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September 10, 2016

Andrew Smith
Christopher Sousa
Difficulties Managing Currency Allocations for Large International Businesses

Recent economic data and actions from central banks have increased volatility in foreign exchange
markets. As a result, currency-dominated portfolios are subject to higher risks than traditional
portfolios. For our commercial clients which participate in international business and trade, we
typically allocate a large mixture of foreign currencies in their portfolio to accommodate for their
expenses and income.
Recent Economic Events Causing Currency Volatility
United Kingdom (UK) withdrawing from European Union (EU) AKA Brexit
United States Federal Reserve interest rate decision
Japan experimenting with negative interest rates
Impact of Economic Events on Foreign Exchange Markets
Following Brexit, the British Pound to US Dollar, GBP/USD, dropped approximately 14%. As a
result, the US Dollar has risen in value relative to other European currencies. At the same time,
the United States Federal Reserves recent decision to keep interest rates unchanged would
normally cause devaluation of the US Dollar. With these events occurring in tandem, the effects
of these events have essentially been negated. Lingering speculation causes rapid price movements
in currency pairs. To make things worse, a negative interest rate environment proposed by Japan
adds another element of uncertainty.
Risk Management Difficulties
The above scenario has caused increased difficulty in managing risk for our customers holding
large currency reserves. For example, one of our biggest customers, British Lumber Corp, has a
portfolio dominated with British Pounds and US Dollars. The frequent price changes on the
GBP/USD pair effects their market capitalization, operating costs, and outstanding debt.
Recommended Course of Action
Our team has determined that implementing an algorithmic currency trading scheme for currencydominated portfolios is necessary for mitigating and managing downside risk. The algorithm will
rapidly trade various currencies to avoid the effects of a changing economic landscape. You will
be in charge of managing this project. I will provide you with the necessary resources to develop
and implement this change.