Advice on how to construct trade idea

Preparing a case competition presentation for sales & trading (as a penultimate uni student). It asks for two trade ideas (one in equities and  one inFX) and I am just seeking some advice on things to consider/focus on when doing it and potential approaches to take.  Based on what has been provided I'm unsure as to how to form trade ideas from it or what exactly is being asked.  Thank you for your time and any feedback is welcome!

This is what has been provided. 


- Would you rather own MUFG (Japanese bank) or Toyota Motor into the Bank of Japan meeting? 

They have also provided questions listed under this to consider which are:

  • How do each of these make money?
  • How is each affected by interest rates?
  • Why does it matter what the market is expecting for a potential hike?


What's your view on ISDJPY spot? Would you like to long or short? 

Questions/considerations provided

  • Why does the relative difference in interest rates between countries affect FX markets?
  • What are some other factors that have an impact on USDJPY spot?
  • How would you calculate gain/loss for a trade?
  • How would you factor the upcoming BOJ into the trade?

Disclaimer: I’m only a junior in college will still chime in. Would love for someone w/ actual experience to add onto or correct anything I say.

First things first, what do you expect the BOJ to do at the meeting? This will serve as the basis for your investment theses.

For the sake of this explanation, I’m going to claim that I expect them to raise rates by 50 bps. I have no idea what Japan’s monetary policy is like currently so don’t flame me on this.

MUFG makes money solely based on interest rates. If the BOJ raises rates by 50 bps, they are making an extra 50 bps on all floating-rate debt, but all their fixed rate debt trades down. Not sure what their balance sheet looks like, but probably safe to claim an increase in rates would raise their revenue. Another thing to consider is deposit beta, which is how of much a rate increase is passed onto the % they pay on deposits.

Conversely, lowering interest rates would likely be good for Toyota. Could increase consumer spending and financing on cars, driving revenue up. Should also take a look at their capital structure though to see how it will affect interest expense (are they heavy in floating rate or fixed rate debt? Do they hedge IR risk?)

Will make a second post soon for the FX side of the problem

Onto the currency part of the problem. Main thing to consider here would be the Fisher Equation.

S(n) = S(0) * ((1+i(usd))/(1+i(jpn))

In non-mathematical terms… assuming risk profiles are the same, the currency with a lower interest rate will appreciate against the one with a higher interest rate so their returns are the same.

This concept is called interest rate parity. Kind of hard to explain in a post, definitely google this if it’s unfamiliar to you.

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