Foreign Exchange Rate Analysis and Forecasting: Assignment 1

This assignment analyzes the distribution and forecasting of the AUD/USD foreign exchange rate. It begins with a graphical representation of continuously compounded returns, examining distributional characteristics and assessing the stationarity and independence of the time series. The analysis reveals that the AUD/USD returns are best modeled by a lognormal distribution. The assignment compares artificially created (normal) returns data with actual returns, highlighting the non-uniform nature of actual returns due to exchange rate volatility. The directional movement of the S(USD/AUD) is assessed, and investment advice is provided. It also assesses the efficiency of the FX market using the random walk method and provides a risk assessment analysis, including implications for key international finance variables and their impact on currency exchange rates. The document also provides insights on the implications of key international trading variables on currency exchange rates.