FIN 540
Week 2 Interpreting Exchange Rates Assignment
Overview
The aim of this assignment is to apply course concepts to a real-world scenario. In this assignment, you will practice utilizing exchange rates to calculate appreciation and depreciation. You will determine if exchange rates are fixed or floating and locate data for an exchange rate crisis. The skills you develop will help you for your Final Assignment: Trading Simulation, which you will work on later this semester.
Activity Time: 15 hours
Learning Objectives
· Analyze direct and indirect exchange rate quotations and bid and ask exchange rates. (1.1)
· Calculate cross exchange rates. (1.2)
· Articulate the appropriate utilization of specific exchange rate quotations based on distinct circumstances. (1.3)
· Describe currency regimes based on the observed behavior. of exchange rates. (2.1)
Instructions
For exchange rates, please go to https://www.xe.com/
When you click on a country on that list, you will see the quotation of that country’s currency against all the other countries’ currencies. Please refer to the column titled “Last”. You need the quote of that country's currency against $. For example, when you click EURO (FX), EURUSD is $/Euro exchange rate.
1. Download the exchange rates of at least 10 foreign currencies, including the US dollar. At least 2 of currencies must be from emerging markets. You are encouraged to work with more than 10 countries, which will increase the complexity of the exercise and you will be awarded more credit.
2. Choose a time window for this exercise. Compute the one-year appreciation or depreciation of each currency against the US dollar year to year within your chosen time window. The time window is your choice, but the longer the better! You will be awarded more credit for a longer time window.) Use the following formula:
($: US dollar, X: The foreign currency that you have chosen)
St($/X) = Beginning Rate
St+1($/X) = Ending Rate
The % appreciation (or depreciation) in X can be calculated as;
(Ending Rate-Beginning Rate)/(Beginning Rate) x 100
For example; if you are working on a 10-year time window; you will do the aforementioned calculation for 2008-2009, 2009-2010, 2010-2011….2018-2019.
For example, to calculate the % of appreciation of € against $ from 2018 to 2019, you need to calculate the following;
(Spot rate $ / € as of January 1st 2019-Spot rate $ / € as of January 1st 2018)/(Spot rate $ / € as of January 1st 2018) x 100
Explore recent exchange rate trends for the pairs of countries that you have selected (the US dollar vs. each country you selected). To plot trends, download the series to a spreadsheet.
4) Plot fixed and floating rates for all of the countries you identified. From the data, which countries are fixed and which are floating? Please justify and explain your conclusions. Based on the plots, how did you know which are fixed and which are floating?
5) In the plots, locate data for an exchange rate crisis within your time-window. Please justify and explain your conclusions. Based on the plots, how did you know this was an exchange rate crisis?
Please see the file below for the further details about the assignment.
Interpreting Exchange Rates Assignment.pdf
Submission Requirements
An Excel file that shows all work with calculations, including the following:
· Identifies 10 or more countries used in this exercise and their exchange rates
· Identifies a time window for the exercise and calculates the one-year appreciation or depreciation of each currency against the US dollar year to year within the chosen time window.
· Plots of examples of fixed and floating rates and answers the question which countries are fixed and which are floating? Please justify and explain your conclusions.
· In your plots, locate data for an exchange rate crisis within your time window.