BAO 3402 INTERNATIONAL BANKING AND FINANCE
Weight : 20% of Final Exam
Due Date : May 2, 2014
Coverage of the assignment: Week 3, 4, 5 and 8 (Learning outcome 2, 3 and 4) Learning Method: Self study
FX market is considered as the most perfect market in the world where we can expect to hold the law of one price. The law of one price provided theoretical base for all international parity conditions. International parity conditions can be used to understand the operational behaviour of the foreign exchange market. In a perfect market, all these parity conditions should be held and there will be no possibility of abnormal profit on arbitrage or speculation. The aim of this group assignment is to give you an opportunity to empirically investigate the existence of some of those parity conditions.
Collect historical daily foreign exchange data for following currencies for the period of 01/01/2010 -31/12/2013 from http://www.rba.gov.au (you are not required to present these data in your written assignment).
Ã¢â‚¬Â¢ US Dollar (USD) Ã¢â‚¬Â¢ Malaysian Ringgit (MYR)
Ã¢â‚¬Â¢ Japanese Yen (JPY) Ã¢â‚¬Â¢ Chinese Yuan (RMB)
Ã¢â‚¬Â¢ UK Pound (GBP) Ã¢â‚¬Â¢ Indian Rupees (INR)
You are also required to collect official annual interest rates and inflation rates in Australia, USA, Japan, United Kingdom, China, Malaysia and India as at 1st January 2012 (You may use either IMF database or data published by central banks of respective countries). Assume you can either borrow or invest at the collected interest rates trough out 2-year period.
1. Plot the collected FX data on a graph (you can plot all data in one chart or use several charts, if the magnitude of the rates varies widely). Using your chart, write a small essay on the behaviour of Australian dollar highlighting major trends and possible factors affected for those trends. (900 Words (excluding tables) - you are required to cite all your information sources).
2. Estimate the average FX rate change (daily) recorded in the last two-year period for each currency and the standard deviation of the average FX rate change.
3. Estimate the potential maximum one day loss of each currency under 5% confidence level. Interpret you results.
4. Estimate the correlation coefficients of daily FX rate change (use all possible currency combinations separately (construct correlation matrix). Explain what you can learn from the estimated correlation coefficients.
5. A business firm expects to have following cash flow scenarios (currency portfolios) on its international trading activities.
Scenario Cash flow situation under each currency
1 US Dollar (USD) 50%
Japanese Yen (JPY) 50% 100%
2 Chinese Yuan (RMB) 40%
Indian Rupees (INR 60% 100%
3 UK Pound (GBP) 70%
Malaysian Ringgit (MYR) 30% 100%
Using the estimates of standard deviations and correlation coefficients in task two and four above, calculate the standard deviations of each currency scenario/portfolio. Which currency portfolio is more risky? Explain.
(20% marks) 6. Based on the spot exchange rates as at 1st January, 2012, estimate the expected exchange rates for USD, MYR, RMB and JPY for each six months period (i.e as at 30 June 2012, 31st December 2012, 30 June 2013 and 31st December 2013) using the purchasing power parity (PPP) and the International Fischer Effect
(10% marks) 7. Compare your estimated spot exchange rates with corresponding actual rates. Explain why they are different to corresponding actual exchange rates. Was there any arbitrage or speculation opportunity? Explain.
(10% Marks) 8. Present your results using a appropriate reporting format.
(5% Marks) 9. You need to cite all references and provide the list of references used in your report (The recommended referencing style is the Harvard.).
Develop an excel worksheet (you can use excel function/formula to do your calculations). Your findings should be presented as a report. The soft copy of the excel worksheet should be separately submitted (via email Lalith.email@example.com).
Specific instructions for the group assignment
All sources of information (such as company annual reports, text books, websites with addresses, etc) which you used to prepare your report should be cited appropriately.
Word limits: 2,000 (Maximum/excluding statistical data)
Group size: Maximum 4 and Minimum 2
You are allowed to select your own group from the tute class you are enrolled in. If you are not able to join in a group, you must contact your tutor before week 6 tutorial. Each group is required to maintain a record of group meetings which should be attached with their final report. Inability to submit the record will incur a 10% penalty of your earned marks on the assignment.
Instructions for Submission:
Ã¢â‚¬Â¢ The soft copy and the printed copy of the completed report should be submitted on or before May 02, 2014 (Week 9-Friday) (If you are in City Flinders, please drop your assignment to the Accounting and Finance Mail Box in Level 10. If you are in Footscray Park campus, you can personally hand over to Mr Abdi Hassan).
Ã¢â‚¬Â¢ The soft copy should be in Ms-word (PDF files are not accepted) and should be submitted via TURNITIN. The similarity index page must be attached to your printed copy.
Ã¢â‚¬Â¢ Assignments submitted without the similarity index will incur a 20% penalty of the marks earned. Late assignment will cost one (01) mark per day.
Ã¢â‚¬Â¢ Inability to submit the assignment as required will cost all marks allocated for the assignment in the final exam.
Ã¢â‚¬Â¢ Please email the Excel work sheet to Lalith.firstname.lastname@example.org .
Ã¢â‚¬Â¢ Name the excel and the word in following order
Unit code followed by ID numbers of all group members (Eg.
Special Requirements for assignment that need to be adhered to:
Ã¢â‚¬Â¢ Need to RESEARCH the topic in depth to gain a favourable mark (Remember there are no one correct answers).
Ã¢â‚¬Â¢ Hand in one assignment per group and read drafts of each otherÃ¢â‚¬â„¢s work to ensure quality and consistency.
Ã¢â‚¬Â¢ Encourage to find Group partners from the same tutorial class.
Ã¢â‚¬Â¢ Do not use plastic covers or folders for your assignment. Simply staple it together.
Ã¢â‚¬Â¢ You must include the assignment front cover sheet that is available on the Web Ct under Ã¢â‚¬ËœAssessment SectionÃ¢â‚¬â„¢.
Ã¢â‚¬Â¢ Ensure that the front page contains the title, your name, your ID number, and importantly, your tutorial day and time. Ensure that all assignment partners read the assessment declarations and sign.
Ã¢â‚¬Â¢ Your report must display headings and sub-headings to help establish its structure and aid the marking process.
Ã¢â‚¬Â¢ The referencing system you are required to use is the Harvard System. It is important you show evidence of research for the assignment beyond the prescribed textbook and the suggested articles. Ensure these are referenced appropriately in your bibliography. Assignments not using the Harvard system, showing no evidence of research for information or are obviously plagiarised will be returned unmarked.
Ã¢â‚¬Â¢ Assignments will be penalised severely where plagiarism (copying directly from textbooks, journal etc. without due recognition) has occurred.
Ã¢â‚¬Â¢ Assignments will be handed back to students in their tutorial in WEEK 12.