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Finance and Accounting International finance

Project description
A. Learning outcomes covered
1. Critically discuss the relationship between exchange rates, interest rates, and prices using models of exchange rate determination.
2. Evaluate the determination of current account and international business co-movement.
3. Critically review the operation of the exchange rate systems.
4. Predict and critically assess the financial and macroeconomic impacts of exchange rate fluctuations and exchange rate policies.
B. Assessment
The assessment consists of two parts, namely empirical study and small essay. Each part accounts for 50% of the final mark of this module. The required word count is 4,000 words in total excluding tables and graphs. This represents 2,000 words in total for empirical study and 2,000 equivalent words for small essay. For each part of the assessment, a 10% on the word limit is acceptable.

Empirical Study:
Please choose ONE of the following questions for your empirical study and prepare a 2,000 word written report. You should submit your dataset and program (in hard copy and in a CD) with hard copy report for evaluation.

1. Test for Risk Premia in Foreign Exchange Markets :
FT.com (UK) reports spot and forward exchange rate of other currencies against US Dollar (USD). You can download these data from FT.com data archive: http://markets.ft.com/RESEARCH/Markets/Data-Archive.
Choose one out of 35 currencies (SDR not included) for your analysis. Use the data of last date for each month as monthly data, collect spot rate (denoted as St), 1-month forward rate (denoted as Ft), and 3-month forward rate (denoted as ) from July 2009 to April 2014. Make use of the STATA programs on the blackboard to prepare answer for the following questions:

a) Produce a graph of the USD/c exchange rate, where c denotes the currency you have chosen. Provide your comments on the graph. Any abnormal observations (outliers)? Double check with the FT.com data archive to make sure these abnormal observations are not due to the errors you made during the data collection process. If they are not error inputs, are there any unexpected events (news) associated with these observations?

b) Produce a graph for monthly forward discount and provide your comments, where and .

c) Produce a summary statistics table for the variables in your dataset.

d) Download the STATA program ‘ex_risk_premia.do’ from blackboard. Modify the program to run the following regressions:

Test for the existence of a risk premium on the 1-month horizon by including the lagged forward discount as a regressor:

Test for the existence of a risk premium on the 3-month horizon by including the 3-month forward discount, lagged three months, as a regressor:


e) Interpret your regression results. Do you find evidence for the presence of risk premia in foreign exchange market? Provide your comments on uncovered interest rate parity (UIP) and covered interest rate parity (CIP) base on your regression results.

2. Test for Long-run Purchasing Power Parity (PPP) :

Read Chapter 14 of the following textbook (essential reading of this module):

Robert C. Feenstra and Alan M. Taylor. International Economics. Worth Publishers: 2nd Revised edition, International Edition (13 April 2011). ISBN-10: 1429269030. ISBN-13: 978-1429269032.

Design a framework to test for absolute PPP and relative PPP following monetary approach. You should use both graphical illustration and econometric method. Provide your comment and interpretation on the evidence you find.

Data needed for this question can be found from UNCTAD Statistics website: http://unctad.org/en/pages/Statistics.aspx.

Your report should contain:

a) Theoretical justification of your framework.

b) Summary statistics of your dataset.

c) Empirical evidence followed by comment and interpretation.

Small Essay:
Please choose ONE of the following questions for your small essay and prepare a 2,000 word written report.

1. Read Chapter 20 of Feenstra and Taylor (2011) textbook and answer the following questions: Compare and contrast the following scenarios in terms of their costs and benefits.

a. The central bank uses sterilization bonds to obtain reserves.

b. The central bank follows a strict currency board system.

c. A country maintains a backing ratio that exceeds 100%.

d. The central bank bails out the banking system to avert a financial system crisis.

2. Consider the different interest rate parity conditions studied in Chapter 13 of Feenstra and Taylor (2011) textbook and answer the following questions. You should briefly summarize the interest rate parity conditions and their underlying logics and implications before you answer the following questions one by one.

a. Why might the exchange rate used in forward contracts differ from the current spot rate? Why might the forward rate differ from the future spot rate expected by investors? Explain.

b. Consider an US investor seeking to invest in France. Using the UIP condition (allowing for risk), illustrate in details how each of the following would affect the value of the euro and U. S. dollar.

(1) A decrease in U. S. interest rates.

(2) An increase in France’s interest rates.

(3) A decrease in the expected future exchange rate, Ee$/€


Sample Answer

Compelling correspondence is essential to the achievement all things considered but since of the changing idea of the present working environments, successful correspondence turns out to be more troublesome, and because of the numerous impediments that will permit beneficiaries to acknowledge the plan of the sender It is restricted. Misguided judgments.In spite of the fact that correspondence inside the association is rarely completely open, numerous straightforward arrangements can be executed to advance the effect of these hindrances.

Concerning specific contextual analysis, two significant correspondence standards, correspondence channel determination and commotion are self-evident. This course presents the standards of correspondence, the act of general correspondence, and different speculations to all the more likely comprehend the correspondence exchanges experienced in regular daily existence. The standards and practices that you learn in this course give the premise to additionally learning and correspondence.

This course starts with an outline of the correspondence cycle, the method of reasoning and hypothesis. In resulting modules of the course, we will look at explicit use of relational connections in close to home and expert life. These incorporate relational correspondence, bunch correspondence and dynamic, authoritative correspondence in the work environment or relational correspondence. Rule of Business Communication In request to make correspondence viable, it is important to follow a few rules and standards. Seven of them are fundamental and applicable, and these are clear, finished, brief, obliging, right, thought to be, concrete. These standards are frequently called 7C for business correspondence. The subtleties of these correspondence standards are examined underneath: Politeness Principle: When conveying, we should build up a cordial relationship with every individual who sends data to us.

To be inviting and polite is indistinguishable, and politeness requires an insightful and amicable activity against others. Axioms are notable that gracious “pay of graciousness is the main thing to win everything”. Correspondence staff ought to consistently remember this. The accompanying standards may assist with improving courtesy:Preliminary considering correspondence with family All glad families have the mystery of progress. This achievement originates from a strong establishment of closeness and closeness. Indeed, through private correspondence these cozy family connections become all the more intently. Correspondence is the foundation of different affiliations, building solid partners of obedient devotion, improving family way of life, and assisting with accomplishing satisfaction (Gosche, p. 1). In any case, so as to keep up an amicable relationship, a few families experienced tumultuous encounters. Correspondence in the family is an intricate and alluring marvel. Correspondence between families isn’t restricted to single messages between families or verbal correspondence.

It is a unique cycle that oversees force, closeness and limits, cohesiveness and flexibility of route frameworks, and makes pictures, topics, stories, ceremonies, rules, jobs, making implications, making a feeling of family life An intelligent cycle that makes a model. This model has passed ages. Notwithstanding the view as a family and family automatic framework, one of the greatest exploration establishments in between family correspondence centers around a family correspondence model. Family correspondence model (FCP) hypothesis clarifies why families impart in their own specific manner dependent on one another ‘s psychological direction. Early FCP research established in media research is keen on how families handle broad communications data. Family correspondence was perceived as an exceptional scholastic exploration field by the National Communications Association in 1989. Family correspondence researchers were at first impacted by family research, social brain science, and relational hypothesis, before long built up the hypothesis and began research in a family framework zeroed in on a significant job. Until 2001, the primary issue of the Family Communication Research Journal, Family Communication Magazine, was given. Family correspondence is more than the field of correspondence analysts in the family. Examination on family correspondence is normally done by individuals in brain science, humanism, and family research, to give some examples models. However, as the popular family correspondence researcher Leslie Baxter stated, it is the focal point of this intelligent semantic creation measure making the grant of family correspondence special. In the field of in-home correspondence, correspondence is normally not founded on autonomous messages from one sender to one beneficiary, yet dependent on the dynamic interdependency of data shared among families It is conceptualized. The focal point of this methodology is on the shared trait of semantic development inside family frameworks. As such, producing doesn’t happen in vacuum, however it happens in a wide scope of ages and social exchange.

Standards are rules end up being followed when performing work to agree to a given objective. Hierarchical achievement relies significantly upon compelling correspondence. So as to successfully impart, it is important to follow a few standards and rules. Coming up next are rules to guarantee powerful correspondence: clearness: lucidity of data is a significant guideline of correspondence. For beneficiaries to know the message plainly, the messages ought to be sorted out in a basic language. To guarantee that beneficiaries can without much of a stretch comprehend the importance of the message, the sender needs to impart unmistakably and unhesitatingly so the beneficiary can plainly and unquestionably comprehend the data.>

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