DO Task 2 only: (Don't write irrelevant stuff I'll report that)

FX market is considered as the most perfect market in the world where we can expect to hold the law of one price. The law of one price provided theoretical base for all international parity conditions. International parity conditions can be used to understand the operational behavior of the foreign exchange market. In a perfect market, all these parity conditions should be held and there will be no possibility of abnormal profit on arbitrage or speculation. The aim of this group assignment is to give you an opportunity to empirically investigate the existence of some of those parity conditions. This assignment consists of two tasks, as described below:

Task 1

Factors affecting the foreign exchange market: (7% marks)

1. You are required to collect data on historical foreign exchange rate for 5 selected currencies against the Bangladeshi Taka for the period of 01/01/2019 -31/12/2020 (two year: daily data).
2. Plot the collected data on a graph showing the daily movements in FX rates (you can plot all data in one chart or use several charts, if the magnitude of the rates varies widely).
3. Identify the significant movement of FX rates during the last year of your data and explain possible reasons for those movements (you are required to cite all your sources).
4. Discuss how those foreign exchange movements have affected the economy in general (you can use any other information such as trade statistics to justify your explanations).
5. Estimate the correlation coefficient for each pair of currency. What can you learn from the estimated correlation coefficients? Explain, how you (assuming that you are a financial controller of a large MNC which having cash flows in all currencies) can use the estimated correlation coefficient to manage the foreign exchange rate exposure.

Task 2

Forecasting foreign exchange rates (3% Marks)

1. Select one currency on which you have already collected data and find corresponding national interest rates and inflation rates information from respective official sources (such as central banks or IMF).

2. Based on the spot exchange rates on 30 April, 2020, estimate the expected exchange rate one month, three months, six months and one year using the power purchase parity and International Fischer Effect.

3. Compare your estimated spot exchange rates with the corresponding actuals rates. Are they different to the actuals? Explain why.