Foreign Exchange Data Modeling Example

This assignment provides a worked example illustrating the concept of real-time foreign exchange data modeling. It showcases three transactions involving US Dollar (USD), Euro (EUR), and British Pound (GBP). The example demonstrates how to calculate currency conversion using bid rates for each transaction, highlighting the process of selling USD to buy EUR, then selling EUR to buy GBP, and finally selling GBP to buy back USD. The last step reveals an arbitrage profit earned through these sequential transactions.

RUNNING HEAD: Financial analysis and currency pair
1
Name of the student
Topic- Financial analysis and currency pair
University name-

Financial analysis and currency pair 2
Executive summary
This report has reflected the key understanding on the currency pair and associate foreign
exchange risk and strategies which could be undertaken by the banks and investors on
international level. This report is accompanied with the structure of currency pair AUD and USD
and another one is related to USD and EURO. However, proper level of risk and obstacles
related with the foreign exchange and what kind of strategies and shield could be used to
mitigate these issues has been taken into consideration.

Financial analysis and currency pair 3
Contents
Executive summary............................................................................................................2
Introduction.......................................................................................................................4
Objective of the report...................................................................................................... 4
Currency pair..................................................................................................................... 4
Outline and explanation of market view and currency pair of AUD and USD....................5
Foreign exchange trading strategies..................................................................................7
Risk and obstacles in Foreign exchange trading.................................................................9
Conclusion........................................................................................................................12
References....................................................................................................................... 13
Appendix.......................................................................................................................... 15

Financial analysis and currency pair 4
Introduction
With the ramified economic changes and complex set of business functioning, each and
every organization is affecting its business structure and financial performance through foreign
exchange rate. In this report, Westpac bank has been taken as organization. In this bank I being a
part of the foreign exchange dealing team working for the bank will evaluate the currency pair at
international level.
Objective of the report
In this report, study has been prepared to evaluate marketing view concerning the
behavior at least two currency pairs over the next three to six months. After that foreign
exchange trading strategies and other methods have been taken into consideration. There are
several risk and obstacles which may be faced by investors while investing their money on
international level.
Currency pair
There are two currency pair have been designed with a view to analysis and evaluate the
market fluctuation throughout the time (Dervis, De Melo, and Robinson, 2015).
 Australian dollar and USD dollar
 USD dollar and EURO

Financial analysis and currency pair 5
Outline and explanation of market view and currency pair of AUD
and USD
After evaluating all the details and market perception of the currency rate of Australia
and America. It is evaluated that since last three months the currency value of Australian dollar
has gone up by 20%. In addition to this, US dollar rate has also increased by 22% since last three
month. There are two currency pair have been designed with a view to analysis and evaluate the
market fluctuation throughout the time (Dervis, De Melo, and Robinson, 2015).
After evaluating the data and details of the currency pair of AUD and US, it is considered
that the base rate is AUD which is compared with the US dollar currency. This currency pair is
the quotation of the relative value of currency units against the unit of another currency which is
determined foreign currency market exchange rate. It has shown that company since 15th august,
2017 AUD dollar rate was affecting by the 1 % if the US dollar rate change by .78%. This has

Financial analysis and currency pair 6
shown that AUD dollar rate has low currency value as compared to US dollar. The main reason
of this level of changes in the currency value of these two countries is based on the balance of
trade, gross domestic product rate and changes in national income. It is evaluated that US dollar
GDP rate is has increased by 5% since last three months. On the other hand, Australian economy
has changed by 2% since last three years. This level of changes has shown that Australian
currency value will go down. In addition to this, in September, US has faced drastic downfall in
its stock market which has resulted to AUD dollar rate to .80 as compared to US dollar rate.
After that, due to the increased national income and GDP rate of USA, currency swap rate or
USA and AUD was 1:.77 (Dervis, De Melo, and Robinson, 2015).
These levels of changes in value of currency of these countries have shown the positive
market growth and effective growth of these countries. The market behavior and forecasted data
of the Australian and US has shown positive inclination however, value of these currency have
increased due to the positive balance of trade and increased purchasing power of parity.
The relation between USD and EUR euro is reflects the key relation between how these
both currencies get fluctuated due to the changes in the global economic rate, gross domestic
product rate and euro money changes. After extracting information form the online sources, it is
observed that average rate of USD dollar value is .84 as compared to 1 Euro. It has been

Financial analysis and currency pair 7
evaluated that throughout the time of three months USD dollar has gained only .01% over the
euro value rate. It is considered that growth domestic rate of USD dollar is average 8%. On the
other hand, European country has also been maintaining around 8% average GDP rate since last
three month. However, the market capitalization of the European countries is comparatively high
as compared to US stock market capitalization value (Arndt, 2015). Furthermore, Foreign
exchange reserve of EU is average 3 times more than maintained by US government. This level
of changes and foreign exchange value of USD and EURO currency has shown that USD has
gained over EU countries only by .1% due to its foreign exchange reserve amount and gained
value.
Foreign exchange trading strategies
With the ramified changes in economic factors and international market outlook, it is
evaluated that if banks could follow proper foreign exchange trading strategies then they could
easily mitigate the risk associated with the foreign exchange investment. There are several
foreign exchange risk mitigating strategies which could be undertaken by the banks to create
hedge against all the risks such as forward contract, future options and underlying asset
(Mancini, Ranaldo and Wrampelmeyer, 2013).
Hedging Forex trading strategies
It is evaluated that when Banks invest in particular companies or lend money to
international borrowers then in that case money is returned back or paid back in base currency in
which that was occurred. Therefore, in order to resist the currency fluctuation or possible
changes in foreign exchanges losses could be done by following hedging forex trading strategies.

Financial analysis and currency pair 8
These are the contracts which are undertaken with a view to compensate the ups and down of the
international market. Ideally, it is controlled by using purchasing power parity, forward contract,
future contract and other heading contracts on international level (Garner, Nitschke and Xu,
2016).
Speculation
It is related to buying and selling of securities or financial assets which is used to create
high amount of profit. These speculations arise when the investors invest in particular condition
to compensate the possible risk. Speculation in currency market wager that results to moving the
currency value in particular directions and creating profit out of that certain situation. Ideally,
banks or investor uses these strategies to create profit out of these situations
Other foreign exchange investing strategies
It is evaluated that trading investing strategies that focus upon the relative value between
two currencies are also popular type of currency trades. Using arbitrage strategies in creating
shield against all the ups and down of the foreign exchange investing strategies are the main
major factor to create value from the investment in foreign currency. For instance, in case of the
lending money to EU foreign person would get destructed when the USD dollar value increases
its value on EU currency at the time of payment. Therefore, by creating forward or future
contract banks or other landers could bind the value of this currency at the particular stipulated
rate which results to lower down the foreign exchange risk.
In this case we could follow arbitrage trading strategies

Financial analysis and currency pair 9
In this case, USD 10, 00,000 will be sold to buy EURO after that EURO will be sold to
buy GBP. After that GBP will be sold to purchase USD. This will help to create arbitrage profit
of $ 3,427.98 (Mueller Stathopoulos and Vedolin, 2017).
Triangular
Arbitrage
Textbook
Example Live Data
a. Sell of USD to
Purchase EUR
$
10,00,000.0
0
$
10,00,000.00
USD/EUR
Bid x 1.0240
€
10,24,000.0
0 € 0.00
b. Sell of EUR to buy
GBP
€
10,24,000.0
0 € 0.00
EUR/GBP
Bid x 0.6418
£6,57,252.8
9 £0.00
c. sell of GBP to buy
USD
£6,57,252.8
9 £0.00
GBP/USD
Bid x 1.5267
$
10,03,427.9
8
$
-
Arbitrage Profit
$
10,03,427.9
8
$
-
-
$
10,00,000.0
0
$
10,00,000.00
$
3,427.98
$
(10,00,000.00
)

Financial analysis and currency pair 10
Risk and obstacles in Foreign exchange trading
Foreign exchange risk is also known as FX risk which arise due to uncertainty or high
fluctuation in exchange rate on domestic and international level of particular countries. This risk
typically affects to banks or investors who are indulged in investing money on international level
or imports or exports of business. It is evaluated that risk and obstacles in Foreign exchange
trading is based on the investing currency and its associate economic factors. For instance, if the
stock market is highly fluctuated due to affecting factors of economic and investing factors such
as lower down in the market capitalization and high inflation. Therefore, in this case investors or
banks will be having high investment risk. Another example is related to purchasing power
parity changes on the banks investment level (Bali and Wilma, 2015).
Transaction exposure risk
It is evaluated that banks would face these transactions exposure risk only when it has
receivables and payables from other countries. This transactions exposure risk arise when banks
faces fluctuation in the payment amount due to the exchange rate of two different dates i.e.
transaction occurring date or date given in invoice (Hsiao, 2017).
Economic exposure
This economic exposure risk arises due to the changes in economic factors and negative
downfall in the foreign exchange rate of the invested currency due to the economic factors. For
instance, banks invested USD 1 million in Euro but due to economic factors rate of USD
increased by .4 points due to negative economic factors of EU. In this case, it will decrease the
value of the investment (Hasbrouck, and Levich, 2017).

Financial analysis and currency pair 11
Contingent exposure
These are the risk which arise when investing money in or negotiate contracts directly
with the foreign firms. For instance, if Banks in USA entered in to strategic alliance with other
companies having origin of EU then it may create high contingent exposure when there is
negative situation in EU countries (Engle III, Ito, and Lin, 2008).
Translation Exposure
This Translation Exposure risk arises due to the changes in reporting period and at the
time when the books of accounts are prepared in organization. For instance, banks in USA will
having business origin will diminish the value of the assets shown in its books of account if at
the reporting time period the value of the USD goes down as compared to EU currency
(Domowitz and Hakkio, 2015).

Financial analysis and currency pair 12
Conclusion
After evaluating all the data and changes in currency fluctuation, it could be inferred that
changes in foreign exchange rate is highly dependent upon the foreign exchange reserve and the
balance of trade of particular countries. However, EURO dollar has decreased its value on
international level due to its Grease issues and USD dollar has gained strong by .2 points since
last six month. Arbitrage profit has been created in this report by using triangular arbitrage
foreign trading strategies.

Financial analysis and currency pair 13
References
Arndt, S.W., 2015. International Short Term Capital Movements: A Distributed Lag Model of
Speculation in Foreign Exchange. In Evolving Patterns in Global Trade and Finance (pp. 241-
252).
Bali, T.G. and Yilmaz, K., 2015. The intertemporal relation between expected return and risk on
currency. In Handbook of Financial Econometrics and Statistics (pp. 1105-1141). Springer New
York.
Dervis, K., De Melo, J. and Robinson, S., 2015. A general equilibrium analysis of foreign
exchange shortages in a developing economy. In Modeling Developing Countries' Policies in
General Equilibrium (pp. 71-86).
Domowitz, I. and Hakkio, C.S., 2015. Conditional variance and the risk premium in the foreign
exchange market. Journal of international Economics, 19(1-2), pp.47-66.
Engle III, R.F., Ito, T. and Lin, W.L., 2008. Meteor showers or heat waves? Heteroskedastic
intra-daily volatility in the foreign exchange market.
Garner, M., Nitschke, A. and Xu, D., 2016. Developments in Foreign Exchange and OTC
Derivatives Markets. RBA Bulletin, December, pp.63-74.
Hasbrouck, J. and Levich, R.M., 2017. FX Market Metrics: New Findings Based on CLS Bank
Settlement Data (No. w23206). National Bureau of Economic Research.

Financial analysis and currency pair 14
Hsiao, C.M., 2017. The Foreign Exchange Exposures and Enterprise Risk Management:
Evidence from Hospitality Industry in Taiwan. Asian Journal of Finance & Accounting, 9(1),
pp.274-309.
Mancini, L., Ranaldo, A. and Wrampelmeyer, J., 2013. Liquidity in the foreign exchange market:
Measurement, commonality, and risk premiums. The Journal of Finance, 68(5), pp.1805-1841.
Mueller, P., Stathopoulos, A. and Vedolin, A., 2017. International correlation risk. Journal of
Financial Economics.

Financial analysis and currency pair 15
Appendix
AUD and USD
Date (G
MT) Rate**
Average 0.78592
15-Aug-
17
0.78188
8
16-Aug-
17
0.78848
5
17-Aug-
17
0.79132
7
18-Aug-
17
0.79377
7
19-Aug-
17
0.79270
7
20-Aug-
17
0.79283
3
21-Aug-
17
0.79371
4
23-Aug-
17
0.78896
4
24-Aug-
17
0.79051
4
25-Aug-
17
0.79378
6
26-Aug-
17 0.79321
27-Aug-
17
0.79327
3
28-Aug-
17
0.79529
2
29-Aug-
17
0.79659
1
30-Aug-
17
0.78989
6
31-Aug-
17
0.79261
3
01-Sep-
17
0.79785
2
02-Sep- 0.79690

Financial analysis and currency pair 16
17 8
03-Sep-
17
0.79732
1
04-Sep-
17
0.79493
8
05-Sep-
17
0.79941
5
06-Sep-
17
0.80073
7
07-Sep-
17
0.80315
2
08-Sep-
17
0.80708
6
09-Sep-
17
0.80544
5
10-Sep-
17
0.80573
7
11-Sep-
17
0.80310
3
12-Sep-
17
0.80296
5
13-Sep-
17
0.79740
7
14-Sep-
17
0.79764
2
15-Sep-
17
0.80038
4
16-Sep-
17 0.80032
17-Sep-
17 0.80032
18-Sep-
17
0.79538
7
19-Sep-
17
0.79958
4
20-Sep-
17
0.80778
4
21-Sep-
17
0.79340
8
22-Sep-
17
0.79611
5
23-Sep-
17
0.79586
2
24-Sep-
17
0.79630
5
25-Sep- 0.79440

Financial analysis and currency pair 17
17 7
26-Sep-
17
0.78755
7
27-Sep-
17 0.78663
28-Sep-
17
0.78440
6
29-Sep-
17
0.78437
5
01-Oct-
17
0.78388
3
02-Oct-
17
0.78268
7
03-Oct-
17 0.78281
04-Oct-
17
0.78554
6
05-Oct-
17
0.78018
3
06-Oct-
17
0.77672
9
07-Oct-
17
0.77700
1
08-Oct-
17
0.77700
1
09-Oct-
17 0.77631
10-Oct-
17
0.77869
5
11-Oct-
17
0.77739
3
12-Oct-
17
0.78222
8
14-Oct-
17 0.78911
15-Oct-
17
0.78889
2
16-Oct-
17
0.78607
1
17-Oct-
17
0.78400
6
18-Oct-
17
0.78448
3
19-Oct-
17
0.78747
3
20-Oct- 0.78201

Financial analysis and currency pair 18
17 4
21-Oct-
17
0.78189
1
22-Oct-
17
0.78167
7
23-Oct-
17
0.78049
7
24-Oct-
17
0.77781
7
25-Oct-
17
0.76967
5
26-Oct-
17
0.76799
6
27-Oct-
17
0.76591
4
28-Oct-
17 0.76802
29-Oct-
17 0.76799
30-Oct-
17
0.76778
4
31-Oct-
17
0.76566
7
01-Nov-
17
0.76742
4
02-Nov-
17
0.77169
4
03-Nov-
17
0.76429
2
04-Nov-
17
0.76508
2
05-Nov-
17
0.76505
2
06-Nov-
17 0.76743
07-Nov-
17 0.76333
08-Nov-
17
0.76755
4
09-Nov-
17
0.76654
2
10-Nov-
17
0.76562
6
11-Nov-
17
0.76619
5

Financial analysis and currency pair 19
USD and EUR
Average 0.84715
15-Aug-
17
0.85214
5
16-Aug-
17
0.85505
5
17-Aug-
17
0.85126
5
18-Aug-
17
0.85112
5
19-Aug-
17 0.85031
20-Aug-
17 0.85023
21-Aug-
17
0.84583
5
23-Aug-
17
0.84732
5
24-Aug-
17 0.84686
25-Aug-
17
0.84158
5
26-Aug-
17 0.83877
27-Aug-
17
0.83853
5
28-Aug-
17
0.83497
5
29-Aug-
17
0.83214
5
30-Aug-
17
0.84043
5
31-Aug-
17 0.842
01-Sep-
17
0.84228
5
02-Sep-
17 0.84308
03-Sep-
17
0.84299
5
04-Sep- 0.84002

Financial analysis and currency pair 20
17 5
05-Sep-
17 0.8399
06-Sep-
17 0.83821
07-Sep-
17 0.83366
08-Sep-
17
0.83083
5
09-Sep-
17 0.83093
10-Sep-
17
0.83073
5
11-Sep-
17 0.83565
12-Sep-
17 0.83601
13-Sep-
17 0.84137
14-Sep-
17
0.84155
5
15-Sep-
17 0.83728
16-Sep-
17 0.83706
17-Sep-
17
0.83713
5
18-Sep-
17 0.83813
19-Sep-
17
0.83555
5
20-Sep-
17
0.83294
5
21-Sep-
17 0.8375
22-Sep-
17
0.83744
5
23-Sep-
17
0.83698
5
24-Sep-
17
0.83678
5
25-Sep-
17 0.844
26-Sep-
17
0.84846
5
27-Sep- 0.85086

Financial analysis and currency pair 21
17 5
28-Sep-
17
0.84849
5
29-Sep-
17
0.84721
5
30-Sep-
17 0.85168
01-Oct-
17
0.84620
5
02-Oct-
17
0.85132
5
03-Oct-
17
0.85081
5
04-Oct-
17
0.85005
5
05-Oct-
17
0.85414
5
06-Oct-
17
0.85293
5
07-Oct-
17 0.85226
08-Oct-
17 0.85226
09-Oct-
17
0.85114
5
10-Oct-
17
0.84740
5
11-Oct-
17 0.8443
12-Oct-
17 0.8444
14-Oct-
17
0.84600
5
15-Oct-
17
0.84591
5
16-Oct-
17 0.84678
17-Oct-
17
0.85113
5
18-Oct-
17
0.84830
5
19-Oct-
17 0.84526
20-Oct-
17 0.84909
21-Oct- 0.84853

Financial analysis and currency pair 22
17 5
22-Oct-
17 0.84879
23-Oct-
17 0.85139
24-Oct-
17
0.84994
5
25-Oct-
17 0.84688
26-Oct-
17
0.85580
5
27-Oct-
17
0.86281
5
28-Oct-
17 0.86146
29-Oct-
17 0.86129
30-Oct-
17 0.8594
31-Oct-
17 0.85811
01-Nov-
17
0.86024
5
02-Nov-
17
0.85759
5
03-Nov-
17 0.8618
04-Nov-
17
0.86152
5
05-Nov-
17 0.86062
06-Nov-
17
0.86209
5
07-Nov-
17
0.86401
5
08-Nov-
17
0.86278
5
09-Nov-
17
0.85851
5
10-Nov-
17
0.85801
5
11-Nov-
17 0.85728

Financial analysis and currency pair 23

Financial analysis and currency pair 24
Triangular Arbitrage Spreadsheet Example
Richard Holowczak - Baruch College,
CUNY
[e-mail] www.holowczak.com
© 2013 R. Holowczak
This example is excerpted from
Holowczak, R. "Real Time Foreign Exchange Data Modeling in International Economics and
Finance." Journal of Financial Education. Summer, 2007. pg. 23-36.
Textbook
Example
a. Sell of USD to Purchae
EUR
₹
10,00,000.00
USD/EUR Bid
x 1.0240
€ 10,24,000.00
b. Sell of EUR to buy GBP € 10,24,000.00
EUR/GBP Bid
x 0.6418
£6,57,252.89
c. sell of GBP to buy USD £6,57,252.89
GBP/USD Bid
x 1.5267
₹
10,03,427.98
Arbitrage Profit
₹
10,03,427.98
-
$
10,00,000.00