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Forecasting Currency Rates

You work on the currency trading desk of a large international investment bank. Your boss has asked you to forecast what the exchange rates (USD/AUD, EUR/AUD and GBP/AUD) are going to be on 11 August 2015. Your boss has stressed that you must use a number of different methodologies to forecast these rates and then you must combine the results of these methodologies into one summary forecast for each exchange rate.

As your boss is feeling generous, he has decided to let you speculate with AUD$100 million of the bank's money to try and profit from your forecasts. He suggests that you try and make as much money as you can assuming that your forecasts are correct. Any profits will be split between you and the bank. You make money by changing your AUD into the foreign currencies now and then back again to AUD at the end of the period. In other words you will profit if you put some of your money into a foreign currency that appreciates against the AUD.

Your boss is a busy man so at most he wants to read 5 pages of information about your forecasts and trading strategy. This includes text and graphs. References should be included in the text or in footnotes. Your boss does not want to see a separate reference list and does not want to see any appendices. Your boss does not need you to define or introduce your methodologies, just apply them.

The aim is to use the knowledge you have acquired to forecast future exchange rates and to attempt to profit from these forecasts.


In the currency forecasts section you are to forecast the spot rate for each currency (US Dollar, Euro and British Pound) relative to the Australian dollar for 12 months (from the day this project begins). You enter these forecasts only once and will not be able to revise them. In the trading strategy section, you have to allocate a percentage of your money into each currency to attempt to make money from your forecasts. You can allocate anywhere between 0% and 100% into a currency. Percentages must be positive and total 100%. For example, if you predict that the Australian dollar will depreciate relative to the US dollar over the period then you will make money by having some of your money in the US dollar.

You can forecast your future spot rates in any manner you wish. However, in a maximum of 5 pages you have to explain how you have come about these forecasts and how you plan to make money from these forecasts.

Your boss will find your project successful if you:

- Accurately identify and describe a range of basic and complex methodologies
- All of your methodologies are correctly applied; Correct interpretation of financial data
- Trading strategies are coherently explained and consistent with forecasts
- Summary explanations are perfectly clear; Appropriate terminology used correctly throughout

References should be added into the text or put in footnotes. He doesn't want't other appendices or extra pages. He does not need you to explain formulas and methodologies, just apply them!

The spot rates on the 11th of August, 2014 are

USD/AUD = 0.93
EUR/AUD = 0.69
GBP/AUD = 0.55


Solution Summary

This solution explains the process of foreign exchange rate forecasting and trading in foreign exchange. The sources used are also included in the solution.