Group formation:

This is a group research project that must be completed and submitted as a group. To encourage collaboration, students are encouraged to form a group of 2-5 students during the first four weeks of the semester. Forming groups across different tutorials are permitted. The tutor will also facilitate group formation in tutorial classes. The class tutor should be the first contact if you need any help with the assignment (group formation and preparation). The “Discussion Forum” on Canvas has a dedicated section on group formation and assignment preparation.

Each group is required to complete the group registration by week 4 (26th March 2023) on Canvas. Click on the tab “people”, then “Assignment Group” . You can choose to enrol into any of the unfilled groups in the  list.  Group registration will remain  open until the  end  of week 4.  Students without  group registration by then will be randomly assigned to an unfilled group in Week 5. Please make sure to complete group registration before it is closed.

Mark Allocation:

This project will be marked out of 30 and constitutes 30% of your overall grade.

Length:

The length of the project must NOT EXCEED 12 typed pages with double spacing, 12 points Times New Roman, including executive summary and references but excluding appendix, if used. Appendices must

not exceed 5 pages. There will be a penalty of 1 mark per page for not meeting this requirement. What’s included in the 12-page limit?

•   Executive summary1

•   Assignment body

•   Tables

•   Figures

•   Reference list

What’s excluded from the 12-page limit?

•   Title (Cover) page

•   Table of contents

•   Appendices

Due date:

The due date for the project is 11:59pm 8th May 2023. A late penalty of 5% mark per day is applicable (see Unit outline).

Submission:

The only acceptable form of submission is electronic via the submission link in the unit’s Canvas site. Hardcopy and email submissions will NOT be accepted. Late submissions will be penalized. See below for penalty details. All submission will be checked through TURNITIN for similarity with external sources.

Submission format:

Each group can only submit ONE project report. The group leader (as determined in your first group meeting) is required to submit the assignment. (do NOT submit if you are not the group leader). It is imperative that your project report is submitted in ONE document. Only a PDF format document will be accepted, and it is your responsibility to ensure all pages correctly display your original content. Missing or distorted figures and formulas will result in lower marks.

Cover page:

Ensure  the  Student  Identification Number  (SID)  of EACH  student  is  on  the  cover page  of your assignment. The name of student must NOT show up on the assignment to ensure the anonymous marking requirement. The cover page should be submitted with the assignment in a single file (as the front page).

Document name:

Your project PDF file must be named in the following format:

FINC6013_Groupnumber _2023.PDF

Example:

FINC6013_Group23 _2022.PDF

There will be a penalty of 1 mark for incorrectly named projects.

Referencing:

List   of   references   used   and   in-text   citations   must   follow   the   Harvard   referencing   style

http://libguides.library.usyd.edu.au/content.php?pid=160012&sid=1510179

Students are expected to use more than 6 academic references in total. Ensure to use academic reference (not solely web sources) to support your discussions/arguments.

Presentation:

Pay particular  attention  to presentation.  A  significant  component  of your mark will  be based  on presentation. Avoid overdoing formatting, and ensure that the assignment is very clear, logical, and professional. Pay attention to grammar. Clear and logical presentation is a major challenge. Preparing a concise report is another major challenge. Every part of the assignment should add to the end result otherwise it is superfluous and distracting.

Information sources:

•   FRED® database of the Federal Reserve Bank of St. Louis:https://fred.stlouisfed.org/

•   Central bank web sites of relevant currencies (most provide relevant data for sufficient periods)

•   Web sites of international organizations – OECD, IMF, BIS, etc.

•   International Financial Statistics (On-line database available from Fisher Library’s web site)

•   Newswire and financial newspaper reports (accessible via Factiva database from Fisher Library’s web site)

•   Other Web sources – market commentaries of FX and money market movements

PENALTIES:

Late penalty:

Refer to Unit outline.

Incorrectformat penalties:

1 mark per page for exceeding the page limit.

1 mark penalty for inappropriate referencing and formatting.

1 mark penalty for a failure to follow the naming convention of the project.

Plagiarism:

While discussion and collaboration are expected, plagiarism is a breach of the University of Sydney

Code of Conduct and will be dealt with by the Faculty.

http://sydney.edu.au/student_affairs/plagiarism/index.shtml

Be sure to acknowledge all of your source materials and provide proper citations for any quotes. Checks for similar contents (web materials, other students’ projects, etc.) and plagiarism will be conducted by TURNITIN and the projects with a similarity index significantly above an acceptable level will be reported to the faculty and this may result in a zero mark being awarded for the project. You may use generative AI responsibly as a tool to support your analysis. However, the report must be your own original work.

A currency carry trade involves investors arbitrage upon interest rate differentials between two currencies. Historically, carry trade was profitable by borrowing a low interest currency, such as Japanese Yen and investing in a higher interest currency, such as AUD or USD. While the world was battling COVID- 19 pandemic  since 2020, various  economic policies,  especially monetary tools have been  adopted to overcome the challenges caused by the disruptions to economic activities, which certainly impacted the financial market significantly. A striking influence of these tools is the price spike experienced by most countries in the world in the recent years. The purpose of this assignment is to examine the profitability of carry trade in the last few years in the context of the economic environment before and during the pandemic. A high-quality assignment should include a balanced quantitative and qualitative analysis and the arguments are well supported by either academic or/and industry references.

Each  group  is  first  required  to  select  a  SINGLE  pair  of currencies  of YOUR  OWN  GROUP’S CHOOSING. Once you have decided on the pair, you are required to research online to find and collect the following real-world data: (i) exchange rate, and (ii) monthly (usually 30-day or alternative short- term) money market interest rates for both currencies (i and i  *). Make sure your selected pair of

currencies have no missing data in recent years.

There are four parts of the assignment listed below:

1. Examine UIP violations pre-pandemic during 2018-2019 (6 marks)

a. Justify your choices for both currencies and interest rates. Predict the exchange rates at the end of each month for the period January 2018 to December 2019 assuming UIP is valid. Present and discuss

(1) time-series of the predicted and actual realized exchange rates in one figure, and

(2) time-series of the deviations between them in another figure.

b. Since the UIP condition can be represented in different ways, deviations from the uncovered interest rate parity can be represented in different ways as well. One form of deviation is the difference between the forecasted and the actual exchange rate, as discussed above. Another form is the difference between the percentage change in the exchange rate and the interest rate differential. Present a scatter plot of the interest rate differential (on x axis) and the percentage change in the exchange rate (on y axis). Describe whether your data points lie on the 45-degree line through the origin and discuss the implications of the plot.

c. Discuss the forecast accuracy of exchange rates and implications to the validity of UIP during this two- year period. Identify and demonstrate the causes of the periods, if any, where the UIP appears to have been significantly violated. Would you think you have identified a profitable carry trade strategy?