FINM 7406 Individual Assignment
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FINM 7406 Individual Assignment
2020
Questions 1 to 4: International Monetary System/International Parity Conditions/Balance of Payments [14 marks in total]
In this part of the assignment, you will be investigating the cryptocurrency market and international parity conditions.
1) Using daily close data, please plot the following two exchange rates on the same chart:
i) the exchange rate between RMB and USD from 1 July 2017 to 30 June 2022; and
ii) the exchange rate between Bitcoin (BTC) and USD from 1 July 2017 to 30 June 2022.
Indicate one specific point on each of these two lines where the trend changes, and provide some reason(s) why this is the case.
(Hint: Please clearly mark the legend and the relevant information on the axes, and provide data sources. You can use the left axis for the RMB/USD exchange rate, while using the right axis for the BTC/USD exchange rate. Please note that you should create a chart on your own rather than copying from other sources.) (4 marks)
2) El Salvador became the first country to adopt bitcoin as a legal tender on 7 Sept 2021. Do you think this is the right move? And why? (2 marks)
3) Please briefly comment on the rationale of the cash rate decisions from the Reserve Bank of Australia between 1 April till 30 Sept 2022. Which industries will likely to be the winners or losers of these cash rate decisions, and discuss why? (3 marks)
4) According to CNN, Sri Lankan Prime Minister Ranil Wickremesinghe said that his country was “bankrupt” on 5 July 2022. A Wall Street Journal article by Tankah Ishan (2022)1 mentioned that some critics argued that loans from Beijing may play a role in this so-called “debt-trap diplomacy”, meaning loans were granted to make the country dependent on China. Please discuss whether you agree or disagree with the criticism above, and why. (3 marks)
Note: 2 marks will be allocated for correct grammar and clear and logical writing.
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For Part 2, you only need to submit your designed spreadsheet (no other files, i.e., PDF) via Blackboard.
Using the monthly return data for USA (U), China (C) and the Japan (J) between Jan 2000 and June 2022, calculate the following three items for Countries U, C and J: (3 marks)
a) Annualised mean returns
b) Annualised standard deviation of returns
c) Return covariances between these three countries
Please present the following table with answers in your excel spreadsheet. Please include the
raw data and the formula you used in your excel spreadsheet.
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Country U |
Country C |
Country J |
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Yearly Mean Return |
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Yearly Standard deviation (Returns) |
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Covariance between Countries |
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U, C |
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U, F |
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C, J |
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d) 
Provide an efficient frontier for these three assets (U, C and J). (3 marks) For part (d), you are required to provide a figure showing the efficient frontier for Countries U, C and J. [Hint: Below is an “illustrative” example of an efficient frontier between other assets.]
To come up with an efficient frontier, you will need to design your Excel spreadsheet to calculate the optimal portfolio weight for each of these three countries (U, C and J) to maximise the portfolio returns while achieving a range of target sigma.
[Hint: You may try any target sigma ranges between 0.10 and 0.30 and plot an incremental interval of 0.01 (i.e., 0.10, 0.11, 0.12, …, 0.30) in your figure.]
To calculate the optimal portfolio weight, you can try to use the “solver” function in Excel. Please note that portfolio weights are not restricted to positive values only.
You must save the answer for target sigma = 0.15 as a scenario in your Excel spreadsheet for marking. For example, please save your answer for (Q5d) as “Q5d”.
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2022-10-10