Taking Short Position in British Pound and Long Position in Euro

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Assignment topic: Taking Short Position in British Pound and Long Position in Euro

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Taking Short Position in British Pound and Long Position in Euro

The task of investing on behalf of the clients as an investment agent or investment manager need some managerial skills and competence. This stems from the fact that the proper choice to make, in identifying the right commodity to trade on, needs some strategy and clear analysis. Therefore, as an investment manager, I would pick on foreign currency as my appropriate commodity of trade. More specifically, I pick on the British pound and the Euro as the hard-foreign currencies which are worth investing into. According to the market trend in investments, it is more appropriate to consider the currency spot market before delving into the entire activity.

The rationale behind my picking of the two hard currencies, the Euro and the British pound, is because of how the two currencies tend to be having a significant impact on the global economy. Besides, there are other myriad reasons which, after weighing up the cons and pros, have made me settle on the pound and Euro. The investment decision, on the two, is based on trend analysis, relative inflation rates between the various nations,

Taking either long or short position in either, or both currencies is a critical factor which ought to have been taken seriously. The position that an investment manager takes while trading the two foreign currencies proves to be vital because it acts as a determinant of whether the investment or trading can be of a profit or loss (Dreger and Reimers, 2016). Therefore, as the manager who has been tasked with trading the foreign currency for my agent, I would resort to taking a short position in the British pound and long position on the Euro.

Justification Based on Trend analysis.

Uptrend and downtrend analysis of the foreign exchange (Forex) trade is always a factor that ought to be put in place every time to make a profit (Sueshige et al.,. 2018). For instance, selling a base currency against a quote currency which has been depreciating over time can work to the advantage of an investor. Therefore, it is advisable for every investor to first weigh up the chances of a base currency with that of the quote currency before making a position through which the investment can be made.

According to the upward and downward trend in the forex trade, it is much appropriate to trade Euro in an extended position. In the foreign exchange market, the Euro’s share has been seen to have risen by a considerable margin, more than even 1 percent. Besides, the Euro has been revealed to be a currency that, over time, has been maintaining an increasing value in the market. This upward trend of the Euro’s increasing value has been a credit to the European Commission, which had worked towards facilitating an initiative that would later enable the currency to get stronger thus, increasing its international role in the global economy.

Due to the factors which have made the euro to maintain an upward trend, it is more beneficial to take a long position in trading the euro as a base currency. Going long is the best option since there are higher chances of the euro, maintaining the upward trend of rising over time (Drakopoulou, 2016).

 On the other side, the British pound deserves a short position in forex trading and investment. According to the trend, it is evident that there are higher chances of the pound plunging below the other main currencies like the US dollar. Therefore, taking a long position on such a currency while trading shall be a significant loss (Du and Zhang, 2018). However, taking a short position is the only way to minimize the loss; since within a short period, there are higher chances of making a profit in trading the two pairs.

Justification Based on Relative Inflation Between the Euro Zone and the US

The inflation rate is another crucial factor that should be, first, put into consideration before taking a position in which an investor is to trade a given currency. An inflation rate of a nation, therefore, can determine the shift in the trade. For instance, if a given nation has been experiencing relatively high inflation, then it is evident that compared to some economists, the rate at which its currency can be bought tends to erode and deteriorate with time.

Therefore, this fact will hold many people back from buying the currency. In the case of the two nations, the United States and the Euro Zone, the euro stands a better place of getting a long position trade. Higher inflation rates in the United States shall make the US dollar lose values, thus leaves the euro with a higher value compared to the dollar. Through this, the dollar shall depreciate against the euro.

           Trading a euro as a base currency against the US dollar, a quote currency, when there is a shift in the United States’ inflation, can bring much profit in a long position of trading the pair compared to trading a short position. With relative inflation, I take s time to gain some substantial profit; thus, a short position can never be of any benefit. Therefore, the investment shall work to the advantage of any trading done in a long position; because it is a gradual process that takes time for the base currency to be bought at a higher price, thus, raking in profit. Consequently, the trading of the euro in a long position shall prove beneficial and profitable since, due to the relative inflation in the US economy, the euro gets to gain value; thus, it can be bought at an increased price.

Justification Based on Relative Inflation Between Britain and the US

On the other side, such inflation in the United States shall result in another different instance in trading of the US dollar with the British pound. If the inflation rate becomes higher in the United States compared to the British world, the Dollar will depreciate compared to the pound. Therefore, it would be reasonable enough to trade the pound as a base currency.

However, since inflation does not incur a sudden impact in the trading, a long position still cannot bring profit in the trade. A short position of trading the pair, US dollar and the pound, tend to be the most appropriate because it will bring more profit since a further depreciation in the value of Dollar currency does not require a long position to gain some profit in trading the two foreign currencies (Sueshige et al.,. 2018). Going the short position in such a situation proves to be vital compared to going the long position.

Justification on the relative interest rates about investment positions

The two foreign currencies, that is, the euro and British pound, go hand in hand since their exchange rates are similarly closer. In the United Kingdom, the British pound has been used over past years, but the research and money transfer activities surveyed show that the euro has up to about ten percent higher value than the British pound in recent years. Though, as we speak, the euro value is a little bit lower value than the British pound. The comparison between the two hard currencies have similarities in Europe and with exceeding significance to England.

 Having taken a long position in Euro and short position in the British pound, it would be favorably for one to invest maximumly using Euro (Alvarez-Diez 2019) since banks will pay more interest rates as compared to the British pound. It, therefore, means that an experienced investor will prefer a long position in investing using euros since the profit-making will eventually become a reality after some time. Consequently, when applying a short position to the British pound, an investor will buy stock or futures when the prices go down and sell the same products after a short period when the value of the stock has again increased. 

Lastly, after long consultation with the mentor, I, therefore, decide to invest with large sums of amounts from the given dollars to a short position based to the British pound and long position about euros. The justification behind putting more investment to long position using euros is because the value of euros is currently higher (Bhogal 2019) than British pounds; hence more profit gains though short position using pounds result to quicker profits but low. In general, investment through euros and pounds may both work smartly just depending on how smart an investor is.

Justification on the expected interest rates about investment decision

Investment decision for an experienced and potential investor dramatically depends on the future expectations on the increase of the interest rates. An investor, therefore, may agree with the mentor or the financier to put more focus on the stock, which in turn will safeguard or hold onto the market for a certain period 0of time.

With maximum input to a given currency, which for this case, comparing US dollars and euros-pound relationship, we prefer to pick on euros because it will eventually outdo the value of the US dollar. Interest rates play a major key role to investors as it enhances future planning for both short- and long-term investments whereby a higher ((Almeida 2019) expected interest rates in future calls for an investor to purchase stock and wait until the time when the value goes up. This makes the euro fit for the long position to relate to pound having US dollar as the base currency.

Secondly, the need to put more emphasis on critical analysis of the expected interest rates has a huge impact if the investor messes up on the right and wise based decisions. For instance, if an investor decides to invest using the pound currency with the aim of making a profit in future, then all over a sudden, the value of pound goes down than euro and US dollar, it, therefore, means that sales during the future dates will automatically lead to losses. Because no one may wish to incur losses, it is therefore essential and quite necessary for a mentor and investor to make terms, conditions, and agreements to minimize the chances of losses in due time.

Justification on investment decisions about fundamental analysis

Firstly, an investment decision may greatly depend on the rate of unemployment to a given nation or nations involved with the stock, capital, and purchases required. Though most of the western countries, from statistics, do portray relatively low levels of unemployment rates as compared to other nations.

For instance, in the United Kingdom, there are numerous business opportunity gaps, and therefore at least, to some standards, the economy is stable. Even though things may stand right, but all the same, there are cases of unemployment. These cases may interfere with an investor’s decision to solemnly and wisely invest with the best (Bordo 2019) methodology and criteria. Consequently, unemployment may also possibly attribute to good investment plans since the unemployed will get jobs; hence the investor may make profits.

Secondly, capital flows also have a great impact on investment planning and decision since an investor may not do the right procedures and keep good records, which in turn may lead to many capital pumps with resultant fewer profits made. When the capital flow is timely and well calculated, an investor can quickly realize a maximum profit through calculations using the trading balance account.

Again, the gross domestic product has much significance to an investor. An investor must consider all the finished products and services offered by the citizens of that nation plus foreigners working within the borders of that particular country. For the case of investment using twenty thousand US dollars in the UK, it is advisable for a mentor to first clearly examine the opportunity gaps and less crowded businesses on both produce and service. Therefore, investment decision depends on so many characteristics that affect the general market and exchange rates.

Currencies with Negative Correlation for Risk Management

Every investor should take the appropriate precautions in ensuring that certain risks of losses are reduced. The best way to ensure that it is achieved is to optimize the return, which is expected as the primary goal; reduction of the correlation between the currencies helps in achieving this goal. Therefore, a negative correlation between the two currencies as the variables can help in reducing the risks of losses in every investor’s portfolio. Investment and portfolio managers use the idea of correlation to ensure that their investments are free and safe from any risk. This idea helps them to give a clear analysis of the (Parikh 2019) potential losses, which are likely to be accounted in the process of trading any pair of currency; plus, any which can be associated with their portfolios. For instance, the EUR/USD is a pair that has a perfect negative correlation; thus, it can help in reducing the risk of encountering loss while trading the pair.

Calculation on the investment returns

           Return on Investment (ROI) forms the basic goal for any investor or a portfolio manager since it is through ROI figure that an investor (Kousky 2019) knows whether the net return is ‘black’ or ‘red.’ There are two formulas of calculating ROI; that is, benefit/ total cost or investment gain/ investment base.

In this case, the client’s amount is $20,000. Therefore, the investment base is the amount given for the investment. If the investment benefit goes up to $50,000, then the net return on investment, ROI is given by;

($50,000 -$20,000)/$20,000 = 1.5

References

Almeida, D. M. (2019). Is the Forward Exchange Rate Able to Predict the Spot Rate? -An Application to the Euro.

Alvarez-Diez, S., Baixauli-Soler, J. S., & Belda-Ruiz, M. (2019). Co-movements between the British pound, the euro and the Japanese yen: the Brexit impact. Journal of Economic Studies

Bhogal, T., & Trivedi, A. (2019). Foreign Exchange Rates. In International Trade Finance (pp. 15-24). Palgrave Macmillan, Cham.

Bordo, M., & James, H. (2019). The trade-offs between macroeconomics, political economy, and international relations. Financial History Review, 26(3), 247-266.

Drakopoulou, V. (2016). A review of fundamental and technical stock analysis techniques. Journal of Stock & Forex Trading, 5.

Dreger, C., & Reimers, H. (2016). Does public investment stimulate private investment? Evidence for the euro area. Economic Modelling, 58, 154-158. doi: 10.1016/j.econmod.2016.05.028

Du, W., & Zhang, M. (2018, April). Analysis and Prediction About the Relationship of Foreign Exchange Market Sentiment and Exchange Rate Trend. In Future of Information and Communication Conference (pp. 744-749). Springer, Cham.

Kousky, C., Ritchie, L., Tierney, K., & Lingle, B. (2019). Return on investment analysis and its applicability to community disaster preparedness activities: Calculating costs and returns. International Journal of Disaster Risk Reduction, 41, 101296.

 

Parikh, J. D. (2019). Assessment of Currency Hedging Strategies for International Equity Portfolios: Evidence from a perspective of a UK investor investing in the US (Doctoral dissertation, Dublin, National College of Ireland).

Sueshige, T., Kanazawa, K., Takayasu, H., & Takayasu, M. (2018). Ecology of trading strategies in a forex market for limit and market orders. PloS one, 13(12).

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