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FINC5090 Group Assignment
NOTE: Ensure that your exposition based on references are paraphrased and corresponding references are
cited. Otherwise, it may be red flagged by Turnitin and Academic Dishonesty team will investigate your
case.
It is recommended not to leave your submission time until the few minutes before the deadline. Murphy's
law tells us that technical issues tend to occur around that time.
Task 1 - Tapering (max 500 words, 20 marks)
a. What is tapering? (4 points)
c. What is the direct effect of tapering on the balance sheets of commercial banks? (4 points)
d. Why does the Federal Reserve increase rates before they start the tapering process? (4 points)
e. How do you expect the tapering process to occur regarding the monetary policy during the October 2017
- June 2018 period? (4 points)
Task 2 - The influence of tapering on money supply (max 500 words, 20 marks)
Use the data in Colum L, M, S, T and U only to answer parts (a), (b) and (c).
a. Which measure in columns L, M, S, T and U is the most sensitive to (i.e. most directly influenced by)
tapering? You should provide a theoretical justification instead of using the real data when answering this
question. (5 points)
b. Use the data to validate your justification provided in part (a). You should make your own decision on
how to display/ visualise the changes of ALL available measures provided in part (a). (10 points)
c. Why are the changes of M2 during the October 2017 - June 2018 period not in proportion to the changes
of the measure you chose in Part (a)? (5 points)
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Task 3 - The influence of tapering on the yield curve (max 500 words, 20 marks)
a. Explain how tapering could influence the yield curve. You are not expected to provide any empirical
evidence when answering this question. (6 points)
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b. Generate three yield curves and label each graph clearly:
i. one for the date immediately before the October 2017 Federal Reserve statement as per the timeline
set out in Task 1(b); (2 points)
ii. one for the date right after the statement was made; and, (2 points)
iii. one for the date one year after the statement was made. (2 points)
c. Explain whether the changes of the yield curve around the October 2017 Federal Reserve statement are
consistent with your expectation developed in part (a). (4 points)
d. Why does the yield curve one year after the announcement exhibit a different shape? Provide a brief
justification. (4 points)
Task 4 - The influence of QE on the foreign exchange rates (max 500 words, 20 marks)
a. Assuming sticky prices, apply the overshooting model of Topic 5 to forecast the influence of the Federal
Reserve’s QE on the short-run exchange rate between the Australian dollar (AUD) and the US dollar (USD).
Make necessary assumptions. You are not expected to use actual data when answering this question. (4
points)
Download the Excel workbook titled “Interest Parity Data” from the Group Assignment Canvas page. The
interest rates in the workbook are quoted effectively and annually. You can follow the simple interest rate
convention to cover the rates into daily, weekly or monthly rates.
b. Calculate the monthly interest rate differences and estimate the AUD/USD exchange rate for each month
from November 2017 through September 2018 using the interest parity model. Display the following results
in a single table with workings:
i. the monthly interest rate differentials; (2 points)
ii. the forecasted monthly exchange rates based on the interest parity model; (2 points)
iii. the difference between the actual and the forecasted exchange rates for each month (i.e. forecast
error); and, (2 points)
iv. the relative size of the forecast errors (i.e. error/actual foreign exchange rate) (2 points)
Use the FORMULATEXT() function in Excel to show all your workings next to the above computation
output. Take screenshots of your spreadsheet with inputs, outputs, workings, column and row labels into
the report as such:
c. Based on the results in part (b), comment on the effectiveness of the interest parity in predicting foreign
exchange rates. Are the results consistent with the predictions of the overshooting model? (4 points)
d. Suppose you conduct a carry trade on 2nd of October 2017 and close your position one year later.
Calculate the profit/loss of the carry trade using the Interest Parity data. (4 points)