BAO 3402 INTERNATIONAL BANKING AND FINANCE

GROUP ASSIGNMENT©

Weight : 20% of total assessment for the unit

Due Date :Week 9 (Friday 5.30) (辽大同学上交时间待定)
Coverage of the assignment: Week 3, 4, 5 and 8 (Learning outcome 2,3 and 4)
Learning Method: Self and Group Study

Instructions for group formation • Identify your group (you are responsible for suitable members for your group). • Enrolled for a group in VU-COLLABORATOR. Keep inform the number of the group you enrolled to other members in your group. Ask them to enrol to the same. • You should not enrol to group which somebody else already picked without their consent. Any such enrolment will be cancelled without prior-notice. • If you enrol without knowing into a group which you do not want, please inform me, I will de-enrol you.

Introduction

In theory, the foreign exchange (FX) market is considered a perfect market where we can expect the law of one price to hold.As we know, the law of one price provides thetheoretical basisfor all international parity conditions. International parity conditions can be used to understand the operational behaviour of the FX market.Thus, in a perfect market there will be no possibility of abnormal profit on arbitrage or speculation. Theaim of this group assignment is to give you an opportunity to empirically investigate the existence of some of thoseparity conditions.
Assignment Tasks:
Collect historical daily FX data for the following currencies for the period:02/01/2013to 31/12/2015. Data is to be collected from http://www.bankofcanada.ca/rates/exchange/10-year-lookup/ . For tasks 1 to 9 you will need to use all of the FX data collected. Please note that you are not required to present these data in your written assignment.
|Australian dollar(AUD) |Great Briton pound (GBP) |
|Brazilian real (BRL) |Japan yen (JPY) |
|Chines renminbi (CNY) | |

1. Construct three line charts (GBP& AUD, GBP&CNY and CNY& AUD) using the collected FX data in GBP, AUD and CNY (hint: Watch the link; https://www.youtube.com/watch?v=AT8O1UwZd-I). (5 Marks)
2. Based on the chart/s, you are required to write a critical report on factors which affect the major trends in Canadian Dollar (CAD) value during last 3 year. You need to compare and contrast how those factors affected the movement in GBP, AUD and CNY. (15 Marks)
3. Estimate the recorded daily FX rate change in all currencies, the average annual change and the annual standard deviation at the of the FX rate change at the end of each calendar year (for the year ended 31st December 2013, 31st December 2014 and 31st December 2015). Are there any changes in the average price change (volatility) during period? (10% Marks)
4. Write a short essay on volatility of Foreign Exchanges Rates, highlighting factors affecting to foreign exchange rate volatility. Use the statistics you estimated in task 3 (you can construct line chart to show the volatility of each currency and use them for your discussions (Maximum words 600 Words - excluding tables). (10% Marks)
5. Estimate the potential maximum one day loss of each currency for the each year under a 95% confidence level. Interpret you results. (10% Marks)
6. Estimate the correlation and the covariance coefficients of daily FX rate changes (use all possible currency combinations (hint: construct a correlation/ covariance matrix). Explain what you can learn from the estimated correlation coefficients. (10% Marks)
7. A business firm expects to have the following cash flow scenarios (currency portfolios) on its international trading activities.
|Scenario |Cash flow situation under each currency |
|1 |Great Briton(GBP) 75% |
| |China(CNY) 25% 100% |
|2 |Brazil (BRL) 40% |
| |Australia(AUD) 60% 100% |
|3 |Australia (AUD) 45% |
| |Brazil (BRL) 35% |
| |Japan (JPY) 20% 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.
(10% marks)
Youhave been given the following official annual interest rates and inflation rates (annualised monthly)as at 2st January 2014
|Country |Inflation Rate |Over-night money market Interest Rate |
|Australia |1.61% |2.50% |
|Canada |1.47% |1.25% |
|China |2.49% |1.97%*** |
|Great Briton |1.92% |0.50% |
|Japan |1.41% |1.25% |
|Brazil |5.26% |4.00% |

Assume that interest rates and inflation rate were not changed during the next two-year period.

8. Based on the spot exchange rates as at 2stJanuary 2014, estimate the expected exchange rates for AUD, CHN and GBPfor each six month period (i.e., as at 2nd July 2014, 3nd January 2015, 3rd July 20151st 31 December 2015,) using the purchasing power parity (PPP) and the International Fischer Effect (IFE).[Important: if there is any public holidays, take the next available date] (10% marks)
9. Write a short essay explaining possible uses of international parity condition in business decision making. (10% Marks)
10. Present your results as a report. (5% Marks)
11. You need to cite all references and provide the list of references used in your report (The recommended referencing style is the Harvard.).
(5% Marks)

Develop an excel worksheet (you can use excel function/formula to do your calculations). Yourfindings should be presented as a report. Soft copies of both excel and words files should be submitted through the respective assessment drop box.
Specific instructions for the group assignment

All sources of information which you used to prepare your report (such as company annual reports, text books, websites with addresses, etc.) 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 tutorial class you are enrolled in. If you are not able to join a group, you must contact your tutor prior to theweek 6 tutorial. Each group is required to maintain a record of group meetings which should be attached with their final report. Inability to submit thisrecord will incur a 10% penalty of your earned marks on the assignment. Once you have picked your group, all members in a group should enrol to the same group in VU collaborator (You can find list of group under the communication tag in VU-Collaborator). Please site your group number in the cover sheet of the assignment.
Instructions for Submission: • Please site your group number in the cover sheet of your assignment. • The soft copy and the printed copy of the completed report should be submittedon or before Week 9-Friday. • 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. TheExcel file is not required to TURNITIN. • Assignments submitted without the similarity index will incur a 20% penalty of the marks earned. Late assignment will cost one (01) mark per day. • Your assignment should not exceed 35% limit of the similarity index. Each 10% exceeding the limit will result 2 points of your earned marks (Marks will be deducted proportionately). • You will lose all marks allocated to the group assignment if you didn’t submit the assignment as required. • Name the excel and word documents as follows: Unit code followed by ID numbers of all group members (Eg.Group No_BAO3402 2015S2.DOCX and Group No_BAO3402 2015S2.XLSX).

Some useful web sites for your assignment

http://www.centralbanksguide.com/central+banks+list/

http://www.rbnz.govt.nz/statistics/tables/b3/

https://secure.mas.gov.sg/dir/domesticinterestrates.aspx

http://www.federalreserve.gov/releases/h15/

http://www.bankofcanada.ca/rates/interest-rates/

http://www.rba.gov.au/

https://www.bot.or.th/English/Statistics/FinancialMarkets/Pages/default.aspx

http://www.tradingeconomics.com/

Other instructions

Special Requirements for the assignment that need to be adhered to: • Need to RESEARCH the topic in depth to gain a favourable mark (Remember there isno one correct answer). • Hand in one assignment per group and read drafts of each other’s work to ensure quality and consistency. • Endeavour to find group partners from the same tutorial class. • Do not use plastic covers or folders for your assignment. Simply staple it together. • You must include the assignment front cover sheet that is available on the VU Collaborate under ‘Assessment Section’. • Ensure that the front page contains the title, names of group members, your ID numbers, and importantly, your tutorial day and time. Ensure that all assignment partners read the assessment declarations and sign. • Your report must display headings and sub-headings to help establish its structure and aid the marking process. • 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. • Assignments will be penalised severely where plagiarism (copying directly from textbooks, journal etc. without due recognition) has occurred. • Assignments will be handed back to students in their tutorial in WEEK 12.