International Business Finance
Semester 1 2020 Assessment
AUD vs SGD
EMPHASIS HEADING 1 1
Heading 2 1
Heading 2 2
The Uncovered Interest Parity and Currency Carry Trades
FOREIGN EXCHANGE REPORT,
RE: AUD vs SGD
A currency carry trade involves investors looking to exploit interest rate differentials between two currencies and it is thought to be one of the factors that contribute to the empirical violations of the uncovered interest parity (UIP). Choose a pair of funding and investment currencies (you decide pairs ofcurrencyonyourown)andtheirmoneymarketinterestrates(e.g.,monthlyrates, 𝑖 and 𝑖∗).Provide detailed responses for each of the parts below.
The FX Markets at Saxon Bank have engaged AlphaConsulting (Alpha) to prepare a Currency Report in relation the AUD and SGD currencies. This was requested for Saxo Bank’s FX Market offer purposes to present new offers for their clients and investors.
1.1 Trend analysis (8 marks)
Document the trends of the exchange rate and two interest rates over the past 10 year period (or more) using data at a monthly frequency. This should include a graphical analysis showing the movements of each of the three series. In addition, provide commentaries (descriptions) of the salient points of the trends, if any.
Ensure to use risk-free rates. A proxy for risk-free rate can be either short-term Treasury bill, or Interbank rate. Since the investment horizon is one-month, it’s better to use short-term (1-month or 3- month) maturity bond rate than long-term maturity bond rate (5-year or 10-year). These risk-free rate proxies can be obtained from a central bank website of each country. The FRED® database of the Federal Reserve Bank of St. Louis (see its link below) provide these data for some countries.
Deviations from the uncovered interest parity
1.2 Deviations from the uncovered interest parity (8 marks)
If the UIP condition holds, the exchange rate that was predicted from the interest rate differential 30 days prior to today would equal to the currently observed exchange rate. If the UIP condition does not hold, there would be deviations (i.e., differences) between the predicted exchange rate and actual realized exchange rate. Present (1) time-series of the predicted and actual realized exchange rates in one figure, and (2) time-series of the deviations between them in another figure. Identify the periods, if any, where the UIP appears to have been significantly violated.
Since the UIP condition can be represented in different ways, deviations from the uncovered interest rate parity can be represented in different ways as well. One form of deviation is a difference between the forecasted and actual exchange rate, as discussed above. Another form is a difference between percentage change in the exchange rate and interest rate differential. Present a scatter plot where the y- axis is an interest rate differential and the x-axis is percentage change in the exchange rate. Discuss whether your data points lie on the 45-degree line through the origin.
Empirical testing of the UIP
1.3 Empirical testing of the UIP (8 marks)
Empirically test the validity of the UIP for the two currencies you have chosen. A regression analysis is required and you can use Excel’s data analysis add-in or any of the statistical packages you have access to. Be sure to (1) clearly identify the regression model, (2) the null hypothesis you are testing, and (3) provide appropriate discussions on the results of the regression analysis.
Profitabilities of carry trade strategies
1.4 Profitabilities of carry trade strategies (8 marks)
Identify the periods of significant profitable carry trade opportunities that existed during your sample and calculate the carry trade profits that would have resulted. Carry trade profits can be represented as a dollar (or other currency) terms, assuming that investors invest a certain amount of money at the beginning of the sample period.
Document the market conditions during these periods (e.g., measures of system stability – exchange rate volatility, stock market volatility, etc.). Check newspaper reports (using Factiva via library’s web access) to see whether actual carry trades during the identified periods have been reported.
In addition, identify the periods when carry trade strategies deliver significant negative returns. To what extent market conditions differ from the period when carry trade strategies deliver positive returns?
The remaining 8 marks are allocated for presentation of report
• Ensure to use academic reference (not solely web sources) to support your discussions/arguments.
• Pay particular attention to presentation. Avoid overdoing formatting, and ensure that the assignment is very clear, logical, and professional.
• Clear and logical presentation is a major challenge in assignment preparation. Preparing a concise assignment is another major challenge. Information sources:
• FRED® database of the Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/
• Central bank web sites of relevant currencies (most provide relevant data for sufficient periods)
• Web sites of international organizations – OECD, IMF, BIS, etc.
• International Financial Statistics (On-line database available from Fisher Library’s web site)
• Newswire and financial newspaper reports (accessible via Factiva database from Fisher Library’s web site)
• Other Web sources – market commentaries of FX and money market movements
307205649 MA TANYA ELIZABETH firstname.lastname@example.org
480142520 LI XIN email@example.com
490105175 SUN FENGMING firstname.lastname@example.org
490370625 DINH NGOC HUY email@example.com
500100796 ZHOU WENKAI firstname.lastname@example.org
This is a group research project that must be completed and submitted as a group. Web-based checks on plagiarism will be conducted on each group project.
This project will be marked out of 40 and constitutes 40% of your overall grade.
Length: The length of the project must NOT EXCEED 12 typed pages with double spacing, 12 points Times New Roman, including executive summary and references but excluding appendix, if used. Appendices must not exceed 5 pages. There will be a penalty of 1 mark per page for not meeting this requirement.
What’s included in the 12 page limit?
• Executive summary
• Assignment body
• Reference list What’s excluded from the 12 page limit?
• Title (Cover) page
• Table of contents
• Appendices Due date: The due date for the project is 11:59pm May 31st, 2020. A late penalty of 1 mark per day is applicable (see penalty breakdown below). Submission:
Page 1 of 5
The only acceptable form of submission is electronic via the submission link in the unit’s Canvas site. Hardcopy and email submissions will NOT be accepted. Late submissions will be penalized. See below for penalty details. All submission will be checked through TURNITIN for similarity with external sources.
The TURNITIN assignment submission box will close at 11:59pm on June 12, 2020 (Closing date).
Each group can only submit ONE project report. It is imperative that your project report is submitted in ONE document. Only a PDF format document will be accepted and it is your responsibility to ensure all pages correctly display your original content. Missing or distorted figures and formulas will result in lower marks.
Ensure the Student Identification Number (SID) of EACH student is on the cover page of your assignment. The name of student must NOT show up on the assignment to ensure the anonymous marking requirement.
Document name: Your project PDF file must be named in the following format: FINC6013_Groupnumber_StreamNumber_2020.PDF Example: FINC6013_Group23_S3_2020.PDF
If a group is formed across different streams, use a stream number where a nominated group leader enroll in. There will be a penalty of 1 mark for incorrectly named projects.
List of references used and in-text citations must follow the Harvard referencing style
Pay particular attention to presentation. A significant component of your mark will be based on presentation. Avoid overdoing formatting, and ensure that the assignment is very clear, logical, and professional. Pay attention to grammar. Clear and logical presentation is a major challenge. Preparing a concise report is another major challenge. Every part of the assignment should add to the end result otherwise it is superfluous and distracting.
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A late submission will attract 0.5 mark per 6 hours (2 marks per calendar day).
Incorrect format penalties:
1 mark per page for exceeding the page limit. 1 mark penalty for inappropriate referencing and formatting. 1 mark penalty for a failure to follow the naming convention of the project.
While discussion and collaboration are expected, plagiarism is a breach of the University of Sydney Code of Conduct and will be dealt with by the Faculty.
Be sure to acknowledge all of your source materials and provide proper citations for any quotes. Checks for similar contents (web materials, other students’ projects, etc.) and plagiarism will be conducted by TURNITIN and the projects with a similarity index significantly above an acceptable level will be reported to the faculty and this may result in a zero mark being awarded for the project.