FNCE90016 International Financial Management
International Financial Management
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FNCE90016 International Financial Management
Group Assignment
Details:
1. This assignment constitutes 20% of your final grade.
2. This assignment includes two files:
• this pdf assignment instruction file, and
• the Excel file containing the necessary data needed for the assignment.
3. It must be finished with your assignment a group.
4. Due date: Sunday September 24th, 2023, 11:59pm through LMS.
Marking Guidelines:
1. The distribution of the marks are:
• Part I. 40 marks
• Part II. 40 marks
• Part III 20 marks
• Total: 100 marks
2. Penalties for late submission: In order to ensure equality for all students, the
assignment must be completed within specified time limits. Each calendar day beyond
the due date incurs 10 marks deduction. Assignments submitted later than 10
calendar days after the due date will not be marked and will receive no marks.
3. Your submission to the assignment include a written report and an Excel file.
• The written report should contain all the answers, including all necessary
results and/or plots.
• The Excel file should provide all the calculations, including but not limited to
the results presented in the written report.
4. Plagiarism and Collusion:
Policy against plagiarism and collusion has been included in your course outline.
5. Policy against “free-riders”
You are encouraged to resolve any dispute by yourselves, which is a vital part of the
learning experience. Each group member will receive the same marks, except any
individual that is identified as a non-contributor by a formal statement with supporting
evidence from the group members. Zero mark will be recorded for such individual.
2
Part I. Currency Carry Trade (40 marks)
All the questions and requirements are underlined with bold fonts.
In this exercise, we take a look at the currency carry trade. In the assignment Excel
file:
• Sheet “Part IA” includes the end of month exchange rate USD/AUD and
JPY/USD.
• Sheet “Part IB” includes the monthly interest rates for USA, Japan and
Australia.
• The data period is 31-Jan-2003 to 31-Dec-2020.
• Note: To be consistent, we will use the quote 1AUD = USD, 1USD = JPY,
and 1AUD = JPY, in answers to all of the questions in this part.
1. Report the mean, standard deviation, skewness, kurtosis, and maximum
and minimum of monthly percentage change of the BID exchange rates
between USD and AUD, JPY and USD. (5 marks)
2. Report the mean, standard deviation, skewness, kurtosis and maximum
and minimum of the interest rate differences between JPY and USD, and
between USD and AUD. (5 marks)
3. Plot the time-series of percentage changes of USD-JPY exchange rate and
interest rate difference between JPY and USD, all in per annum terms.
Then in another graph do the same for AUD and USD. (10 marks) You
may find a similar graph in the lecture on AUD and JPY relation.
4. To further explore whether currency carry trade is profitable, we use the
following strategy acting as a Japanese investor to consider AUD and JPY
carry trade. At the end of each month, we borrow 1 million JPY, convert to
AUD and convert back to JPY in one month. Starting with the given data,
describe the steps and formula you use in the calculation (backed up by
your excel spreadsheet). Report the average monthly profits or losses and
the standard deviation. (15 marks)
5. Using the data from the following two sub-periods, 31/March/2017 -
28/February/2019; 29/March/2019 – 31/Dec/2020, your task is to replicate
the same process from Question 4. Comment on any difference in findings
resulting from the impact of the Covid-19 on the carry trade practice. (5
marks)
Note: This question (Question 5) is an open question. The word limit is stickily no more than
100.
3
Part II. Exchange Rates during Brexit (40 marks)
All the questions and requirements are underlined with bold fonts.
On Thursday, June 23, 2016, electorate in the United Kingdom and Gibraltar voted in
the referendum on whether to Remain or Leave the European Union. Voting started at
0700 BST and finished at 2200 BST. The final result was announced at 0720 BST,
June 24, 2016. We will take a look at the exchange rate movements during this period.
• Sheet “Part IIA” in the Excel file includes daily data in 2016 (Jan 1 – Dec 30)
covering the spot, overnight (ON) and one-week forward rates for GBP and
USD pair.
• Sheet “Part IIB” includes the daily LIBOR rates for GBP and USD in per
annum terms (the day count per year for GBP and USD are 365 and 360 days
respectively).1
1. Find the rate of change of the spot rate St: et+1 = ΔSt+1/St. Plot the time-series
of et+1. Report the mean, standard deviation, max and min of e. Find out
the dates for the max, min. (15 marks)
2. We are interested in the specific two-week period from Monday, June 20 to
Friday, July 1. This is the period of turmoil in the market. Our task here is to
check if the CIRP holds. Calculate ON forward rates from the spot rates
and two interest rates. Compare it with the market forward rates by
calculating the differences. Describe the steps and the formula you used in
your calculation, starting with the given data. Report the resulting
differences over the two-week period, its mean and standard deviation.
(10 marks)
3. You are a forex trader. In the evening of June 20 just before going home, you
had a long position in GBP and were very happy that your position just got the
largest boost of the year so far. What did the market predict the GBP rate
(in USD) in the future at the time? Why? (5 marks)
4. In the afternoon of June 22, 2016, you, as an analyst of a major investment
bank, were asked to give your opinion on the status of the market and make
trade suggestions to clients.
1 Here you will find one of the common feature in the real data: There are often missing values. Please
use the average of the day before and after to replace to missing value if required.
4
a. Given the data provided, state the market’s opinion on the next
day (June 23)’s GBP movements (e.g. likely up or down), provide
one reason to back up your statement. (5 marks)
b. You were asked to make suggestions on a speculative strategy using
instruments we learned in the class. Suppose you form an opinion that
is different from the market expectation, (either higher or lower than
the market expectation). First pick either opinion (arbitrary, no
mark attached). Then make your recommendation (long or short,
instrument) and give one reason for such recommendation. (5
marks).
Note: This question (Question 4) is an open question. There is no right or wrong
answer. Your marks depend on your analysis, not on your conclusions. The word
limit is 100, with the ±10% word limit leeway.
5
Part III. PPP Study Using Specific Commodities (20 marks)
All the questions and requirements are underlined with bold fonts.
1. We start with the Big Mac index. Sheet “Part III” in the Excel file includes the raw
data for big mac recorded on 1 January, 2023.2 For this assignment, we are
particularly interested in the following regions:
• USA
• Australia
• Brazil
• Canada
• Hong Kong
• India
• Philippines
• Singapore
• UAE
• UK
Use the data, write down the local price, market exchange rate vs. USD, PPP
implied exchange rate vs. USD, and relative difference (in percentages) between
the two exchange rates. (5 marks).