International Corporate Finance
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FINS5516 – International Corporate Finance
Marking Criteria
This assessment is worth 15% of your final grade for FINS5516 – International Corporate
Finance.
Purpose of this Assignment
The whole purpose behind this assignment is to get students to apply and assess the
relevance of the International Parity Conditions and Purchasing Power Parity (PPP) Theory in
a practical setting and using actual data and basic statistics. Students enrolled in this course
should also have a working knowledge of Microsoft Excel – which will be used in this
assignment for general calculation and plotting data into graphs. This assignment is similar to
how economists and analysts in industry approach the topic of exchange rates.
-----IMPORTANT NOTE-----
The departure of the previous tutor during the term has caused some disruption to existing
assessments. To adequately compensate all students for this disruption, the following will be
implemented: students that submit responses to the assignment questions will automatically
receive 2 percentage points of the 15%. In other words, the lowest mark each student will
receive if they submit this assignment is 2/15 (assuming no plagiarism, no lateness of
submission and no academic misconduct).
This assignment is individual work and must be submitted as individual work only.
2
International Parity Conditions/PPP Theory Assignment Questions
We will focus on the US and Australia. Refer to the attached Excel file which has key
macroeconomic data for both countries.
1. Use the realised rates of inflation for both countries from 2004Q1 to 2021Q1 to
calculate the USD/AUD exchange rate according to relative PPP. In other words,
suppose we are in 2004Q1, and we want to forecast the USD/AUD exchange rate one
year ahead. Repeat for each quarter in the sample period. Refer to Exhibit 4-7 in the
textbook (page 151) to give you a sense of what is being expected. How well does this
international parity condition explain the USD/AUD exchange rate? You will need to
compare the RPPP-implied exchange rate with the realised exchange rate. Plot the
two time series in a graph and report the average disparity between the two. Are there
any periods where there is a large disparity between the realised exchange rate and
the RPPP-implied exchange rate? Provide commentary as to the reasons in
approximately 150 words. (2 marks)
2. Between 2010Q4-2013Q1 the Australian dollar’s value reached parity, and also
exceeded parity against the USD. Using the data provided identify the reason(s) for
the appreciation of the AUD against the USD. You can also refer to other sources to
support your argument. Is such an outcome consistent with what you have learnt thus
far in this course about PPP theory? (2 marks)
3. Can PPP theory explain the reason(s) for the decline in the AUD against the USD
during the global financial crisis (see 2008Q2 to 2009Q1)? Calculate the percentage
change in the USD/AUD exchange rate over this period. What other economic factors
could have been at play? Provide commentary (approximately 150 words). (1 mark)
4. Using the data provided in the Excel file, calculate the value of the real exchange rate
(USD/AUD) at the end of the sample period, and compare it with the value of the real
exchange rate at the start of the sample period. Provide brief commentary about the
reasons for the change or lack thereof in the real exchange rate in approximately 150
words. You should focus on the effect of inflation rates, real interest rates, and which
agents in the two economies benefitted from the changes in the real exchange rate
(for example, were importers or exporters the main beneficiaries?) (3 marks)
5. Consider the following econometric structural model of the USD/AUD exchange rate:
Δ/ = 0 + 1Δ, + 2Δ, + 3 + 4 +
where
Δ/ is the change in the USD/AUD exchange rate over period .
Δ is the annual percentage growth rate in real GDP over period
is the inflation rate differential for period
is the interest rate differential for period