This document provides study material and assignments on International Finance. It covers topics such as currency forecasting, detecting distribution features, and analyzing different models for forecasting. The document also includes information on risk implications and advice for investing in USD/AUD.
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Running head: INTERNATIONAL FINANCE International Finance Name of the Student: Name of the University: Author’s Note:
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2INTERNATIONAL FINANCE Table of Contents Introduction:...............................................................................................................................3 a) Detecting the kind of distribution features of USD/AUD and graphically computing its return:.........................................................................................................................................3 b) Using 68-95-99.7 normal thumb rule for deriving the evidence that the distribution is normal:.......................................................................................................................................4 c) Providing characteristics of the returns for gauging the difference in two returns:...............4 d) Institution and statistic data for providing directorial move of AUD/USD:..........................5 e) Advising the client whether to invest or not in USD/AUD for the next 30 days:.................6 f.1) Identifying the efficiency of FX market in context with the Autoregressive of order 1 model and Random Walk Model:..............................................................................................7 f.2) Analysing the best model that could be used for forecasting:.............................................7 g) Identifying the risk implications of the investment on a daily basis:....................................8 Conclusion:................................................................................................................................9 References and Bibliography:..................................................................................................10
3INTERNATIONAL FINANCE Introduction: The assessment aims in evaluating the significance of Currency forecasting, which allows investors to improve their decision-making capability. The different forecasting model is used for detecting the future currency value of USD/AUD. Moreover, relevant normal distribution method is detected under USD/AUD for detecting the return conditions. The data has been used from 2003 to current date for detecting the return distribution condition of USD/AUD. a) Detecting the kind of distribution features of USD/AUD and graphically computing its return: 1/2/2003 8/2/2003 3/2/2004 10/2/2004 5/2/2005 12/2/2005 7/2/2006 2/2/2007 9/2/2007 4/2/2008 11/2/2008 6/2/2009 1/2/2010 8/2/2010 3/2/2011 10/2/2011 5/2/2012 12/2/2012 7/2/2013 2/2/2014 9/2/2014 4/2/2015 11/2/2015 6/2/2016 1/2/2017 8/2/2017 3/2/2018 10/2/2018 -8.00000 -6.00000 -4.00000 -2.00000 0.00000 2.00000 4.00000 6.00000 8.00000 10.00000 USD/AUD-Continues Compound Return The above figure provides information regarding the continuous return of USD/AUD from 2003 to 2019. The above figure indicates that the continuous return distribution of USD/AUD is at the levels of non-symmetric distribution approach. The figure indicates that the distribution of returns does not follow normal distribution attributes. This attribute indicates that current return distribution of USD/AUD is not appropriate and in accordance with the normal distribution conditions (Lettau, Maggiori and Weber 2014).
4INTERNATIONAL FINANCE b) Using 68-95-99.7 normal thumb rule for deriving the evidence that the distribution is normal: Mean-0.00569200 SD0.79975595 RulingFromToNumber of observations At 68% of th rule-0.80544790.7940639453087 At 95% of th rule-1.60520391.593819892810 At97.7%ofth rule -2.40495982.393575839133 Total4030 The above table provides relevant evidence for the 68-95-99.7 normal thumb rule, which is considered adequate for USD/AUD. In accordance with normal thumb rule the number of observations in 68% is higher than other rulings. Moreover, 95% ruling is higher than 97.7%, which indicates that the distribution of the USD/AUD follows the normal thumb rule.
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5INTERNATIONAL FINANCE c) Providing characteristics of the returns for gauging the difference in two returns: 1/2/2003 8/2/2003 3/2/2004 10/2/2004 5/2/2005 12/2/2005 7/2/2006 2/2/2007 9/2/2007 4/2/2008 11/2/2008 6/2/2009 1/2/2010 8/2/2010 3/2/2011 10/2/2011 5/2/2012 12/2/2012 7/2/2013 2/2/2014 9/2/2014 4/2/2015 11/2/2015 6/2/2016 1/2/2017 8/2/2017 3/2/2018 10/2/2018 -8.00000 -6.00000 -4.00000 -2.00000 0.00000 2.00000 4.00000 6.00000 8.00000 10.00000 Continues Compound ReturnArtificial return The comparison between the continuous and abnormal returns has been depicted in the above figure. The probability has been used for detecting the artificial returns of the USD/AUD, which is compared with the continuous return of USD/AUD. The graph indicates that the artificial returns do not follow the continuously compounded returns of USD/AUD. d) Institution and statistic data for providing directorial move of AUD/USD: 1/2/2003 8/2/2003 3/2/2004 10/2/2004 5/2/2005 12/2/2005 7/2/2006 2/2/2007 9/2/2007 4/2/2008 11/2/2008 6/2/2009 1/2/2010 8/2/2010 3/2/2011 10/2/2011 5/2/2012 12/2/2012 7/2/2013 2/2/2014 9/2/2014 4/2/2015 11/2/2015 6/2/2016 1/2/2017 8/2/2017 3/2/2018 10/2/2018 0.8000 1.0000 1.2000 1.4000 1.6000 1.8000 2.0000 USD/AUD
6INTERNATIONAL FINANCE The above figure provides information regarding the trend of USD/AUD, which has been detected to be in an uptrend. However, the values of USD/AUD are reaching previous high and resistance line, which can be identified as a negative attribute for the current value of the currency (Du and Schreger 2016). Hence, after reaching the previous resistance line formed during 2016 the USD/AUD values can retrace back, which indicates that the investors need to short the position. The mean values of USD/AUD are mainly at the levels of - 0.005692002, while the SD value is 0.799755947, which indicates that the current valuation can decrease in future. e) Advising the client whether to invest or not in USD/AUD for the next 30 days: SUMMARY OUTPUT Regression Statistics Multiple R 0.3719 431 R Square 0.1383 417 Adjusted R Square 0.1075 681 Standard Error 0.0075 279 Observations30 ANOVA dfSSMSF Signific ance F Regression1 0.000254 75 0.00 025 4.495 47840.04298 Residual28 0.001586 73 5.7E -05 Total29 0.001841 48 Coeffic ients Standard Error t Stat P- value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 1.4090 513 0.001376 57 102 3.59 1.416 E-651.40623 1.4118 71.406231.41187 Compoundin0.00610.0029062.120.0420.000210.01210.000210.01212
7INTERNATIONAL FINANCE g return6213302597842 The above table provides information regarding the regression analysis, which is conducted for the latest 30 periods of USD/AUD. This helps in detecting that the accurate level of current projection for USD is mainly negative, where the values can decline. Hence, the short trend of USD/AUD is negative, where the investors can initiate a Sell Side trade for getting benefits from the declining values of USD/AUD (Carfi and Musolino 2014). The statistical confirmation is provided from the standard error, which is at the levels of 0.0075279. f.1) Identifying the efficiency of FX market in context with the Autoregressive of order 1 model and Random Walk Model: The forex market is considered to be volatile, while it does not provide higher returns, where the calculation such as hypothesis and return can be used for detecting the efficiency of the market. Moreover, investors to forecast the future price movement of USD/AUD. can use the calculation of ‘Autoregressive of order 1 model’ and ‘Random Walk Model’ The FX market does not have any kind of huge fluctuations without any kind of big impact such as recession that came during 2008. f.2) Analysing the best model that could be used for forecasting: Evaluating Autoregressive of order 1 model RMSEMAEMSE 0.0651-0.06470.0042 AFSQ errorAbsError(A-F) 3/21/201 91.39961.47780.00610.0782-0.0782 3/22/201 91.40731.46330.00310.0560-0.0560 3/25/2011.41261.47130.00340.0587-0.0587
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8INTERNATIONAL FINANCE 9 3/26/201 91.40411.47690.00530.0728-0.0728 3/27/201 91.40831.46800.00360.0598-0.0598 3/28/201 91.40901.47230.00400.0633-0.0633 3/29/201 91.41101.47320.00390.0621-0.0621 4/1/20191.40431.47530.00500.0710-0.0710 4/2/20191.41241.46820.00310.0558-0.0558 4/3/20191.40731.47670.00480.0695-0.0695 Evaluating Random Walk Model MSERMSEMAE 0.00010.0090(0.0082) DateAFAbsSQ errorError(A-F) 3/21/20191.39961.41390.01430.0002(0.0143) 3/22/20191.40731.41430.00700.0000(0.0070) 3/25/20191.41261.41470.00210.0000(0.0021) 3/26/20191.40411.41510.01100.0001(0.0110) 3/27/20191.40831.41560.00730.0001(0.0073) 3/28/20191.40901.41600.00700.0000(0.0070) 3/29/20191.41101.41640.00540.0000(0.0054) 4/1/20191.40431.41690.01260.0002(0.0126) 4/2/20191.41241.41730.00490.0000(0.0049) 4/3/20191.40731.41770.01050.0001(0.0105) The calculations conducted in the above table regarding Autoregressive of order 1 modelandRandomWalkModelcanbeused fordetectingthecurrentvaluationof USD/AUD. The calculation conducted in the above table indicates that the MAE of both the
9INTERNATIONAL FINANCE model have provided negative values. In addition, RWM can be used for predicting the closet value of USD/AUD, which can help in generating high level of return from investment. g) Identifying the risk implications of the investment on a daily basis: Parameters Portfolio Value$1,000,000.00 Average Return0.030073862 Standard Deviation0.000262395 Confidence Level0.99 Calculations Min Return with 99% prob0.029463441 Value of Portfolio$970,536.56 Value at Risk$29,463.44 Risk percentage2.9% From the relevant evaluation, it can be detected that the risk percentage of investment is anticipated to be at the levels of 2.9%, where the value amounts to $29,463.44. The risk calculation is based on the min return with 99% probability with 0.99 confidence level.
10INTERNATIONAL FINANCE -7.156171473 -6.446991671 -5.737811869 -5.028632067 -4.319452265 -3.610272463 -2.901092661 -2.191912859 -1.482733057 -0.773553255 -0.064373453 0.644806349 1.353986151 2.063165953 2.772345755 3.481525557 4.190705359 4.899885161 5.609064963 6.318244765 7.027424567 More 0 100 200 300 400 500 600 700 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% Histogram FrequencyCumulative %Bin Frequency The above histogram indicates that the return of USD/AUD falls under -7.156171473 to 7.02424567, which indicates about the maximum and minimum returns of USD/AUD. Moreover, the investment of 1 million can generate a return in accordance with the above mentioned maximum and minimum limits (Bruno and Shin 2015). Conclusion: The different types of investment strategies are mainly evaluated in the above assessment, which can help investors to forecast the values of currency and make adequate investment decisions. The trend of USD/AUD is evaluated, which indicates a downtrend is in progress. Thus, investors can use sell strategies to improve their returns from the currency trades.
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11INTERNATIONAL FINANCE References and Bibliography: Barroso,P.andSanta-Clara,P.,2015.Beyondthecarrytrade:Optimalcurrency portfolios.Journal of Financial and Quantitative Analysis,50(5), pp.1037-1056. Beckmann,E. and Stix,H., 2015. Foreigncurrencyborrowingand knowledge about exchange rate risk.Journal of Economic Behavior & Organization,112, pp.1-16. Bruno, V. and Shin, H.S., 2015. Capital flows and the risk-taking channel of monetary policy.Journal of Monetary Economics,71, pp.119-132. Carfi, D. and Musolino, F., 2014. Dynamical stabilization of currency market with fractal- like trajectories.Scientific Bulletin of the Politehnica University of Bucharest, Series A- Applied Mathematics and Physics,76(4), pp.115-126. Chernov, M., Graveline, J. and Zviadadze, I., 2018. Crash risk in currency returns.Journal of Financial and Quantitative Analysis,53(1), pp.137-170. Colacito, R., Croce, M.M., Gavazzoni, F. and Ready, R., 2018. Currency risk factors in a recursive multicountry economy.The Journal of Finance,73(6), pp.2719-2756. Corte,P.D.,Riddiough,S.J.andSarno,L.,2016.Currencypremiaandglobal imbalances.The Review of Financial Studies,29(8), pp.2161-2193. Du, W. and Schreger, J., 2016. Local currency sovereign risk.The Journal of Finance,71(3), pp.1027-1070. Glick,R.andRose,A.K.,2016.Currencyunionsandtrade:Apost-EMU reassessment.European Economic Review,87, pp.78-91.
12INTERNATIONAL FINANCE Guesmi, K., Moisseron, J.Y. and Teulon, F., 2014. Integration versus segmentation in Middle East North Africa equity market: Time variations and currency risk.Journal of International Financial Markets, Institutions and Money,28, pp.204-212. Jensen, J.B., Quinn, D.P. and Weymouth, S., 2015. The influence of firm global supply chainsandforeigncurrencyundervaluationsonUStradedisputes.International Organization,69(4), pp.913-947. Lai, E.L.C. and Yu, X., 2015. Invoicing currency in international trade: An empirical investigation and some implications for the renminbi.The world economy,38(1), pp.193-229. Lettau, M., Maggiori, M. and Weber, M., 2014. Conditional risk premia in currency markets and other asset classes.Journal of Financial Economics,114(2), pp.197-225. Rba.gov.au.2019.HistoricalData.[online]Availableat: https://www.rba.gov.au/statistics/historical-data.html#exchange-rates[Accessed3Apr. 2019].