Exchange Rate of Six Foreign Currencies with Respect to The Usd Analysis

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Business Finance

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- THE FINAL ASSIGNMENT –

For this assignment you need to use the Bloomberg Database, which is available for you at Douglas Hall Room 170- CME Training Lab. In order to be able to work on the Bloomberg terminal, please refer to the document titled “Bloomberg_Workshop_Material” uploaded on the Blackboard.

Part 1: 1) From Bloomberg, download the exchange rates of at least 6 foreign currencies (at least 2 of them have to be from emerging markets) including the US dollar. (The number of currencies depends on your choice, the more the better)

2) Compute the one-year appreciation or depreciation of each currency against the US dollar year to year within your chosen time window. (The time window depends on your choice, the longer the better). ($: US dollar, X: The foreign currency that you have chosen) St(X/$) = Beginning Rate St+1(X/$) = Ending Rate The % appreciation (or depreciation) in X can be calculated as; [(Ending Rate – Beginning Rate) / Beginning Rate] x 100

3) Explore recent exchange rate trends for the pairs of countries that you have selected (the time window depends on your choice, the longer the better). To plot trends, download the series to a spreadsheet.

4) Try to plot examples of some fixed and floating rates. Can you tell from the data, which countries are fixed and which are floating? Please justify and explain your conclusions

5) In the plots, can you locate data for an exchange rate crisis within your time-window?

Part 2:

1) (In order to complete this part of your assignment, please refer to your lecture notes on Uncovered Interest Arbitrage)

Imagine you are a carry trader. Obtain 15-day Swap rates for some major currencies (Remember to divide the obtained swap rates by 24): US dollar, pound, euro, Japanese yen, Swiss franc, Canadian dollar, and Austrian dollar (The number of currencies depends on your choice, the more the better) Find the lowest yield currency and call it X. How much interest would you pay in X units after borrowing X 1,000,000 for 15 days? (Remember that the raw data are annualized rates.) Obtain the exchange rate between X and every other high yield currency Y. For each Y, compute how much X would be worth in Y units today, and then in 15 days time with Y-currency interest added. Revisit this question in 15 days time, find the spot rates at the moment, and compute the resulting profit from each carry trade. Did any of your imaginary trade pay off?

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Part 1 1. Exchange Rate of six foreign currencies with respect to the USD The six foreign downloaded currencies from Bloomberg as on November 30, 2018 are European (EUR), United Kingdom currency (GBP), Swiss franc (CHF), Australian currency (AUD), Indian currency (INR), and Japanese currency (JPY). Region Foreign Currency (To US dollar) Exchange Rate as at 11/30/18 Europe EUR 1.1317 United Kingdom GPB 1.2749 Switzerland CHF 1.0015 Australia AUD 0.7306 India INR 0.0143 Japan Yen (JPY) 0.0088 2. Calculation of appreciation or depreciation A positive change denotes appreciation whereas a negative change denotes depreciation. So we can conclude from the below chart. That all those foreign currencies we selected are depreciating against to US dollar. Foreign Currencies St(X/$) = Beginning St+1(X/$) = Ending % appreciation or Rate on 11/30/2017 Rate on 11/30/2018 depreciation in X EUR-USD 1.1898 1.1317 -4.88% GBP-USD 1.3471 1.2749 -5.36% 1.0245 1.0015 -2.24% 0.7595 0.7306 -3.81% 0.01579 0.0143 -9.44% 0.009548 0.0088 -7.83% CHF-USD AUD-USD INR-USD JPY-USD % Appreciation or depreciation in X =[(Ending Rate –Beginning Rate) / Beginning Rate] x 100 3. The Currency Exchange graphs: The graphs show the currency with base and quote currency given. The base currency is USD while the quote currencies include, EUR, GBP, CHF, AUD, INR, and JPY. The graphs are constructed to show the currency exchange rates between USD and other 5 different currencies mentioned above. EUR and the USD This graph shows the currency exchange rate between EUR and the USD. 1USD=1.1317EUR GBP and the USD This graph shows the currency exchange rate between GBP and the USD. 1USD=1.2749GBP CHF and the USD This graph shows the currency exchange rate between CHF the USD. 1USD=1.0015CHF AUD and the USD This graph shows the currency exchange rate between AUD and the USD. 1USD=0.7306AUD INR and the USD This graph shows the currency exchange rate between INR and the USD. 1USD=0.0143INR JPY and the USD This graph shows the currency exchange rate between JPY and the USD. 1USD=0.0088 JPY 4. Fixed and floating rates The fixed rates of interest are constant for relatively long periods of time while the floating rates is more variable which keep changing. The graph below shows a trend with 5-year variation for the floating exchange rate of each of the foreign currencies that we picked with respect to the USD. All of the currencies we picked are floating exchange rate. 5. Analysis of currency exchange rate crisis within your time-window It is a sudden volatility in the currency which ends up causing speculation in the foreign exchange or forex market due to currency pegs or monetary policy decision and they are solved via the implementation of floating exchange rate or monetary policy avoidance which fights the market. The data for an exchange rate crisis within my time-window is the plots in the INR/USD rate crisis at 7pm. Part 2. US One Month Swap Rate On Nov 1st We decide to choice the above five major currencies. And we found that the CHF, Swiss Franc (X) is the lowest yield currency. 1-month interest rate compared to LIBOR Currency (%) Current exchange Current exchange Swap 1 month rate referred to USD rate referred to CHF referred to CHF USD 0.0231 1.0000 1.0021 1.0334 GBP 0.0073 1.3012 1.3036 1.3235 EURO -0.0041 1.1408 1.1433 1.1476 YEN -0.0010 0.0089 0.8890 0.8951 CHF -0.0079 0.9979 1.0000 1.0000 Sample calculation for Swap (USD): 1.0021*((1+0.0231)/(1-0.0079))=1.0334 On Dec 3rd Currency Current exchange rate referred to CHF USD 0.9975 GBP 1.2695 EURO 1.1331 YEN 0.878 CHF 1 For the calculation (If I borrowing 1,000,000) For USD 1,000,000*0.9975-1,000,000*1.0334= -35,900 For GBP 1,000,000*1.2695-1,000,000*1.3235= -54,000 For EURO 1,000,000*1.1331-1,000,000*1.1476= -14,500 For YEN 1,000,000*0.878-1,000,000*0.8951= -17,100 Unfortunately, none of our trade paid off. References Data from Bloomberg.com Running head: EXCHANGE RATE ANALYSIS Exchange rate analysis (Name) (Course) (Date) 1 EXCHANGE RATE ANALYSIS 2 Exchange rate analysis Part 1 1. Exchange rate of six foreign currencies with respect to the USD The six foreign currencies selected include the euro, the yen, the Swiss franc, the Canadian dollar, the renminbi and the Brazilian real. Table 1 summarizes the current exchange rates of each of these foreign currencies with respect to the US dollar. Table 1. Current exchange rates of selected currencies Country or region Foreign currency Several European countries Japan Switzerland Canada China Brazil Euro Yen Swiss franc Canadian dollar Renminbi Brazilian real Exchange rate on April 14th 2018 1.2328 0.0093 1.0397 0.7934 0.1593 0.2920 2. Estimation of the 1-year appreciation or depreciation against the USD As observed in table 2, the euro, the Swiss franc, the Canadian dollar and the renminbi have appreciated against the US dollar in the past year, while the yen and the Brazilian real have depreciated. Table 2. Calculation of the annual % change in each exchange rate – Appreciation or depreciation with respect to USD Foreign currency Euro Yen Swiss franc Canadian dollar Renminbi Brazilian real Exchange rate on April 14th 2018 1.2328 0.0093 1.0397 0.7934 0.1593 0.2920 Exchange rate on April 14th 2017 1.0618 0.0101 0.9946 0.7504 0.1454 0.3180 % change 16.10 -7.92 4.53 5.73 9.56 -8.18 EXCHANGE RATE ANALYSIS 3 3. Observed trends Figures 1-6 represent the variation of the exchange rate for each of the selected currencies with respect to the USD in the past five years. According to the reported figures, there is a relatively small variation in most of the exchange rates considered between the different foreign currencies and the USD. Figure 1. 5-year variation of the exchange rate between the euro and the USD Figure 2. 5-year variation of the exchange rate between the yen and the USD EXCHANGE RATE ANALYSIS Figure 3. 5-year variation of the exchange rate between the Swiss franc and the USD Figure 4. 5-year variation of the exchange rate between the Canadian dollar and the USD 4 EXCHANGE RATE ANALYSIS Figure 5. 5-year variation of the exchange rate between the renminbi and the USD Figure 6. 5-year variation of the exchange rate between the Brazilian real and the USD 4. Fixed and floating exchange rates The fixed exchange rate represents the situation in which one of the two governments regulates the exact currency exchange rate of their currency with respect to any other foreign currencies. In contrast, the market will be the determining force of the exchange rate in floating exchanges rates. As a result of this difference, the floating exchange rate is significantly more variable, since the exchange rate changes on a daily basis, not requiring the government to 5 EXCHANGE RATE ANALYSIS modify it. In contrast, the fixed exchange rate presents a step-wise trend, in which the currency exchange rate remains constant for relatively long periods of time, and suddenly increases or decreases depending on the applied governmental decision. Figures 7 and 8 present a schematic representation of these two different trends. Figure 7. Sample trend of a floating exchange rate with a high intra-day variability Figure 8. Sample trend of a fixed exchange rate with a negligible intra-day variability 6 EXCHANGE RATE ANALYSIS 7 The comparison of these trends with the 5-year variation for the exchange rate of each of the foreign currencies with respect to the USD highlight how exchange rates like CHY/USD or BSL/USD are fixed. In contrast, the higher variability of the EUR/USD, CHF/USD, JPY/USD and CAD/USD point towards a floating exchange rate. 5. Analysis of currency exchange rate crisis A currency exchange rate crisis visible in the plots is the CHF/USD rate crisis at the beginning of 2015. This exchange rate crisis appears in the form of a very sharp increase in the exchange rate for the CHF/USD. Part 2 Table 3 shows the calculated SWAP exchange rate in 1 month, assuming that the onemonth interest rate paid on the different currencies is measured according to the LIBOR interest rate (global-rates.com) Currency USD GBP EURO YEN CHF CAD AUD 1-month interest rate compared to LIBOR (%) 1.89550 0.52369 -0.40157 -0.04183 -0.79020 1.0520 2.86500 Current exchange rate referred to USD 1.0000 1.4239 1.2328 0.0093 1.0397 0.7934 0.7764 Current exchange rate referred to CHF 0.9618 1.3695 1.1857 0.0089 1.0000 0.7631 0.7468 Swap 1 month referred to CHF 0.9724 1.3659 1.1717 0.0089 0.9843 0.7651 0.7621 A sample calculation for the USD/CHF swap exchange rate is shown below: 𝑆=𝐶∗ 1 + 𝑟(𝑈𝑆𝐷) 1 + 0.0189550 = 0.9618 ∗ = 0.9724 1 + 𝑟(𝐶𝐻𝐹) 1 − 0.0079020 EXCHANGE RATE ANALYSIS 8 Work cited Comparison of the global exchange rates to the LIBOR index rate. Retrieved April 15th, 2018, from http://www.global-rates.com/interest-rates/libor/libor.aspx Exchange rates of different currencies referred to USD. Retrieved April 15th, 2018, from http://www.bloomberg.com - THE FINAL ASSIGNMENT- For this assignment you need to use the Bloomberg Database, which is available for you at Douglas Hall Room 170-CME Training Lab. In order to be able to work on the Bloomberg terminal, please refer to the document titled "Bloomberg_Workshop_Material" uploaded on the Blackboard. Part 1: 1) From Bloomberg, download the exchange rates of at least 6 foreign currencies (at least 2 of them have to be from emerging markets) including the US dollar. (The number of currencies depends on your choice, the more the better) 2) Compute the one-year appreciation or depreciation of each currency against the US dollar year to year within your chosen time window. (The time window depends on your choice, the longer the better). ($: US dollar, X: The foreign currency that you have chosen) S.(X/$) = Beginning Rate SE+1(X/$) = Ending Rate The % appreciation (or depreciation) in X can be calculated as; [(Ending Rate - Beginning Rate) / Beginning Rate] x 100 3) Explore recent exchange rate trends for the pairs of countries that you have selected (the time window depends on your choice, the longer the better). To plot trends, download the series to a spreadsheet. 4) Try to plot examples of some fixed and floating rates. Can you tell from the data, which countries are fixed and which are floating? Please justify and explain your conclusions 5) In the plots, can you locate data for an exchange rate crisis within your time-window? Part 2: 1) (In order to complete this part of your assignment, please refer to your lecture notes on Uncovered Interest Arbitrage) Imagine you are a carry trader. Obtain 15-day Swap rates for some major currencies (Remember to divide the obtained swap rates by 24): US dollar, pound, euro, Japanese yen, Swiss franc, Canadian dollar, and Austrian dollar (The number of currencies depends on your choice, the more the better) Find the lowest yield currency and call it X. How much interest would you pay in X units after borrowing X 1,000,000 for 15 days? (Remember that the raw data are annualized rates.) Obtain the exchange rate between X and every other high yield currency Y. For each Y, compute how much X would be worth in Y units today, and then in 15 days time with Y-currency interest added. Revisit this question in 15 days time, find the spot rates at the moment, and compute the resulting profit from each carry trade. Did any of your imaginary trade pay off?
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Explanation & Answer

Here is your assignment :)

1

Part 1:
1. Exchange rate based on United Nations $ (6 Foreign currencies)
Table 1

Country

Currency

Exchange Rate per Dollar

United states

Dollar

1$

India

Indian Rupee

INR 73.4463

Brazil

Brazilian Real

BRL 3.6888

Japan

Japanese yen

JPY 112.5000

French

French franc

FRF 5.7590

Great Britain

British pound

GBP 0.7810

Kuwait

Kuwait Dinar

KWD 0.3036

2) Calculation of Appreciation (Depreciation)
Exchange rate were taken within 52 weeks
Table 2
Country

Beginning Ending rate Appreciation
Rate

(Assumed

(Depreciation)

Percentage %

2

today rate)

73.4463 − 63.2463
𝑥100 = �...


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