UNSW Sydney
FINS5516
International Corporate Finance
T1,2023
Mohamad Mourad – Instructor
Note: These notes are property of the author (Mohamad Mourad). They are for the exclusive use of students enrolled in the iLab component of
FINS5516 International Corporate Finance for Term 1,2023. Reproduction, distribution and re-use of these notes outside the scope of the course,
in any way, shape or form is strictly prohibited. The author and UNSW bear no responsibility for any loss, injury or claims made by any party, entity
or individual, however defined, if these notes are used in exchange rate forecasts for private or commercial purposes.
All students in the Business School have been
provided with a FACTSET Account.
User Name Login Details:
firstname.lastname@factset.net
If you do NOT have a FACTSET account, email
the School of Banking and Finance
(bankfinexams@unsw.edu.au) to get you set up
ASAP.
IMPORTANT NOTE
Note: These notes are property of the author (Mohamad Mourad). They are for the exclusive use of students enrolled in the iLab component of
FINS5516 International Corporate Finance for Term 1,2023. Reproduction, distribution and re-use of these notes outside the scope of the course,
in any way, shape or form is strictly prohibited. The author and UNSW bear no responsibility for any loss, injury or claims made by any party, entity
or individual, however defined, if these notes are used in exchange rate forecasts for private or commercial purposes.
FINS5516 – Data Exercise Task Overview
You are building a regression model to estimate the future USD/AUD exchange
rate.
You expect changes in future exchange rates depend on:
1. the countries’ real GDP growth rates,
2. the differences in inflation,
3. long-term interest rates between the countries.
Students are expected to complete this exercise and take notes as
preparation for your actual data exercise assignment!
Note: These notes are property of the author (Mohamad Mourad). They are for the exclusive use of students enrolled in the iLab component of
FINS5516 International Corporate Finance for Term 1,2023. Reproduction, distribution and re-use of these notes outside the scope of the course,
in any way, shape or form is strictly prohibited. The author and UNSW bear no responsibility for any loss, injury or claims made by any party, entity
or individual, however defined, if these notes are used in exchange rate forecasts for private or commercial purposes.
Steps – Downloading Data and Setting up File
1. Obtain quarterly data from 2001Q1 to 2022Q3 on:
- USD/AUD spot exchange rate (FactSet identifier: AUDUSD)
- Economic growth for both countries, defined as the year-on-year % change in real GDP
- Inflation rates for both countries, defined as the year-on-year % change in CPI
- Long-term interest rates for both countries
2. Calculate the following:
- The change in exchange rates over (i) 1 quarter, (ii) 1 year, and (iii) 3 years. These should be
forward looking, i.e. the quarterly change for June 2022 is:
/2022
/2022
− 1
- Economic growth rates for both countries as a decimal. This is done by dividing the FactSet
value by 100.
- The inflation rate differential as a decimal, defined as the US rate less the Australian rate, and
then dividing this value by 100.
- The long-term interest rate differential as a decimal, defined as the US rate less the Australian
rate, and then dividing this value by 100.
Note: These notes are property of the author (Mohamad Mourad). They are for the exclusive use of students enrolled in the iLab component of
FINS5516 International Corporate Finance for Term 1,2023. Reproduction, distribution and re-use of these notes outside the scope of the course,
in any way, shape or form is strictly prohibited. The author and UNSW bear no responsibility for any loss, injury or claims made by any party, entity
or individual, however defined, if these notes are used in exchange rate forecasts for private or commercial purposes.
Steps – Estimating the Model and Forecasting
3. Estimate separate regression models for each change in exchange rate as
functions of:
- both countries economic growth rates,
- the long-term interest rate differential, and
- the inflation rate differential.
4. Using your regression models, forecast the future change in exchange rates
using the most recently available quarterly economic data.