FIN3IFM
EXCHANGE RATE BEHAVIOR
SEMESTER 1, 2021
Release Date: 28th Mar 2021
Due Date: Before 11.50 pm 18th Apr 2021
Note: Please carefully read this document thoroughly. Do not rush! The document sets the task
description, work expectation, preparation, and submission guidelines, and marking scheme.
This research report aims to provide you the experience of the professional nature of work
analyst in the foreign exchange market undertakes. The higher the commitment you put, the
etter you learn and take from this task in the job market (beyond your grading concern!).
1. TASK OVERVIEW
Lecture week 4 introduces the concept of a
itrage and parity theories – interest rate
parity (IRP), purchasing power parity (PPP), and international Fisher effect (IFE).
Lecture 3 introduces the foreign cu
ency market, its equili
ium condition, factors
affecting the exchange rate, why the government controls the exchange rate, and the
way government interferes in the foreign exchange market. Building on the concepts
primarily related to Week 3 and 4, this Exchange Rate Report aims to test and expand
your understanding to assess whether IRP, PPP, and IFE hold in the forex market with
egards to AUD/USD pair over the past 5 years.
2. MAJOR TASK DETAILS
Background Work - Data
Collection
The task requires you to collect the
following data from various open
sources.
• Collect monthly spot exchange
ate between AUD/USD pair over
last five years (60 data points)
• Collect quarterly future exchange
ate1 between AUD/USD pair
over last five years over las five
years (20 data points).
• Collect the monthly interest rate
and inflation rate for both the
USA and Australia.
1 Note that ideally you would require forward rate not future rate to test interest rate parity. But
the data on forward rate is difficult to obtain from a public and free sources. Hence, you will
use future rate as an approximation of forward rate to determine the forward premium or
discount. Please note this limitation in the appropriate place of your report.
Research Report
FIN3IFM: International Financial Management
Prepared by Dr Muhammad Al Mamun for FIN3IFM Students XXXXXXXXXXPage 2 of 7
Helpful Data Sources:
Yahoo Finance
(https:
au.finance.yahoo.com/quote/AUDUSD%3DX/history?p=AUDUSD%3DX)
Barchart
https:
www.barchart.com/futures/quotes/A6*0/historical-prices?viewName=main
Reserve Bank of Australia – for monthly
interest rate and inflation rate in Australia.
Federal Reserve Bank for monthly inflation
ate
(https:
fred.stlouisfed.org/graph/?g=1ED0) &
monthly interest rate
(https:
fred.stlouisfed.org/series/DGS3MO#0)
in the USA.
You can also use other sources that you find
more convenient.
Summary statistics
You are required to analyse the mean, median, and volatility of each data series. You
are required to use graphs for meaningful visualization of your data series.
Examining the Behavior of the Exchange Rate
Present a meaningful economic explanation of the trend of the AUD/USD spot exchange
ate. What are the main factors that explain the changes in the value of the Aussie dollar
against the USD during the last five years? You are required to use the relevant factors
that have been covered during the lectures. These include economic factors – trade and
finance related, government intervention, political factors, government policy
egulations, etc. You are expected to spend significant time in this section.
Evaluating the Future Exchange Rate
Examine the trend of spot exchange rate and future exchange rate. Do you find any
links? Identify whether the future exchange rate includes a discount or premium for each
quarterly period (total 20 quarters)? Present your result in a table and a graph. Note that
while forward rate and future rate are not the same, you can use these terms
interchangeably for this assignment for reasons mentioned earlier.
Testing IRP, PPP, and IFE
Using the last five years (60 data points), examine whether IRP, PPP, IFE holds.
Present your result in tabular and graphical form. What are the implications you can
draw from your analysis about potential actions by market participants (MNCs, Banks,
forex traders)?
Since you will have quarterly future rate data from public sources, you can use the
linea
nonlinear interpolation method in Excel / Numbers or other data analyzing
software to fill the missing data to generate monthly future rates. If you are unsure of
what is interpolation, and how to do that in Excel, please visit credible websites to form
your understanding.
https:
au.finance.yahoo.com/quote/AUDUSD%3DX/history?p=AUDUSD%3DX
https:
www.barchart.com/futures/quotes/A6*0/historical-prices?viewName=main
https:
fred.stlouisfed.org/graph/?g=1ED0
https:
fred.stlouisfed.org/series/DGS3MO#0
Research Report
FIN3IFM: International Financial Management
Prepared by Dr Muhammad Al Mamun for FIN3IFM Students XXXXXXXXXXPage 3 of 7
3. DETAILED REPORT & STRUCTURE
Cover Page
Create a professional cover page. You are
training to be a professional. See the cover
page of a report by IMF. It is simple but
professional. You can click the image and see
the full report. I want you to draw inspiration
from this or similar reports to prepare your one.
Table of Contents
Table of contents presents the main headings
and the subheadings of each topic / chapter
section. Both the main headings and
subheadings should be hyperlinked to the
espective page. It should label the page
number for each section as well.
Executive Summary
The executive summary should contain key
highlights of the report.
Introduction
This section should highlight the background of this report – why you are preparing this
eport, what is the main focus, what this report wishes to achieve etc. Please keep it
short.
Data and Summary Stats
This section should highlight the nature of the data, data frequency – monthly, quarterly,
or yearly; what are the variables you collected, very
ief definition of each variable,
what are the sources, etc.
It should also highlight if you have used an alternative measure to define a variable i.e.
future rate for forward rate etc. You should also mention
iefly if you have used any
techniques i.e. average, interpolation, or extrapolation to convert data in a different
frequency than what the original data has been.
It should also report the summary stats table. Provide summary stats of each variable,
any co
elation among the variables, etc. Any initial inference about the variables and
potential implication for the exchange rate.
Exchange Rate Behavior
This is an important section. Students are expected to provide the economic explanation
not just in the theoretical sense but in the applied sense to justify the behavior of
exchange rate movements in the spot market over the period.
The use of meaningful graphs is key to set the context to expand the economic
arguments. You are required to explain the major trends and intermediate trends that
you observe in the sport rate movement during the last 5 years.
A significant part of this section requires students to research online from credible
sources i.e. Federal Reserve System, Reserve Bank of Australia, reputed news articles
https:
www.imf.org/external/pubs/ft/gfs
2016/01/pdf/text.pdf
Research Report
FIN3IFM: International Financial Management
Prepared by Dr Muhammad Al Mamun for FIN3IFM Students XXXXXXXXXXPage 4 of 7
to identify policy measures – regulatory, economic, and political – undertaken by the
espective governments that explain the behavior of exchange rate movement.
It is important to note that policy taken by other countries can also affect the AUD/USD
exchange rate. Such information can also be incorporated in explaining the behavior of
the AUD/USD movement.
Future Exchange Rate
In this section, students should use the future exchange rate to examine the trend and
determine how it diverges from the spot rate.
Identifying any discount or premium for each quarterly/monthly future exchange rate
and linking the policy measures – regulatory, economic, and political - are key in
explaining whether