– THE FINAL ASSIGNMENT –For this assignment you need to use the Bloomberg Database, which is available for you at Douglas Hall Room 170- CME Training Lab. In order to be able to work on the Bloomberg terminal, please refer to the document titled “Bloomberg_Workshop_Material” uploaded on the Blackboard.Part 1: 1) From Bloomberg, download the exchange rates of at least 6 foreign currencies (at least 2 of them have to be from emerging markets) including the US dollar. (The number of currencies depends on your choice, the more the better)2) 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 depends on your choice, the longer the better). ($: US dollar, X: The foreign currency that you have chosen) St(X/$) = Beginning Rate St+1(X/$) = Ending Rate The % appreciation (or depreciation) in X can be calculated as; [(Ending Rate – Beginning Rate) / Beginning Rate] x 1003) Explore recent exchange rate trends for the pairs of countries that you have selected (the time window depends on your choice, the longer the better). To plot trends, download the series to a spreadsheet.4) Try to plot examples of some fixed and floating rates. Can you tell from the data, which countries are fixed and which are floating? Please justify and explain your conclusions5) In the plots, can you locate data for an exchange rate crisis within your time-window?Part 2:1) (In order to complete this part of your assignment, please refer to your lecture notes on Uncovered Interest Arbitrage)Imagine you are a carry trader. Obtain 15-day Swap rates for some major currencies (Remember to divide the obtained swap rates by 24): US dollar, pound, euro, Japanese yen, Swiss franc, Canadian dollar, and Austrian dollar (The number of currencies depends on your choice, the more the better) Find the lowest yield currency and call it X. How much interest would you pay in X units after borrowing X 1,000,000 for 15 days? (Remember that the raw data are annualized rates.) Obtain the exchange rate between X and every other high yield currency Y. For each Y, compute how much X would be worth in Y units today, and then in 15 days time with Y-currency interest added. Revisit this question in 15 days time, find the spot rates at the moment, and compute the resulting profit from each carry trade. Did any of your imaginary trade pay off?
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Part 1
1. Exchange Rate of six foreign currencies with respect to the USD
The six foreign downloaded currencies from Bloomberg as on November 30, 2018 are
European (EUR), United Kingdom currency (GBP), Swiss franc (CHF), Australian currency
(AUD), Indian currency (INR), and Japanese currency (JPY).
Region
Foreign Currency (To US dollar)
Exchange Rate as at 11/30/18
Europe
EUR
1.1317
United Kingdom
GPB
1.2749
Switzerland
CHF
1.0015
Australia
AUD
0.7306
India
INR
0.0143
Japan
Yen (JPY)
0.0088
2. Calculation of appreciation or depreciation
A positive change denotes appreciation whereas a negative change denotes depreciation.
So we can conclude from the below chart. That all those foreign currencies we selected are
depreciating against to US dollar.
Foreign Currencies
St(X/$) = Beginning St+1(X/$) = Ending % appreciation or
Rate on 11/30/2017 Rate on 11/30/2018 depreciation in X
EUR-USD
1.1898
1.1317
-4.88%
GBP-USD
1.3471
1.2749
-5.36%
1.0245
1.0015
-2.24%
0.7595
0.7306
-3.81%
0.01579
0.0143
-9.44%
0.009548
0.0088
-7.83%
CHF-USD
AUD-USD
INR-USD
JPY-USD
% Appreciation or depreciation in X =[(Ending Rate –Beginning Rate) / Beginning Rate] x 100
3. The Currency Exchange graphs:
The graphs show the currency with base and quote currency given. The base currency is
USD while the quote currencies include, EUR, GBP, CHF, AUD, INR, and JPY. The graphs are
constructed to show the currency exchange rates between USD and other 5 different currencies
mentioned above.
EUR and the USD
This graph shows the currency exchange rate between EUR and the USD. 1USD=1.1317EUR
GBP and the USD
This graph shows the currency exchange rate between GBP and the USD. 1USD=1.2749GBP
CHF and the USD
This graph shows the currency exchange rate between CHF the USD. 1USD=1.0015CHF
AUD and the USD
This graph shows the currency exchange rate between AUD and the USD. 1USD=0.7306AUD
INR and the USD
This graph shows the currency exchange rate between INR and the USD. 1USD=0.0143INR
JPY and the USD
This graph shows the currency exchange rate between JPY and the USD. 1USD=0.0088 JPY
4. Fixed and floating rates
The fixed rates of interest are constant for relatively long periods of time while the floating rates
is more variable which keep changing. The graph below shows a trend with 5-year variation for
the floating exchange rate of each of the foreign currencies that we picked with respect to the
USD. All of the currencies we picked are floating exchange rate.
5. Analysis of currency exchange rate crisis within your time-window
It is a sudden volatility in the currency which ends up causing speculation in the foreign
exchange or forex market due to currency pegs or monetary policy decision and they are solved
via the implementation of floating exchange rate or monetary policy avoidance which fights the
market. The data for an exchange rate crisis within my time-window is the plots in the INR/USD
rate crisis at 7pm.
Part 2. US One Month Swap Rate
On Nov 1st
We decide to choice the above five major currencies. And we found that the CHF, Swiss Franc
(X) is the lowest yield currency.
1-month interest rate
compared to LIBOR
Currency (%)
Current exchange
Current exchange
Swap 1 month
rate referred to USD rate referred to CHF referred to CHF
USD
0.0231
1.0000
1.0021
1.0334
GBP
0.0073
1.3012
1.3036
1.3235
EURO
-0.0041
1.1408
1.1433
1.1476
YEN
-0.0010
0.0089
0.8890
0.8951
CHF
-0.0079
0.9979
1.0000
1.0000
Sample calculation for Swap (USD):
1.0021*((1+0.0231)/(1-0.0079))=1.0334
On Dec 3rd
Currency Current exchange rate referred to CHF
USD
0.9975
GBP
1.2695
EURO
1.1331
YEN
0.878
CHF
1
For the calculation (If I borrowing 1,000,000)
For USD
1,000,000*0.9975-1,000,000*1.0334= -35,900
For GBP
1,000,000*1.2695-1,000,000*1.3235= -54,000
For EURO
1,000,000*1.1331-1,000,000*1.1476= -14,500
For YEN
1,000,000*0.878-1,000,000*0.8951= -17,100
Unfortunately, none of our trade paid off.
References
Data from Bloomberg.com
Running head: EXCHANGE RATE ANALYSIS
Exchange rate analysis
(Name)
(Course)
(Date)
1
EXCHANGE RATE ANALYSIS
2
Exchange rate analysis
Part 1
1. Exchange rate of six foreign currencies with respect to the USD
The six foreign currencies selected include the euro, the yen, the Swiss franc, the
Canadian dollar, the renminbi and the Brazilian real. Table 1 summarizes the current exchange
rates of each of these foreign currencies with respect to the US dollar.
Table 1. Current exchange rates of selected currencies
Country or region
Foreign currency
Several European countries
Japan
Switzerland
Canada
China
Brazil
Euro
Yen
Swiss franc
Canadian dollar
Renminbi
Brazilian real
Exchange rate on April 14th
2018
1.2328
0.0093
1.0397
0.7934
0.1593
0.2920
2. Estimation of the 1-year appreciation or depreciation against the USD
As observed in table 2, the euro, the Swiss franc, the Canadian dollar and the renminbi
have appreciated against the US dollar in the past year, while the yen and the Brazilian real have
depreciated.
Table 2. Calculation of the annual % change in each exchange rate – Appreciation or
depreciation with respect to USD
Foreign currency
Euro
Yen
Swiss franc
Canadian dollar
Renminbi
Brazilian real
Exchange rate on
April 14th 2018
1.2328
0.0093
1.0397
0.7934
0.1593
0.2920
Exchange rate on
April 14th 2017
1.0618
0.0101
0.9946
0.7504
0.1454
0.3180
% change
16.10
-7.92
4.53
5.73
9.56
-8.18
EXCHANGE RATE ANALYSIS
3
3. Observed trends
Figures 1-6 represent the variation of the exchange rate for each of the selected currencies
with respect to the USD in the past five years. According to the reported figures, there is a
relatively small variation in most of the exchange rates considered between the different foreign
currencies and the USD.
Figure 1. 5-year variation of the exchange rate between the euro and the USD
Figure 2. 5-year variation of the exchange rate between the yen and the USD
EXCHANGE RATE ANALYSIS
Figure 3. 5-year variation of the exchange rate between the Swiss franc and the USD
Figure 4. 5-year variation of the exchange rate between the Canadian dollar and the USD
4
EXCHANGE RATE ANALYSIS
Figure 5. 5-year variation of the exchange rate between the renminbi and the USD
Figure 6. 5-year variation of the exchange rate between the Brazilian real and the USD
4. Fixed and floating exchange rates
The fixed exchange rate represents the situation in which one of the two governments
regulates the exact currency exchange rate of their currency with respect to any other foreign
currencies. In contrast, the market will be the determining force of the exchange rate in floating
exchanges rates. As a result of this difference, the floating exchange rate is significantly more
variable, since the exchange rate changes on a daily basis, not requiring the government to
5
EXCHANGE RATE ANALYSIS
modify it. In contrast, the fixed exchange rate presents a step-wise trend, in which the currency
exchange rate remains constant for relatively long periods of time, and suddenly increases or
decreases depending on the applied governmental decision. Figures 7 and 8 present a schematic
representation of these two different trends.
Figure 7. Sample trend of a floating exchange rate with a high intra-day variability
Figure 8. Sample trend of a fixed exchange rate with a negligible intra-day variability
6
EXCHANGE RATE ANALYSIS
7
The comparison of these trends with the 5-year variation for the exchange rate of each of
the foreign currencies with respect to the USD highlight how exchange rates like CHY/USD or
BSL/USD are fixed. In contrast, the higher variability of the EUR/USD, CHF/USD, JPY/USD
and CAD/USD point towards a floating exchange rate.
5. Analysis of currency exchange rate crisis
A currency exchange rate crisis visible in the plots is the CHF/USD rate crisis at the
beginning of 2015. This exchange rate crisis appears in the form of a very sharp increase in the
exchange rate for the CHF/USD.
Part 2
Table 3 shows the calculated SWAP exchange rate in 1 month, assuming that the onemonth interest rate paid on the different currencies is measured according to the LIBOR interest
rate (global-rates.com)
Currency
USD
GBP
EURO
YEN
CHF
CAD
AUD
1-month interest
rate compared to
LIBOR (%)
1.89550
0.52369
-0.40157
-0.04183
-0.79020
1.0520
2.86500
Current
exchange rate
referred to USD
1.0000
1.4239
1.2328
0.0093
1.0397
0.7934
0.7764
Current
exchange rate
referred to CHF
0.9618
1.3695
1.1857
0.0089
1.0000
0.7631
0.7468
Swap 1 month
referred to CHF
0.9724
1.3659
1.1717
0.0089
0.9843
0.7651
0.7621
A sample calculation for the USD/CHF swap exchange rate is shown below:
𝑆=𝐶∗
1 + 𝑟(𝑈𝑆𝐷)
1 + 0.0189550
= 0.9618 ∗
= 0.9724
1 + 𝑟(𝐶𝐻𝐹)
1 − 0.0079020
EXCHANGE RATE ANALYSIS
8
Work cited
Comparison of the global exchange rates to the LIBOR index rate. Retrieved April 15th, 2018,
from http://www.global-rates.com/interest-rates/libor/libor.aspx
Exchange rates of different currencies referred to USD. Retrieved April 15th, 2018, from
http://www.bloomberg.com
…
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