You are required to setup a prediction model for remainder of the year. Your target is to make a prediction of the exchange rate between Australia and Canada. The prediction is to be for the expected exchange rate at the end of 2020. The prediction should be made assuming the current date is April 1^st of 2020. This means that the exchange rate prediction is for a period of nine months ahead. You can use any information available to you when you attempt the assignment, but you must assume that you only have data available to you up to 31 March 2020. You should also take advantage of data available in FactSet such as historical FX price data, interest rate data and macroeconomic data.

You are required to use a linear regression model with three independent variables that resembles the following equation:

Change in exchange rates (CAD/AUD) = a₀ + a₁(GDP growth rate differential (CAD-AUD)) + a₂(expected inflation rate differential (CAD AUD)) + a₃(Variable 3)

Where:

a₀ = y intercept

a₁ = regression coefficient for GDP growth rate differential(CAD-AUD)

a₂ = regression coefficient for expected inflation rate differential (CAD AUD)

a₃ = regression coefficient for Variable 3

Please note that FX quotes in this assignment are made on traditional market convention meaning that the base currency is quoted first, followed by the price currency. For example, CAD/AUD means the number of AUD per 1 CAD.

In the regression model, the GDP growth rate differential, and expected inflation rate differential (CAD AUD) for the two countries must be used as independent variables, while you must select one other independent variable. You must justify why you selected the other independent variable.

Data frequency for your regression model (EG: monthly, quarterly) is your choice, but ensure that you are consistent, and that all data required is available at your chosen frequency. To ensure meaningful regression results, you should use a historical data period that provides enough data points for a statistically robust analysis. For example, a quarterly model would need at least 10 years of historical data.

The bid and ask rates for CAD/AUD are expected to change at the same rate as indicated by your regression model (i.e. the change in the exchange rates predicted for CAD/AUD are equal for the bid, ask and mid rates).

At the start of April 2020 (1/Apr/2020), the spot rate of CAD/AUD (AUD per 1 CAD) was 1.1579 (bid) 1.1585 (ask). You also checked the current FX quotes for the USD/CAD (CAD per 1 USD) and AUD/USD (USD per 1 AUD) currency pairs. The quotes were as below:

	USD/CAD			AUD/USD
1 April 2020	Bid	Ask		Bid	Ask
Spot	1.4178	1.4181		0.6088	0.6090
1 Months Forward	-3	-1		1	1
2 Months Forward	-9	-5		1	2
3 Months Forward	-13	-9		1	2
6 Months Forward	-26	-16		0	2
9 Months Forward	-35	-23		-1	2