FNCE30003 International Finance

Group Assignment

2024 Semester 2

Details:

1. This assignment constitutes 15% of your final grade.

2. This assignment includes two files:

●   this pdf assignment instruction file, and

●   the Excel file containing the necessary data needed for the assignment.

3. It must be finished with your assignment group.

4. Due date: Monday September 30, 2024, 11:59pm through LMS.

Marking Guidelines:

1. The distribution of the marks are:

2. Penalties for late submission: In order to ensure equality for all students, the assignment must be completed within specified time limits. Each calendar day beyond the due date incurs 10 marks deduction. Assignments submitted later than 10 calendar days after the due date will not be marked and will receive no marks.

3. Your submission to the assignment include a written report and an Excel file.

●   The written report should contain all the answers, including all necessary results and/or plots.

●   The Excel file should provide all the calculations, including but not limited to the results presented in the written report.

4. Referencing

●    1. Websites, magazine/newspapers, etc.

o Refer to websites and magazines/newspapers as footnotes (footnotes not endnotes).

o For websites, include the full link and also the date accessed. (You don’t need to put these in the bibliography.)

o If you paste in a graph/figure/table from some other document or website, you must provide full information on the source.

o If you create a table or a graph from data that you have found on a website (or elsewhere), you must provide the data source.

●   Academic articles/books.

o When referring to academic sources in your essay, use the name of the author(s) and the year of publication.

o For example: “Dixon (2015) reports that. . . ”; “ . . . as Zeng and Gao (2021) argue. . . .”

o If there are more than three authors, you should state the first author followed byet al., for example “ . . . La Portral et al. (2018).” (The full list of authors must be included in the bibliography).

5. Plagiarism and Collusion:

Policy against plagiarism and collusion has been included in your course outline.

Please see https://academicintegrity.unimelb.edu.au/ for more information.

6. Policy against “free-riders”

You are encouraged to resolve any dispute by yourselves, which is a vital part of the learning experience. Each group member will receive the same marks, except any individual that is identified as anon-contributor by a formal statement with supporting evidence from the group members. Zero mark will be recorded for such individual.

Part I. Currency Carry Trade (45 marks)

All the questions and requirements are underlined with bold fonts.

In this exercise, we take a look at the currency carry trade. In the assignment Excel file:

●   Sheet “Part IA” includes the end of month exchange rate USD/AUD and JPY/USD.

●   Sheet “Part IB” includes the monthly interest rates for USA, Japan and Australia.

●   The data period is 30-Jan-2010 to 30-Jul-2024.

●   Note: To be consistent, we will use the quote 1AUD = xUSD, 1USD = yJPY, and 1AUD = zJPY, in answers to all the questions in this part.

1. Report the mean, standard deviation, skewness, kurtosis, and maximum and minimum of monthly percentage change of the BID exchange rates between USD and AUD, JPY and USD. (5 marks)

2. Report the mean, standard deviation, skewness, kurtosis and maximum and minimum of the interest rate differences between JPY and USD, and between USD and AUD. (5 marks)

3. Plot the time-series of percentage changes of USD-JPY exchange rate and interest rate difference between JPY and USD, all in per annum terms.

Then in another graph do the same for AUD and USD. (10 marks) You may find a similar graph in the lecture on AUD and JPY relation.

4.   To explore whether currency carry trade is profitable, we use the following  strategy acting as a Japanese investor to consider AUD and JPY carry trade:

i). at the end of each month t, we borrow 1 million JPYs, convert to AUD straight away, then invest the money for month t+1;

ii). then convert back to JPY at the end of each month t+1.

Starting with the given data, describe the steps and formula you use in the calculation (backed up by your excel spreadsheet). Report the average monthly profits or losses and the standard deviation. (20 marks)

5.   At the beginning of 2019, suppose you just started your carry trade business.

You started replicating the same process as described in Question 4 for the full 2019 calendar year. Report your average monthly profits or losses from your first year in carry trade. Regardless of your first year results, you wanted to keep trading for the full 2020 calendar year. Report your average monthly results for 2020. Is there any difference from these two years’ results? Comment on what potentially would cause the difference. (5 marks)

Note: Question 5 is an open question. The word limit is stickily no more than 100 .

Part II. US-China Geopolitical/Geo-economic Fragmentation (25 marks)

After decades of increasing global economic integration, the world is facing the risk of fragmentation. Increasing political tensions, physical, and regulatory barriers on   international trade are accelerating the fragmentation of the world's economy. Geopolitical fragmentation refers to the increasing divisions and tensions among nations along geopolitical lines, which are straining international relations and impacting global trade flows (Aiyar et al., 2023; Fernández-Villaverde et al., 2024). The US-China conflict is a quintessential example of geopolitical fragmentation. The ongoing rivalry between the US and China began in 2018, in which the United States accused China of unfair trade practices and imposed tariffs on Chinese goods, to which China retaliated with counter-tariffs (Son, 2022).

The conflict in the US-China trade relationship resulted in immediate economic shocks, significantly disrupting global supply chains, particularly in industries heavily reliant on cross-border trade, such as technology and manufacturing. Bown (2020) reports the tariffs led to a decline in US-China bilateral trade, with a 15% decrease in imports from China to the US in 2019 alone compared to the previous year. This disruption forced companies to reconfigure their supply chains, often at substantial cost, leading to increased prices for consumers and decreased profit margins for businesses (Campos et al., 2023).

Though the economic consequences of geopolitical fragmentation are profound and multifaceted, littler explanation has been offered for the potential causes to the US-China conflict in the first place. In his recent speech at the National Press Club of Australia, Yanis Varoufakis shed some light on the causes. After watching his speech his speech via the weblink, https://www.youtube.com/watch?v=1AI8RG6nMGg, you  are asked to answer the following questions.

1.   What is (are) the explanation(s) offered by Yanis as the cause(s) of the US- China conflict; (The word limit is stickily no more than 100) (10 marks)

2.   With further supporting evidence, state whether you agree or disagree with

Yanis explanation(s) discussed in question 1. (The word limit is 300,with the ±10% word limit leeway.) (15 marks)

Note: Part II is an open question. There is no specific right or wrong answer. Your marks  depend on your analysis and/or how well you will apply your learnings obtained from the course.

Part III. PPP Study Using Specific Commodities (30)

All the questions and requirements are underlined with bold fonts.

1. We start with the Big Mac index. Sheet “Part III” in the Excel file includes the latest releasedata for the Big Mac index recorded on 1 January, 2024. For this assignment, we are particularly interested in the following regions:

●   Australia

●   Brazil

●   Canada

●   Hong Kong

●    India

●   Philippines

●   Singapore

●   UAE

●   UK

●   USA

Use the data, write down the local price, market exchange rate vs. USD, PPP

implied exchange rate vs. USD, and relative difference (in percentages) between the two exchange rates. (5 marks).

2. For comparison, we will also look at the same results using the iPhone. You can check 256G iPhone 15 outright prices across different regions from Apple’s website: http://www.apple.com/choose-your-country/. For the same regions listed above, write down the local prices, PPP implied exchange rate vs. USD, and relative difference (in percentages) between the two exchange rates. (10 mark)

Note: You can use the same market exchange rate as above, since Apple’sprice do not change that often.

3. Compare the results for Big Mac and iPhone and briefly discuss the differences. (15 marks)

Note: The word limit of this question (Question 3) is 150, with the ±10% word limit leeway.