We have built spreadsheet models of foreign exchange trading strategies. The assignment for this module involves writing a report explaining and evaluating the performance of these strategies (and any others you care to examine):
You have been hired as a researcher in a quantitative hedge fund that until now has only considered equity market strategies. The fund has expanded and intends to develop foreign exchange strategies. As a preliminary step you have been asked to write a report considering at least three well-established strategies – ca
y trade, fair value (PPP Strategy) and order flows. The report should
iefly explain these strategies to your colleagues, report and evaluate the performance of these strategies based on the data files you have been using (attached excel). The exact definition of the strategies is up to you to determine (and explain), you may wish to consider other cross-sectional sort-based strategies and you may want to consider the strategies independently or in combination(s). Finally, your manager has requested that you comment on how you expect these strategies to perform in the Covid-crisis.
The exact methods used to answer the assignment are up to you. Imagine your manager has told you to do this piece of research and then gone on vacation. Make the best attempt you can, given the instructions you have. If you are unsure exactly what to do, make an intelligent assessment and justify it in the report you write.
The reports are to be written in business style, as if prepared for your manager. The use of graphs and tables is encouraged, where relevant and these are not counted in the report length guidelines so make all graphs and tables large and legible. Full referencing is necessary.
Your manager is busy and does not have time to waste. The target length for each report is four pages of text. Tables and charts are extra. As your manager values conciseness and completeness equally you should aim to include all the things you deem to be important and exclude anything that is not. If your report needs to be longer than four pages because there is just so much stuff you need to include then fine. Similarly, if you feel you can cover what is needed in less than four pages then you can hand in a shorter piece of work. However, your manager (and the marker) may not agree, so this choice will affect your grade.
We have addressed the various strategies in the course. You should therefore make an effort to link your reports to what we have discussed. You could, for example, emphasize where your results confirm (or conflict with) the mainstream view.
Ken Froot and Richard Thaler (1990) “Anomalies: Foreign Exchange”, Journal of Economic Perspectives, 4, 179–192.
Craig Burnside (2011) “Ca
y Trades and Risk” NBER working paper No. 17278
John F.O. Bilson XXXXXXXXXXAdventures in the Ca
y Trade CME Group.
Investment banks have realised that they can offer funds that track foreign exchange strategies to investors. One group of funds which follow the performance of the cu
y trade are Deutsche Bank’s Harvest Indices. For more information read XXXXXXXXXXdb Cu
ency Harvest, Deutsche bank.
Craig Burnside (2011) “Ca
y Trades and Risk” NBER, working paper No. 17278.
Lukas Menkhoff, Lucio Sarno, Maik Schmeling and Andreas Schrimpf (2011) “The Risk in Ca
y Trades” The Journal of Finance and alternative description: http:
Norges Bank Investment Management (2014) “The Cu
y Trade”, Discussion Note 03/2014
Fair Value Model (PPP Strategy)
Menzie Chinn (2011) “Macro Approaches to Foreign Exchange Determination” Working Paper Series, La Follette School Working Paper No XXXXXXXXXX, University of Wisconsin-Madison
(2017) “Our Big Mac index of global cu
encies reflects the dollar’s strength” The Economist
Richard Meese and Kenneth Rogoff (1984) “Empirical Exchange Rate Models of the Seventies: Do they Fit Out of Sample?” Journal of International Economics, 3-24
Jan Annaert and Marc De Ceuster (1997) “The Big Mac: More than just a Junk Asset Allocator?” International Review of Financial Analysis
Yin Wong Cheung, Menzie Chinn and Antonio Garcia “Empirical exchange rate models of the nineties: are any fit to survive?” Journal of International Money and Finance, 24
Yin Wong Cheung, Menzie Chinn, Antonio Garcia and Yi Zhang (2017) “Exchange Rate Redux: New Models, New Data, New Cu
encies”, European Central Bank, working paper 2018
Robert Cumby (1996) “Forecasting exchange rates and relative prices with the hamburger standard: Is what you want what you get with McParity?”, NBER, working paper 5675 (http:
Michael Melvin, John Prins, Duncan Sand, Forecasting Exchange Rates: An Investor Perspective
Martin Evans (2006) “Foreign Exchange Market Microstructure” mimeo
Martin Evans and Richard Lyons (2006) “Understanding Order Flow”,International Journal of Finance and Economics
Mintao Fan and Richard Lyons (2003) “Customer Trades and Extreme Events in Foreign Exchange” in Monetary History, Exchange Rates and Financial Markets: Essays in Honour of Charles Goodhart
Martin Evans and Richard Lyons (2002) “Order Flow and Exchange Rate Dynamics” Journal of Political Economy, XXXXXXXXXX
Ian Marsh and Ceire O’Rourke (2004) “Customer Order Flows in Foreign Exchange Markets: Do They Really Contain Information?” mimeo
Martin Evans and Richard Lyons (2005) “Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting” American Economic Review”
Lucas Menkhoff et al (2011) “The cross-section of cu
ency order flow portfolios”, mimeo