FINC3011 International Financial Management
Due: 14 May 2023 at 23:59
Introduction
You will be asked to perform two major tasks in this group assignment. The first
task will provide you an opportunity to collect FX quotes and use these quotes to
develop an exchange rate forecasting model and predict the foreign exchange rate.
The second task will be for you to explore potential speculative opportunities in the
FX market.
IMPORTANT INFORMATION
 The written report should be no more than 10 A4 pages, 1.5 line spacing and
size 11 Arial Font. Please number the pages of your report. Use margins of at
least 2.54 cm (1 inch).
 All assignments must include a list of references in academic form using
the APA 7th method.
 The report must be submitted as a .pdf document. The Excel spreadsheet
must be submitted as a .xlsx workbook. The Excel spreadsheet should
contain all the calculations used to generate the values in your report. The
Excel spreadsheet will not be explicitly graded but must be submitted at the
same time as the report to verify your calculations.
 The group leader must submit two files electronically. Failure to submit both
files will result in penalties - late penalties will apply until both files are
submitted. They also need to ensure that all files submitted can be opened and
read in Canvas.
Exchange rate prediction
Doowon is a venturesome engineer who is your close friend and also a golf
buddy of yours. You were invited to the New Year party that Doowon hosted on 1.Jan.
2023. Doowon and his partner have planned to travel around the world. While they
were busy planning the details of the trip Doowon had asked you to help out with
preparing for the travel. When Doowon heard that you had enrolled in the
'International Financial Management' unit at USyd, he suggested a bet on whether
you would be able to guess the spot AUD/GBP exchange rate until Doowon returns
at the end of March 2023. To win the bet Doowon has offered prediction criteria you
must meet in order to win the bet:
1. You are asked to setup at least two regression-based prediction models for
estimating the exchange rate at the end of the first quarter of 2023. Note: The
2
group must compare the multiple models and find the best-fitting prediction
model to present to Doowon.
2. A total of 8 predictions should be made to test the validity of your prediction
model. The predictions are for the exchange rates at the last day of each
quarter made at the start of each quarter.
3. The prediction of the exchange rate must be made by using market data
available one quarter (3 months) prior to the quarter you are trying to predict.
For example, if you are predicting the exchange rate for the first quarter of 2021
you can only use data available until the last day of the previous quarter (fourth
quarter of 2020).
4. The 8 prediction of the exchange rate starts from the first quarter of 2021 till
the fourth quarter of 2022.
5. A minimum of two independent variables are required in each of the
prediction model. You must provide appropriate justification of the theory or
evidence for the need of each variable.
6. Using the best performing model of choice, make a final prediction of what
the S(AUD/GBP) will be on the 31st of March, 2023. The estimation error must
be less than 1% for the exchange rate for you to win the bet. (Note: whether
you win or lose the bet is not a marked item.)
You decided that the bet with Doowon was a good opportunity to try predicting the
future exchange rates and implement a speculative strategy. At the start of the first
quarter of 2023 (2 Jan 2023), you checked the current FX quotes for the spot and
forward rates for the two exchange rates. The quotes were as below.
Table 1.
S(CAD/GBP) S(AUD/GBP)
2.Jan.2023 Bid Ask Bid Ask
Spot 1.6631 1.6641 1.8135 1.8183
1 Months Forward 2 6 10 2
2 Months Forward 17 18 20 6
3 Months Forward 24 26 29 14
6 Months Forward 45 48 65 42
1year Forward 63 73 125 78
After using your prediction model, you decided that a thorough investigation to test
the efficiency of the FX market can be conducted.
With your current credit rating you can borrow up to £ 1 million Pounds Sterling
(GBP) or the equivalent amount at today’s spot in AUD. The spread over the risk-free
rates for each of the countries are as below.
Table 2.
Country AUD CAD GBP
Spread (Loan) 6.000% 5.000% 4.500%
Spread (Deposit) 6.500% 4.600% 4.250%
3
Required: Questions to answer
In your report you are to provide information of the following:
1. Explain the prediction model(s) you have established. Explain how you
collected the data for the models and what issues you faced in selecting the
data.
2. Provide 8 predictions for the AUD/GBP spot exchange rates calculated from
your two models from the first quarter of 2021 till the last quarter of 2022.
3. Compare your predictions with the actual AUD/GBP spot exchange rate.
Reflect on your forecasting model by evaluating the performance of the
prediction models. Did you win the bet?
4. Discuss how you can improve the predictability of your models.
5. Using the forecasted spot exchange rate from your prediction model and the
FX quotes from table 1 and 2, propose a speculative strategy in the FX
market. If there is no speculative profit that can be made, explain why there
was a limit to the profitability.
6. Can you find any patterns using technical analysis in the AUD/GBP exchange
rates during the first quarter of 2023?
Historical spot exchange rates for AUD/GBP & AUD/CAD can be found in the
following link:
http://www.rba.gov.au/statistics/historical-data.html#exchange-rates
Current forward rates can be found in the following link:
https://au.investing.com/currencies/fx-futures
A list of products used to calculate the Consumer Price Index (CPI) is in the
following link:
http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6440.0Appendix102011?op
endocument&tabname=Notes&prodno=6440.0&issue=2011&num=&view=
Au Australian Bureau of Statistics
http://www.abs.gov.au/
Statistics Canada
http://www.statcan.gc.ca/start-debut-eng.html
OECD database
http://stats.oecd.org/Index.aspx?DatasetCode=KEI#
World Development Indicators by The World Bank
http://databank.worldbank.org/data/views/variableselection/selectvariables.aspx?sour
ce=world-development-indicators
4
28 Fail
(0%~25%)
Below Average
(25%~50%)
Above Average
(51%~75%)
Outstanding
(76%~100%)
Are the data used for the
models well specified and
collected?
6 Little or no discussion on data
Some discussion about
data, which is limited in
scope and depth.
Correct identification of
data collection procedure
with justification of why
such data are collected
and used.
Demonstrates excellence in
identifying and justifying the
data used and how the data
are collected
Is the regression analysis
correctly conducted and the
results discussed?
4
Demonstrates little or
no ability to derive a
regression-based
prediction model. Either
draws no conclusion or
draws an inappropriate
conclusion with a lack
of understanding of the
model
Demonstrates an
adequate ability to analyse
and summarise the main
findings of an
appropriately constructed
regression-based
prediction model. There is
consistency with the
analysis but needs more
improved.
Demonstrates clear ability
to analyse and summarise
the main findings of an
appropriately constructed
regression-based
prediction model. There is
consistency with the
analysis but could be
improved.
Demonstrates an excellent
ability to analyse and
summarise the main findings
of an appropriately constructed
regression-based prediction
model. There is consistency
with the analysis.
Is the method to improve the
regression methods well
discussed?
4
No discussion on ways
to improve the
prediction models.
Some discussion on ways
to improve the prediction
models are provided.
In most instance the
discussion on ways to
improve the prediction
models are correct and
relevant to the analysis
All discussion on ways to
improve the prediction models
are correct and relevant to the
analysis
Are the performance of the
models well analysed 4
Demonstrates little or
no ability to discuss the
performance of the
prediction models.
Demonstrates an
adequate ability to discuss
the performance of the
prediction models.
Demonstrates clear
competence in discussing
the performance of the
prediction models.
Demonstrates excellence in
discussing performance of the
prediction models.
5
Is the speculative strategy
well developed and
achievable?
6
No explanation of the
speculative strategies
suggested
Incorrect tests used and
limited justification
provided for the choice of
speculative strategy
suggested
In most instances the
expected profit from the
speculative strategy is
correctly identified with
some explanation.
Correct analysis is used for the
speculative strategy and a
deep explanation of analysis
provided for the development
and achievability of the
strategy
Is the discussion on
technical analysis thorough
and meaningful?
4
Demonstrates little or
no knowledge of
technical analysis
Demonstrates adequate
knowledge of technical
methods.
Demonstrates competent
knowledge of technical
methods.
Demonstrates excellent
knowledge of technical
methods.
Other criteria 2 Fail
(0%)
Pass
(100%)
2-1 Report format:
Format (1.5 spaced, Font
type, 11 font, one inch
margin)
0.5 Lack of any formatting elements, or so many format
errors as to make report presentation ineffective.
Formatting elements are organized, highlight some ideas
and are used consistently throughout the report.
2-2 Report format:
10 Page A4
0.5 The report length is decidedly outside the
suggested requirement and can impede the
readers’ interest or comprehension.
The report length is within the allotted requirement
2-3 Report format:
Language – spelling,
grammar, punctuation
0.5 The report has not been proofread, spell-checked or
edited. The large number of grammar, punctuation,
and spelling errors impede the reader’s
comprehension of the report.
The report has been edited, spell-checked and proofread,
and has minimal errors, All sentences are complete with
grammar and punctuation correctly applied
6
2-4 Use of sources or
Documentation
0.5 Neglects important sources. Overuse of quotations
or paraphrase to substitute writer’s own ideas.
(Possibly uses source material without
acknowledgement.)
Uses sources to support, extend, and inform, but not
substitute writer’s own development of idea.
Combines material from a variety of sources, market data,
authoritative testimony. Doesn’t overuse quotes.