FINS5516 - International Corporate Finance

Term 3, 2024

Data Exercise Assignment

DUE: Friday 15 November 2024, 5pm (Sydney, Australia time)

Weighting

This assessment is worth 25% of your final grade for FINS5516 - International Corporate Finance. Next to each question is the allocation of marks. There are a total of 30 marks for this assignment.

Assignment Learning Objectives

The purpose behind this assignment is to get students to:

1.   apply and assess the relevance of the International Parity Conditions and Purchasing Power Parity (PPP) Theory in a practical setting,

2.  think outside the textbook and homework questions framework,

3.   conduct their own research,

4.   using actual data and statistical methods (regression and regression analysis),

5.   explore and visualize macroeconomic data and improve their familiarity with statistical tools in Microsoft Excel.

This assignment is designed to give students an insight into how economists and analysts in industry approach the topic of exchange rate modelling.

This assignment is individual work and must be submitted as individual work only.

IT IS RECOMMENDED THAT STUDENTS WORK ON THIS ASSIGNMENT FREQUENTLY. CRAMMING AT THE LAST MOMENT IS A BAD STRATEGY.

FINS5516 - Data Exercise Assignment

The LIC will randomly assign each student one of five countries in the list below:

1.   South Africa (ZAR)

2.   South Korea (KRW)

3.   Switzerland (CHF)

4.   Thailand (THB)

5.   United Kingdom (GBP)

Once assigned a country, the student will analyse the exchange rate eℎ/f comprising that country’s currency in relation to that of the  United States  (USD). The USD  is the  base currency  irrespective  of which  currency you  have  been  allocated.  Thus,  if  you  are assigned South Africa, then you need to complete the iLab assignment on the ZAR/USD exchange rate. The ZAR/USD exchange rate is interpreted as the number of ZAR per USD.

Download the Excel file uploaded on Moodle to see which country you have been allocated.

Section 1 - Downloading the Data and Setting up the Excel File.

1.1 – Using FACTSET, obtain quarterly data from 2001Q1 to 2024Q2 on:

-     The exchange rate eℎ/f  you have been randomly assigned.

-     Economic growth rates 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 the CPI.

-     Long-term interest rates for both countries.

1.2 – Using the data you collected from FACTSET, calculate the following:

-     The change in exchange rates over (i) 1 quarter, (ii) 1 year, and (iii) 3 years. These  must be forward looking. Calculating a forward-looking change in the exchange rate is best illustrated by an example. Thus, for example, the one-quarter change in the exchange rate, eℎ/f , for December 2022 is:

-     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 (ensure that you divide the FACTSET

value by 100), which for simplicity, we define as the term currency rate (ℎ) less the base currency rate (f) .

-     The long-term interest rate differential as a decimal (ensure that you divide the

FACTSET value by 100), which for simplicity, we define as the term currency rate (ℎ) less the base currency rate (f) .

Section 2 - Regression Modelling

2.1 – Consider the following econometric structural model of the change in the exchange rate:

where

Δeℎ/f,t  is the percentage change in the exchange rate over period t.

ΔGDpt  is the annual percentage growth rate in real GDP over period t.

InfRDt  is the inflation rate differential for period t.

IntRDt  is the interest rate differential for period t.

Et  is the error term for period t.

Using linear regression, obtain the coefficient estimates for each of the 3-time horizons. You need to report for each time-horizon, ALL coefficient estimates, p-values, Adjusted R-squares, F-statistics (and p-value) in one table, so the grader is able to see your results in your written submission (rather than the Excel file). (4 marks)

2.2 – Analyse the statistical significance of the coefficient estimates at the 5% level. You are to provide a summary/high-level analysis of the key results. Word limit: 150 words. (3 marks)

2.3 – Consider both the p-value from the F-test (at the 5% level of significance) and the adjusted R-squared as the forecast horizon increases from 1 quarter to 3 years. Provide some commentary and discuss whether such results (across the 3 models) are consistent with PPP theory. Word limit: 150 words. (4 marks)

2.4 – Which macroeconomic variables from the model you have estimated are considered economically important for modelling changes in the exchange rate? Are you surprised by these results? Are they consistent with PPP theory? Word limit: 150 words. (5 marks)

2.5 – One potential issue the analyst faces when using multiple linear regression analysis is the multicollinearity of the independent variables. Verify whether or not multicollinearity exists among the independent variables. This is done by examining the correlation between each of the independent variables. Think of this as a correlation matrix (must be included in your document) which can be easily performed in Excel using the “Data Analysis” tool pack. If the independent variables are highly correlated, then the analyst is unable to isolate the effect of each independent variable on the dependent variable. Thus, analysis essentially becomes pointless. Word limit: 100 words. (3 marks)

Section 3 - Forecasting

3.1 – Using the latest values of the key macroeconomic variables forecast the estimated change in the exchange rate:

a)   1-quarter ahead,

b)   1-year ahead

c)   3-years’ ahead

Report the  magnitude  of the forecasts for  each  regression  model  in  no  more  than  two sentences. Provide brief commentary (no more than one sentence) as to whether the currency you have been assigned is forecast to depreciate or appreciate against the USD over each forecast horizon. (3 marks)

3.2 – Do you think that the structural model (Equation 1) is a useful model for modelling changes in the exchange rate? What are some of its limitations? Irrespective of your answer, what other  independent variable would you  include  in  Equation  1?  Provide  at  least  one economic reason for that variable’s inclusion. You should also provide commentary indicating what relationship this variable has with the change in the exchange rate (that is, the dependent variable). Word limit: 150 words. (3 marks)

Additional Information

Note 1: Grammar, Spelling, Punctuation and Style.

1.   Five  marks out of the 30 marks will be allocated to grammar, spelling, and overall professionality of the responses and ensuring that all data and calculations in the Excel file are expressed to 3 decimal places. You need to ensure that your work is polished and contains NO errors. Remember you are presenting your work. When you are working professionally, the market expects high quality output.

2.   If you use sources in your answers, ensure that you formally cite them. The style. of referencing is for you to decide.

3.   Plagiarism is not tolerated. Your answers must be written by you and only you. Turnitin has a similarity indicator that reports a percentage similarity score. Submissions with similarity scores should not be high if they are written in your own words.

Turnitin includes the cover sheet and your references list in its calculation of its similarity score. However, the grader will be able to filter this out and see the percentage similarity score based only on the student’s written responses.

Note 2: Data Exercise Assignment Submissions and Responses.

1.   Students will only be permitted to submit their Data Exercise assignment ONCE in Turnitin. There are NO multiple submission options permitted. What is submitted first will be graded.

2.   There is NO grace period for any submissions.

3.   Lengthy responses to questions will result in only the first 150 words of each part (or whatever the word limit is for that section) being graded.

4.   If a student submits their assignment on an exchange rate other than the exchange rate they were assigned, then they have not followed instructions. The maximum grade a student will then obtain is 60% for this assessment.

5.   If a student submits their assignment via the incorrect Turnitin submission link, then 2 marks will be deducted.

6.  You must type your answers and submit as a PDF document via Turnitin. Ensure that the cover sheet is attached with your submission. See Moodle for cover sheet. A submission without the cover sheet will result in 2 marks being deducted.  If your submission is not submitted in PDF format, 2 marks will be deducted.

7.   Submit your Excel file with the calculations. Failure to submit the Excel file will result in a deduction of 5 marks.

8.   The School of Banking and Finance’s policy stipulates late submissions will attract a 5% penalty per day following the assignment due date (weekend days included). A submission made one week (that is, 5 days) after the specified due date will result in a grade of 0.

9.  AI Policy for Assignment: The assignment is designed for students to put in the time and effort to learn about the country they’ve been assigned, and also the use of regression to interpret results. As such, the use of AI in any way shape or form. is not permitted for this assignment. Teaching staff will inspect all assignment submissions and those deemed as having used AI will result in the student being reported to the UNSW Integrity Committee.

The LIC or iLab Instructor reserves the right to add to this list in light of changing conditions. Any changes made will be communicated with students as an announcement via the Moodle webpage.