You will be asked to perform two major tasks in this group assignment. The first task will provide you an opportunity to collect FX quotes and use these quotes to    develop an exchange rate forecasting model and predict the foreign exchange rate. The second task will be for you to explore potential speculative opportunities in the FX market.

IMPORTANT INFORMATION

The written report should be no more than 10 A4 pages, 1.5 line spacing and

size 1 1 Arial Font. Please number the pages of your report.  Use margins of at least 2.54 cm (1 inch).

All assignments must include a list of references in academic form using

the APA 7th method.

The report must be submitted as a .pdf document. The Excel spreadsheet

must be submitted as a .xlsx workbook. The Excel spreadsheet should      contain all the calculations used to generate the values in your report. The  Excel spreadsheet will not be explicitly graded but must be submitted at the same time as the report to verify your calculations.

The group leader must submit two files electronically. Failure to submit both

files will result in penalties - late penalties will apply until both files are                submitted. They also need to ensure that all files submitted can be opened and read in Canvas.

Exchange rate prediction

Doowon is a venturesome engineer who is your close friend and also a golf           buddy of yours. You were invited to the New Year party that Doowon hosted on 1.Jan. 2023. Doowon and his partner have planned to travel around the world. While they      were busy planning the details of the trip Doowon had asked you to help out with         preparing for the travel. When Doowon heard that you had enrolled in the                    'International Financial Management' unit at USyd, he suggested a bet on whether      you would be able to guess the spot AUD/GBP exchange rate until Doowon returns    at the end of March 2023. To win the bet Doowon has offered prediction criteria you    must meet in order to win the bet:

1. You are asked to setup at least two regression-based prediction models for estimating the exchange rate at the end of the first quarter of 2023. Note: The group must compare the multiple models and find the best-fitting prediction model to present to Doowon.

2. A total of 8 predictions should be made to test the validity of your prediction model. The predictions are for the exchange rates at the last day of each        quarter made at the start of each quarter.

3. The prediction of the exchange rate must be made by using market data        available one quarter (3 months) prior to the quarter you are trying to predict.    For example, if you are predicting the exchange rate for the first quarter of 2021 you can only use data available until the last day of the previous quarter (fourth quarter of 2020).

5. A minimum of two independent variables are required in each of the        prediction model. You must provide appropriate justification of the theory or evidence for the need of each variable.

6.  Using the best performing model of choice, make a final prediction of what the S(AUD/GBP) will be on the 31st of March, 2023. The estimation error must be less than 1% for the exchange rate for you to win the bet. (Note: whether   you win or lose the bet is not a marked item.)

You decided that the bet with Doowon was a good opportunity to try predicting the future exchange rates and implement a speculative strategy. At the start of the first   quarter of 2023 (2 Jan 2023), you checked the current FX quotes for the spot and     forward rates for the two exchange rates. The quotes were as below.

Table 1.

S(CAD/GBP)                         S(AUD/GBP)

2.Jan.2023                        Bid             Ask                      Bid             Ask

After using your prediction model, you decided that a thorough investigation to test the efficiency of the FX market can be conducted.

With your current credit rating you can borrow up to £ 1 million Pounds Sterling          (GBP) or the equivalent amount at today’s spot in AUD. The spread over the risk-free rates for each of the countries are as below.

Table 2.

Required: Questions to answer

In your report you are to provide information of the following:

1.   Explain the prediction model(s) you have established. Explain how you        collected the data for the models and what issues you faced in selecting the data.

2.   Provide 8 predictions for the AUD/GBP spot exchange rates calculated from your two models from the first quarter of 2021 till the last quarter of 2022.

3.   Compare your predictions with the actual AUD/GBP spot exchange rate. Reflect on your forecasting model by evaluating the performance of the  prediction models. Did you win the bet?

4.   Discuss how you can improve the predictability of your models.

5.   Using the forecasted spot exchange rate from your prediction model and the FX quotes from table 1 and 2, propose a speculative strategy in the FX        market. If there is no speculative profit that can be made, explain why there was a limit to the profitability.

6.   Can you find any patterns using technical analysis in the AUD/GBP exchange rates during the first quarter of 2023?