affects.


Continuously check price changes and immediately give suggestions to the dealer.



First, the dealer must prepare well and understand the principles deeply.

To clearly consider what role s/he is and what rate s/he needs to take. If there is an appreciation, what can s/he does to react and whether s/he needs to buy or sell.

To understand there are gaps between reality and expectation. The market trend may exceed your expectations and sometime may experience an adverse direction.

Our strategy is too conventional to deal and the trading amount was always not large as we imagine. We need to be more aggressive next time to take advantages of price spreads.

We need to quickly adjust and quote at appreciate time. When the news is releasing, we have to think about their influences and results to re-establish and alter our strategies.

A good job distribution is required to allocate our tasks. The risk manager needs to observe the market trend and monitor the abnormal situations continuously. In addition, the position keeper has to keep our transactions accurately and quickly. Communications among each other are necessary to help us trade successfully.

In summary, we learned so much again in the second trading process. We know what we did not well and how we can improve. We will prepare better to crab arbitrage chances and get profit in the third FX trading session.

Appendix 3

……… Li Chen …Team Member responsible for the Report

a. Financial Performance

Indicators Week4Budget Week 5 Budget Reality

Return Return on Equity 0.03% 0.05% 0.056%

Dollar profit (USD)

0.8M 0.2M 0.056M

Risk

Maximum transaction amount (AUD)

50M 200M 150M

Extreme long/short position (AUD)

100M 100M 100M


800M 700M 700M


Financial performance indicators mainly focus on two aspects: Risk and Return.

We have earned $56000 profit in this week's trading simulation. The ROE equals total profit divided by total equity, which equals 100 million. The profit of our bank still ranked 5th in this week although the market is very tight.

Graph1: Profit earned by each bank

Regarding the risk control, we monitored our maximum transaction amount and extreme long/short position. Although more turnovers mean more potential profit we could earn, it also includes more risk. The extreme long/short position reminds us to square the account in time. It also can be found that there is a little difference between budget and reality. The reason is that the bid-ask spread is very tight, and we cannot make much profit from other banks except dealing with corporate. Apart from that, we made a mistake to fill the tender, and this made us miss a lot of profit.

b. Summary of the economic scenario and your bank’s view on the foreign exchange price prior to the trading session.

As is shown in the economic scenario, the Australian financial market has been bearish for several weeks, and this trend will continue to affect the economy of Australian. Apart from that, with the decreasing of the foreign investment in Australia, the demand of Aussie dollar will drop. In this situation, the Aussie dollar will continue depreciating in the near future.

1. With the falling of business confidence level, the average number of investment trading will drop. It means that the demand of Aussie dollar will decrease and this results in the depreciation of the AUD.

2. Although the retail expenditure has been steadily reducing over the past 15 months, the consumers regain the confidence in the economy. As the confidence of consumers rises, the Aussie dollar will appreciate accordingly.

3. The rate of unemployment has increased by 1.25% despite of the high level of job creation. It will result in the depreciation of Aussie dollar and bearish share market.

4. Since the Australian's economy mainly depends on the export of its commodity, the decreasing commodity price leads to the high demand of Aussie dollar, theoretically, this will result in the appreciation of Aussie dollar. However, China has become the largest commodity import country from the Australia. If the demand of commodity decreases in China, which means that China wants to relieve its economic growth and does not need so much iron ore or coppers etc., then the Aussie dollar will continue depreciating despite the price of the commodity drops down.

5. Worldwide terrorist activity results in negative influences and serious situation. The global economy will drop down and Australia certainly cannot avoid the negative influences on its economy. It is no longer a safe paradise where investors can invest without any doubts. As a result, the Aussie dollar will depreciate.

6. The high-priced property market means that there exist many economic bubbles in the property. And investors do not want to invest those risky properties. Therefore, the demand of Aussie dollar declines with the depreciation of the Aussie dollar.

c. Strategies developed for the trading session, including contingency strategies prior to the trading session.

The principal trading strategy should always be kept in mind that is buying at a lower price and selling at a higher price. Only in this way can we make profit in the foreign exchange market. According to the economic scenario, we predict that the Aussie dollar will depreciate. Therefore, when the market opens we should short Aussie dollar at a higher price and then buy back at a lower price. Nevertheless, this is only a theoretical strategy and it may not be achieved when the market opens. This is because every market competitor is familiar with this basic method, and no one wants to give other competitors to make profit in such simple way. Hence, we set some contingency strategies to cope with the situation of the market contraction. First of all, we can make transaction with corporate to make profit, for example, we set an appropriate ask price according to the market condition to win the tender from the corporate (toll holdings) and then we get the initiative to reset our bid price to attract other banks to sell their Aussie dollar. Consequently, we can make profit through this strategy. Apart from that, we predict that other banks may make no sense about the market news. If this situation happens, the chance to make profit is very difficult. Thus, we still need to observe other banks bid price and ask price and change our price according to attract buyers and sellers. Although this method helps us to make little profit in the market, this is the most effective way to win in the tight market.

After setting these special strategies, we analyze the market news and anticipate the market is inefficient, so we can find some mispricing to make profit.

Balance of payments due. Expected surplus of AUD 1 billion. The surplus of BOP indicates that the total export is greater than the total import. This also indicates that overseas buyers need more Aussie dollar to pay the commodity charge, thus the demand of AUD increases with the appreciation of the Aussie dollar(10:10 a.m.). If the market is efficient, we should long AUD at this time.

Central bank’s quarterly Statement of Monetary Policy due. Expected to reflect concerns that economy is slowing. When this announcement is released, the AUD will depreciate for that the demand of AUD from investors declines (10:30 a.m.). In this point, we should short our Aussie dollar.

Consumer credit figures due. Expected to show continued slowdown. This indicates that the AUD will depreciate (11:30 a.m.). Since investors reckon that the return of investing in Australia financial market is not attractive, thus the demand of AUD drops down. In this point, we should short AUD.

Consumer Price Index figures due. Expected Annual Inflation Rate expected to be 2.50% (11:40 a.m.). The inflation rate in Australia is about 2% to 3%, and 2.5% is a proper inflation rate in the whole economy. Thus, the exchange rate of AUD may not change, and we should do nothing but observe the market movement to find some arbitrage opportunities.

d. Strategies actually used during the trading session

As is predicted by us, the market is too contracting to make profit easily when the markets open. Each bank's quoting rate is almost the same. At the first time, we pick some banks with relative lower ask price and buy some AUD. After that, the market is moving upward, all banks rise their ask price and bid price. And at that time we change the ask price at a lower level according to other banks in order to attract potential buyers. Finally we sold all AUD successfully, although the profit is not very large at the beginning phase.

In the trading session, we also make transactions with corporate such as Toll Holdings and BHP Billiton, and these transactions is a good opportunities for us to make a promising profit. However, when we fill the tender of Toll Holdings we make a mistake. We do not see the tender amount clearly, 2 billion is equals 2000 million, but we just regard that this company want to buy 200 million and we fill 50million at 0.8499. So we missed a good opportunity to enlarge out profit.

Overall, the strategies which we have prepared are all being implemented in the trading session, and we predict the market correctly. Consequently, these strategies help us to make a good profit.

e. Analysis of how and why the foreign exchange market price changed

Graph 2: FX market movement

If the foreign exchange market is efficient, the price movement should always keep in step with market announcements. In fact, when the surplus of BOP news released, the bid and ask price also moved in contrary direction. After analyzing the market data, we found that the Westpac had mispricing, they set the bid price at 0.843 and ask price at 0.81! They have totally run out of the market. However, according to the code of ethics, we could not make illegal profit from the Westpac.

When the news of cutting interest rate released, the market overreact this news and the ask price dropped dramatically while the bid price did not change. There also exists mispricing when the news spread out. The ANZ bank set the ask price at 0.8102 while the bid price at 0.8489! However, according to the code of ethics, we could not make illegal profit from the ANZ.

During the period from 11:09 to 11:25, OCBC had mispricing in the FX market, they set the bid price at 0.8490 and ask price at 0.8130! This mispricing made the market average ask price slump although there was no news in this time period.

When the news of fallen of consumer credit released, the market suddenly moved into adverse direction. The exchange rate increased!

Graph 3: adjusted Foreign Exchange price movement

When the factors of mispricing have been deducted, the market average selling price tends to be stable. Although the overall tendency of the exchange rate is depreciating, there also exists some abnormal fluctuations after the market announcements. Above all, the market is not very efficient according to the market announcements. Meanwhile, some mispricing also exists in the market, but we cannot make theses illegal profit according to the code of ethics.



1 Filling the tender of Toll Holdings with too little selling amount

Not sensitive about the number, do not make sense 2 billion equals 2000 million

Using another BHP tender to make profit to compensate the loss of profit in this tender.

2 Typing wrong ask price

Unintentionally touch the keyboard button

Change the ask price properly, and explain to those who want to make transaction with you at that time.

3 Buying the AUD high and selling it at lower price

Answering too much

calling and does not make

sense the AUD account

has 30M surplus

Let the risk manager to concentrate on the account position and tell the dealer in time.



Dealer Quickly and clearly answering and dialling phones when other banks tend to trade with us and we tend to buy.

About 1 minute

Communicating with the position keeper about details of trading information including bank name, trading quantity, reference number in time

About 25 seconds

Discussing and setting different trading strategies with the risk manager according to the various market situations.


Closely watching the price changes of other banks. If there exists arbitrage opportunities, grabbing those opportunities.


Position keeper

Communicating with dealer and recording transactions.

Around 30 seconds to record each transaction.

Checking accepted transactions in time and recorded accurately.

10-20 seconds

Discovering trading mismatches with our counterparties. If there exists mistakes, the keeper needs to dial the counterparty bank as soon as possible.

Within 1 minute

Keeping in touch with the risk manager to ensure correct buying and selling quantity.

Within 30 seconds

Risk manager

Tracking the quantity traded and the net position. Identifying arbitrage opportunities.


Discussing contingency strategies with dealer.

Around 30 seconds each time

Continuously noticing all the market announcements and observing the market fluctuation.


Continuously checking price changes and immediately giving suggestions to the dealer.



The dealer must set an appropriate bid and ask price during the trading in order to make profit during the tight foreign exchange market.

Each role in the bank group is equally important. The dealer, position keeper and risk manager should contribute to help the group make more profit.

Understanding the difference between reality and expectations during the trading session. The market may sometimes move to adverse direction according to the news, thus it is important to dealer and risk manager to watch and analyze the market and use a proper strategy to deal with it.

When there is little opportunity to make profit in the tight market, dealing with corporate is a good strategy to break the deadlock. If you can sell at a high price to corporate, then you can take initiatives to set an attracting bid price to attract potential sellers. In this way, you can make more profit than just making transaction with other banks.

Quickly adjusting price and changing strategy according to the various market situations are also important. If you find your price can be done arbitrage by other banks, then the risk manager should help dealer to change price when dealer is being called in order to decrease the potential loss if mispricing exists.

In conclusion, we have learned a lot of skills to make profit and find arbitrage opportunities in the foreign exchange trading session. And we hope to put these methods into practice.

Appendix 4

Foreign exchange policy

During each trading session, we try our best to find any arbitrage opportunities to

make profit under the code of conduct. Overall, we chose a conservative trading

policy. In the first trading session, we made efforts to reduce our risk exposure and

just wanted to make small profit margin from each transaction. Apart from that, we

used tenders to increase our profit. In the second trading session we changed our

policy to aggressive and we crabbed every transaction opportunity with corporate and

made profit.

Appendix 5

The job of each role is well allocated and each group member is responsible for when

s/he needs to do. The dealer’s job is all about trading with other banks by dialing and

answering phone calls. All the information including the trading bank, trading

amount, buying or selling, and reference number is required to be recorded by the

position keeper. The dealer also has to closely watch the price changes of other banks

and quote bid and ask prices.

The risk manager is a key role to dominate the operation of our whole bank. The

manager needs to monitor the entire economic and market environment and discusses

strategies with the dealer. Continuously checking price changes and immediately

giving suggestions to the dealer are also necessary for the manager.

The position keeper should communicating with dealer and recording transactions

accurately. The keeper has to discover trading mismatches with our counterparties. If

there exists mistakes, it is required to dial the counterparty bank as soon as possible.

Finally, all of the members have to comply the code of conduct.

FX Summary Report

Documents

Transcript of FX Summary Report