Introduction

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 one: Factors affecting the foreign exchange market -

1. You are required to collect data on historical foreign exchange ratefor 10 selected

currencies against the USA dollar, one currency must be Pakistani Rs (see the attached link for sources of historical

FX rates) for the period of(one year).

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 two: Forecasting foreign exchange rates

1. Select five currencies on which you have already collected data and find

corresponding national interest rates and inflation rates information from respective

official sources (such as reserve banks or IMF).

2. Based on the spot exchange rates on 1 st

February, 2019,estimate the expected

exchange rates for each currency units in 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.

4. Using your findings explain whether there were any possibility to make a profit on

arbitrage or on speculations in the FX market.

Your findings should be presented as a report. All sources of information (such as bank

names, text books, websites with addresses, etc) which you used to report

should be cited appropriately.(You must attach the FX data tables and other relevant

graphs with the soft copy of your report).

Submission:

The soft copy and the printed copy of the completed report should be submitted on or before

20 July , 2020. The soft copy should be in Ms-word (PDF files are not accepted).All data tables should be

attached to the soft copy of the main report. Inability to provide soft copy on due date will cost 50% of

your earned marks. The soft copy of the assignment should be uploaded using the Microsoft teams.

The file name of soft copy must consist of subject code followed with your reg numbers and name...

(Eg. BOA3402_378XXX_365CCC_380TTT_1234YY.DOC).