FNCE90016 International Financial Management - Group Tutoring

Part I. PPP Study Using Specific Commodities (20 marks)

1. We start with the Big Mac index. The original data are from The Economist’s website: http://www.economist.com/content/big-mac-index. For this Tutoring, we want to look at the following regions: USA, Australia, Brazil, Canada, Hong Kong, New Zealand, Philippines, Singapore, UAE, UK. Use data from July 2020, write down the local price, market exchange rate vs. USD, PPP implied exchange rate vs. USD, and relative difference (in percentages) between the two exchange rates. (5 marks).
2. For comparison, we will also look at the same results using the iPhone. You can check 128G iPhone 11 outright prices across different regions from Apple’s website: http://www.apple.com/choose-your-country/. For the same ten regions above, write down the local prices, PPP implied exchange rate vs. USD, and relative difference (in percentages) between the two exchange rates. (5 mark) Note: You can use the same market exchange rate as above, since Apple’s price do not change that often.
3. Compare the results for Big Mac and iPhone and briefly discuss the differences. (10 marks)

Part II. Exchange Rates during Brexit (80 marks)

On Thursday, June 23, 2016, electorate in the United Kingdom and Gibraltar voted in the referendum on whether to Remain or Leave the European Union. Voting started at 0700 BST and finished at 2200 BST. The final result was announced at 0720 BST, June 24, 2016. We will take a look at the exchange rate movements during this period.

1. The original data is sourced from Bank of England. It includes daily data in 2016 (Jan 4 – Dec 30) covering UK Official Bank Rate (1 month), Spot and 1-month forward USD/GBP rates, and spot EUR/GBP rate. Find the daily change in spot $/£ rate: ΔSt+1=St+1 – St and the rate of change: et+1 = ΔSt+1/St. Plot the two series, ΔS and e. Report the mean, standard deviation, max and min of ΔS and e. Which one do we usually use when studying exchange rate movements and why? Also find out the dates for the max, min. (15 marks)
2. We are interested in the two-week period from June 20 to July 1. Find the 1-month dollar rate over the two-week period using the official bank rate of GBP, forward rate and spot rate. Plot both the 1-month dollar rate and official 1-month pound rate, using percentage point per annum. Did the dollar rate vary a lot or not over the two-week period? Compare it with the pound rate, state the likely reason(s) of the dollar rate pattern. (10 marks)
3. You are a forex trader with a long position in GBP. In the evening of Jun 20 just before going home, you were very happy that your position just got the largest boost of the year so far. What did the market predict the GBP rate (in USD) in the future at the time? Why? (5 marks)
4. (Open Question) In the afternoon of June 22, 2016, you, as an analyst of a major investment bank, were asked to give your opinion on the status of markets and referendum, the effects of the referendum result the next day on the markets, and provide suggestions of speculative trading strategy of say 10 million USD for a major hedge fund client. What will you say? (50 marks)

• This is an open question, meaning there is no right or wrong answer. Your marks depend on your analysis, not on your conclusions.
• There is an 800-word limit.
• Your report should include 3 parts: (1) analysis of the situation; (2) strategy and your rationale; (3) ex post evaluation.
• You do NOT need to go outside to search for additional materials and data.
  Using the data provided and the knowledge you learned in the class is enough.