the details in attached filedeadline on 13/4APA reference styleshould submit MS word/PDF FILE and EXCEL FILEi will send you a video explaining in details
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 better 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 arbitrage and parity theories – interest rate parity (IRP), purchasing power parity (PPP), and international Fisher effect (IFE). Lecture 3 introduces the foreign currency market, its equilibrium 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 regards 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 rate between AUD/USD pair over last five years (60 data points) • Collect quarterly future exchange rate1 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 Page 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 rate (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 rate. 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 regulations, 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 linear/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 Page 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 respective 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 report, 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 brief 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 briefly 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 correlation 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/gfsr/2016/01/pdf/text.pdf Research Report FIN3IFM: International Financial Management Prepared by Dr Muhammad Al Mamun for FIN3IFM Students Page 4 of 7 to identify policy measures – regulatory, economic, and political – undertaken by the respective 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